The recent uptick in canceled contracts reveals that buyers with tepid toes have begun actively looking for valid ways to terminate their purchase, writes mega team leader Carl Medford. Here is his list of top 15 potential deal-breakers.

As the market continues to shift and ambles closer to a buyer’s market, some buyers currently in contract are developing a severe case of buyer’s remorse. Doubtful of their purchase and questioning the timing, some are looking for any excuse possible to bail out of the contract.

Just a few short months ago, most offers we received had most if not all contingencies removed. Fast forward to today, and homes are now going into contract with all contingencies in play. This effectively means that if anything happens to the loan, the property appraises undervalue or something detrimental is discovered during the inspection period; then the buyer has a right to cancel and get their deposit returned (rules and procedures vary from state to state).

The recent uptick in canceled contracts reveals that buyers with tepid toes have begun actively looking for valid ways to terminate their purchase. Here is our list of top 15 potential deal-breakers:

1. Appraisal anomalies

Appraisals have never been an exact science, and, in many cases, the primary goal is to determine whether the property can be valued at the contract price. The value given by the appraiser provides a guarantee of sorts to the lender that the property they are lending to has a requisite value should they need to foreclose. As a result, in our market, appraisals often come in at exactly the contract price.

The current declining market, however, is making the appraisal process more difficult. Sellers are hoping for a value at least at the contract price, buyers are hoping for a lower price, and lenders want to see a valuation in line with their in-house AVM numbers. This is made even more difficult in a declining market since AVMs typically run a few months behind.

If a property fails to appraise at the contract price, the lender will typically only lend to the appraised value, which means the buyer needs to come up with additional cash to make up the difference, or the seller adjusts the contract price lower. Since many sellers currently feel that they are already giving up untold sums due to the shifting market, many are unwilling to lower their prices even more. Conversely, most buyers are unwilling to pay more in an already declining market. If there is no meeting of the minds, a low appraisal can spell doom for the transaction.

Recommendation: Preemptively discuss the possibility of a low appraisal with a seller once they are in contract. A frank discussion at that point can head off surprises and give the seller time to consider a positive course of action. It is important for a seller to realize that even though they may need to lower the price to meet the appraised value, the cost of going back on the market when it is declining could result in a loss substantially higher than a price adjustment now.

2. Foundation flaws

Foundations are like our feet: if everything is good, everything above is secure. If there are issues, however, it can translate to serious problems. While some minor cracks can be ok, more significant issues can be extremely expensive to resolve.

Recommendation: We suggest that our sellers get preemptive inspections so they know what potential issues they will need to deal with. When the market was hot, buyers were willing to overlook any number of issues just to get a home in contract. Now that they have choices, they are getting very particular about what they buy. If foundation issues show up on a property inspection, in my opinion, it is a good idea to get a recommendation from a certified foundation contractor so that costs and solutions are known upfront. This can then be remedied prior to sale or can be factored into the price.

3. Electrical eccentricities

Electrical codes have come a long way since their inception in homes almost 100 years ago. Most homes are sold with the building codes in place from either the time the home was built or from the last permitted upgrades. While buyers cannot reasonably ask for upgrades to electrical systems (example: knob & tube upgraded to Romex), they can ask that dangerous conditions in the system be remedied. As an example, some electrical panels have been demonstrated to cause fires. It is also common to find “homeowner improvements” that do not meet code.

Recommendation: If significant electrical issues show up in a preemptive inspection, we recommend they either be remedied upfront or be negotiated at the point of sale.

4. Plumbing problems

Galvanized or lead pipes, slow drains, leaking showers, deteriorating fixtures … there is no end to issues that can hinder a home’s plumbing system from functioning effectively.

Recommendation: the same as the electrical section above.

5. Roofing revelations

A leaky roof or roofing system (including downs and gutters) that does not adequately divert water away from the home can cause significant issues, including rot, mildew, mold and even foundation problems. Some roofs have been repaired numerous times, while others may have a few roofs installed on top of each other. If a buyer thinks they may have to front the cost for an expensive roof repair or replacement anytime in the near future, that fact alone may give them a reason to bolt.

