Why Pending Home Sales Go Bad
When Mortgage Loans Fall Through and Other Lien Issues
It always arouses suspicion in the neighborhood when a pending house sale goes back on the market as an active listing. Everybody wonders what went wrong. Why did the sale fall apart? Is there something wrong with the property? Did the buyer or seller do something wrong?
It's actually very common to see a "pending sale" sign pop up after two or more months in a buyer's market because the days on market are often much longer when there are fewer buyers than sellers. But it's just as common to see the pending sign come down again. This happened with almost 4 percent of all U.S. home sales in 2016. A sale could cancel due to seller's remorse, but that's a long shot.
Pending Sales Can Go Bad When a Mortgage Loan Falls Through
Buyers might not have knowledge of liens or judgments filed against them until public records are searched by a title company or a lawyer prior to closing. A lender will not lend unless these liens are removed so the loan the buyer thought he had in place can be denied.
Sometimes buyers who don't know any better increase their debt ratios while they're waiting for their mortgage loans to close. They finance large purchases, taking out a loan for a new car or financing the purchase of furniture. This can make a buyer ineligible for that mortgage loan she thought she had in the bag. The pending sale will go back to active if the loan is rejected due to a buyer's impulse financing.
The moral of the story: Do not make any financial arrangements or commitments that differ from those disclosed on your initial loan application. Wait until your loan records and the transaction closes.
Other Lien Issues
It might be discovered at the penultimate moment that the seller can't legally transfer the property to the buyer—at least not without satisfying liens against it ahead of time or at closing. A seller might not be willing to do this. The lien in question might be astronomical so the seller would have little money left to establish himself in a new home if it's paid off from the sale proceeds.
Typical liens include those for unpaid property taxes and other debts, but they might involve something else entirely. Perhaps there's another party on the deed—maybe an ex-spouse—who isn't willing to sign off on a title. The sale can't go through unless and until that lien or encumbrance is removed.
Sometimes buyers just get cold feet. Standard contracts usually give buyers two to three weeks to do inspections and take care of other details, and buyers can often cancel a contract for any reason during this time. Buyers get their earnest money deposit back for any reason upon cancellation during this period, sometimes called an "option period" or an "active option."
Sometimes a property goes back on the market simply because the buyer got scared and fled for the hills. First-time home buyers can benefit greatly from using the services of an experienced real estate agent who can walk them through the process of buying a home. An agent who notices signs of cold feet can provide counseling and help buyers avoid making a mistake like this.
Many homes look the same to an untrained eye: four walls, a floor, and a roof. But every little crack in the wall and every spot on the ceiling could spell trouble to a home inspector. Wet basements, failing roofs, and malfunctioning HVAC systems are three significant problems that an average buyer can't reasonably inspect without professional assistance.
Buyers tend to panic when a home inspector points out problems in a home, but all homes have problems—even new ones. Sometimes buyers demand that sellers replace worn appliances or fix pre-existing conditions.
A buyer can also ask for a credit from the seller as compensation for perceived defects. The pending sale cancels and the home goes back on the market if the seller refuses any of these options. Don't make unreasonable repair or credit requests. Hire a qualified home inspector who can explain the defects to you and their significance.
Lenders almost always ask buyers to pay for appraisals to protect their position when and if they ultimately end up financing the home. Sometimes appraisals come in at less than the sales price. Buyers have a few options when this occurs.
The buyer can pay the difference in cash or order another appraisal from a new professional. She can supply the underwriter with comparable sales that support the sales price or give the seller a second mortgage for the difference. A buyer might ask the seller to reduce the price so it's more in line with the appraisal. But the pending sale will fall apart if the parties can't agree to work out one of these solutions.
Always ask a real estate agent to provide you with comparable sales before you write a purchase contract. This will allow you to keep your offer in line with recent sales. You might also want to hire a strong negotiator to get the offer accepted at this lower price.
Offers That Are Contingent Upon the Buyer's Home Sale
A buyer can lose a home sale if the contract is contingent upon him selling his own home and that hasn't happened within the specified time period. Few buyers can afford to own two residences at the same time, making double mortgage payments. Even if the first house is paid off, he might need cash from that closing to put down on the new purchase.
These contingent offers can create a domino effect. All other transactions that are contingent upon that one closing will fall apart. Depending on the contingency agreement language, sellers might also retain the right to kick out a contingent buyer and cancel the contract if another buyer wants to buy the home without a contingency.
Have a backup plan in place in case your home doesn't immediately sell while you're under contract to buy another. Consider taking out a bridge loan. Some buyers save money by establishing a home equity line of credit before putting their existing home on the market.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.