(This is Part 1 of a two-part series. See Part 2: Home-buyer inspections can kill real estate deals.)
A seller’s worst nightmare is to find out as the moving van pulls away that the sale transaction has fallen apart. Although, most home sales do go through, there are a certain percentage don’t.
To avoid an unpleasant scenario, it helps to consider the reasons why a home sale might fail. Then you can take steps to ensure against failure.
It’s a real showstopper if the buyer can’t obtain the financing to close the deal. This sort of deal-breaker is perhaps the easiest to avoid. Here’s how to protect yourself.
First, before you accept an offer, no matter how good the price, make sure that the buyers are financially qualified. Ideally, you want to sell to buyers who have been pre-approved. This means that a lender has approved them for the mortgage they need to close the sale.
It’s a good idea to find out if there are any conditions attached to the buyers’ pre-approval. If the mortgage pre-approval is subject to the lender verifying the buyers’ income or their cash down payment, then it’s not a solid approval. A phone call to the buyers’ loan agent or mortgage broker will give you a better picture of the risk factors involved. You should let the buyers know that you intend to make the call so that they can inform their loan agent to provide you with the information you need.
If the buyers aren’t completely pre-approved at the time they make you an offer, but you’re inclined to proceed, include a provision in the contract for the buyers to provide you with proof that they have loan approval within a specified time period. That way you will know before the last minute whether or not to anticipate a problem.
Even a pre-approved buyer can have trouble obtaining financing if it turns out the house doesn’t appraise for the purchase price, or if there’s a defect in the title record. The more cash the buyer has to put down, the less of an issue there should be with the appraisal–from the lender’s standpoint. However, a buyer might not feel comfortable buying your home if it doesn’t appraise. If the purchase contract includes an appraisal contingency, and your home doesn’t appraise for the purchase price, the buyers may be able to withdraw from the contract without penalty.
Before you even list your home for sale, your agent should provide you with a comparative market evaluation that will give you information about recent sale prices for similar homes in your neighborhood. If you’re priced inline with recent sales, the appraisal should not be an issue. The appraisers will be looking at the same information you are. Keep this in mind if you’re tempted to accept a very high offer from a buyer with a very low cash down payment. If the deal has little chance of closing, why accept it in the first place?
Title matters can cause problems, although these sorts of problems occur with less frequency. However, it is fairly common to have loans show up on a title review that were actually paid off years ago. Your closing agent can usually clear this up fairly easily. Stickier problems include such things as easements that weren’t recorded properly, bankruptcy proceedings, or disputes over ownership.
Before you enter into contract to sell your home, it might make sense to pay a title company or attorney to check the title record on your home if you have any reason to believe that there might be issues that could derail your home sale.
THE CLOSING: This way, you have time to remedy any problems before you sell.
Dian Hymer is author of “House Hunting, The Take-Along Workbook for Home Buyers” and “Starting Out, The Complete Home Buyer’s Guide,” Chronicle Books.
What’s your opinion? Send your Letter to the Editor to firstname.lastname@example.org.