Recommendation: Have the roof preemptively surveyed by a licensed roofing contractor who can provide a fair assessment of the roof’s condition and the cost of any repairs that may be required to bring it into good condition.

6. Moldy manifestations

There is often a great deal of confusion between mold and mildew: whereas mildew is a surface condition that can usually be easily treated, mold is more insidious and can burrow deep inside surfaces and structures. Mold, if it has gone deep, can be expensive to remediate. The source of mold is always moisture: find the water source first, deal with it and then have the mildew or mold removed. Most often mildew can be removed by the homeowner with a surface treatment while a serious mold issue often requires professional treatment and frequently requires the removal of affected materials and replacement with new. If the mold is serious enough, it can cause significant health issues and will be a serious deterrent to a sale.

Recommendation: Since there is so much misunderstanding about mold and mildew, it is best to have it remedied prior to a sale.

7. Pest predicaments

There are a number of types of pests that can invade homes, and some can do extensive damage. Pests vary from region to region. Here are the broad categories:

  • Wood destroying pests: these include termites, carpenter ants, wood-boring beetles, wasps, bees and more. If left unabated, they can cause significant structural damage. In our region, fungus (dry rot) is included in this category. Recommendation: get a wood-destroying pest inspection and upon receipt, decide whether you wish to treat the issues (remediate the insects and then repair any damage) or sell as-is. If it is a minor issue, some buyers may be willing to accept as-is and remediate it themselves. More significant issues will affect the price if not treated.
  • Interior insects: a partial list includes ants, cockroaches, bedbugs, lice, earwigs, flies, silverfish, house centipedes and spiders. Pet owners sometimes encounter fleas and ticks. Recommendation: if the problem is visible, deal with it prior to a sale. Depending upon the level of infestation, professional abatement may be required.
  • Rodents and other creatures: Rats or mice or rodents not only can carry disease,  but they can also do extensive damage extending deep into inaccessible areas. Their droppings and urination are a definite health issue. Other pests can include raccoons, skunks, squirrels, gophers, opossums, birds and bats. Recommendation: if rodents are visible, have them dealt with professionally prior to a sale. Other creatures may also need professional abatement but can often be dealt with by making sure all openings to a home (crawlspace, basement, exterior walls, attics, chimneys) are properly screened to keep critters out.

8. Structural shortcomings

Over the years, a home may suffer from neglect, abuse or even structural modifications that are not to code. The result can be sagging roofs, cracks or bulges in drywall or stucco, windows or doors that have uneven gaps or will not open or shut, chimneys that are cracked or leaning, damp subareas and more. Some issues may only be cosmetic, while others may require extensive repairs and upgrades.

Recommendation: Hire a professional home inspector to do a complete home inspection prior to sale. Use the inspection report as a guide to determine which issues should be remedied prior to a sale and which items can be left alone.

9. Water worries

Water is insidious and, once allowed inside a structure, can do all sorts of damage. Most interior products are not designed to deal with water and will quickly deteriorate when exposed to moisture. Water can come from leaking roofs, clogged gutters and downspouts, plugged drains, unsealed windows and doors, faulty appliances and fixtures, leaky pipes, failing showers, unwaterproofed basements and more.

Over time, the damage can be catastrophic. Care should be given to ensure that all the plumbing supply and waste lines are in good condition, the home is properly weather sealed and so on. Steps should also be taken to ensure water is diverted away from the exterior: the roof should be in good condition, gutters and downspouts must be free of leaks and debris, and diverters should be installed at the bottom of gutters to direct runoff away from the home, and, if necessary, French drains or other methods of diverting exterior water should be in place.

Recommendation: The same as No. 8 above.

10. Neighborhood nuisances

Whether barking dogs, a neighbor who holds loud parties, registered sexual offenders, trains, airplanes, main intersections, highways, industrial zones … the list is endless. While the majority of these cannot be controlled by any given homeowner, they can be disclosed upfront so that any potential buyer is aware of their existence prior to a purchase contract. It is in no one’s best interest to discover these issues once a home is in contract: this could force a cancellation and harm a home’s future prospects. Disclosure laws vary from state to state: in California, as an example, state regulations mandate that all potential neighborhood issues be disclosed. Other states have almost no disclosure laws, putting the proof of discovery firmly in the buyer’s court. Care must also be given to the content being disclosed: as an example, registered sex offender addresses are notoriously inaccurate and, if incorrect information is disclosed, could be tantamount to slander. Care must also be given so as not to violate any fair housing laws. Thorough knowledge of federal and local regulations is critical.

Recommendation: Thoroughly disclose all facts as required by local, state and federal laws and have the disclosures available while the home is being shown and BEFORE you get into contract. We require buyers submitting an offer on our listings to sign a receipt stating that they have not only received the full disclosure package prior to writing an offer but have read it as well.

11. Title troubles

Nothing is worse than paying to market a property, getting it into contract and then discovering it has a clouded title that cannot be conveyed. We have seen homes with loans that have been paid off but not properly recorded, wrong persons on the title (ie: divorces where one party was not correctly removed or persons who are now deceased), failure to recognize that a homeowner died intestate and the property needs to go through probate and more.

Recommendation: Get a full preliminary title report BEFORE the home goes to market to ensure there are no surprises.

12. Permit problems

Homeowners have been known to do all kinds of “upgrades” without the requisite building permits. While some minor items can potentially be overlooked, actual additions, garage conversions, significant structural modifications and a host of other more serious modifications without permits can cause serious problems for the new owner. Local building departments have the authority (varies from locale to locale) to red-tag properties and ask that any upgrades either be removed or go through an investigative process to obtain the correct permits and confirm that everything was done to code. Once a buyer purchases a home, they are now on the hook for any corrections that might be insisted upon by local building authorities.

Recommendations: This is a tough one — truth is, permits should have been obtained. The cost of remediation may be very expensive and time prohibitive. In many cases, the best solution is to fully disclose the situation and hope a buyer comes along who does not mind absorbing the risk.

13. Remodeling remonstrations

Over the years, we have seen remodeling efforts go bad. In some cases, the owner failed to get the correct permits (see No. 12 above). In other cases, they had poor taste and the “upgrades” actually detract rather than enhance. In some instances, the seller, attempting to save money, did not complete the work to acceptable standards. Others start a project but then lose enthusiasm or the funds required to finish. The worst scenarios incorporate all the above issues.

Recommendation: If the upgrades detract, then this should be reflected in the upfront price. If possible, unfinished projects should be completed prior to sale. 

14. Disclosure dilemmas

As mentioned in No. 10 above, disclosure laws vary from state to state. It is incumbent that the seller follows local rules to fully disclose to the level required. In our state, the rule is Disclose, disclose, disclose. Failure to properly disclose anything can result in a canceled transaction or, worst case, a lawsuit.

Recommendation: know the local disclosure laws and follow them to the letter. We use a checklist approach with our sellers to ensure that they do not forget anything.

15. Hazardous habitats

Earthquakes, tornados, hurricanes, seasonal flooding, wildfires … the list of potential natural hazards is long and can be severe. In our region, we are compelled by state laws to provide a Natural Hazards Disclosure which details proximity to earthquake fault zones, potential liquefaction, areas of potential flooding, distance to manmade dams, wildfire zones, asbestos outcroppings, leaking underground storage tanks and on and on.

Recommendation: This requirement varies from state to state. Some agents in our area prefer to order this report once they are in escrow — I believe it should be ordered ahead of time and included in the disclosure package to head off any potential issues prior to writing an offer.

In all cases, the idea is to deal with these issues before you either get to the market or get a contract.

While we’re aware that this practice differs from region to region, we recommend that sellers provide a comprehensive disclosure package to all potential buyers prior to receiving a contract that highlights as much information as possible so that buyers can make informed decisions. This approach removes as many potential reasons for cancellation as possible.

Once a property goes into contract and issues are discovered, the seller is in a negative position and must either adjust the price, provide credits or deal with a cancellation that, in a declining market, could adversely affect the property’s prospects. Better to effectively prepare in advance than have to backpedal and deal with potential deal-breaking issues once in escrow.

Carl Medford is CEO of The Medford Team.

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