Broken Deals -- "Traditional" Sales

Picking Up the Pieces After a Fall-Through

Fools rush in where angels fears to tread.
--Alexander Pope

"Sale Fell Through!" "Back on the Market!" Great house!

You don't have to spend much time on MLS these days to see evidence of busted deals.

So what exactly is going on? Do any of these deals represent opportunities for future Buyers? (Note: I address broken foreclosure deals in my previous post; this post addresses "traditional" or non-lender mediated sales.)

As economists like to say, it all depends.

"Active" to "Pending"

The first thing to know about a home that was formerly "Pending" on MLS, and that is once again "Active," is that it most likely does not have to do with inspection issues.

That's because the convention is not to switch a home from "Active" to "Pending" until the Inspection Contingency is removed.

So, if the inspection turned up multiple, material defects that caused the Buyer to walk, the home's MLS status likely never would have been switched from Active to Pending.

The second thing to know is that if the deal fell apart because the inspection was a disaster, the Seller is legally obliged to update their disclosure.

So, if the inspection revealed a failing roof and a cracked foundation, the Seller would have to disclose that information to future Buyers.

In fact, that requirement is why Sellers have a strong incentive to resolve any issues with the Buyer at-hand -- and often do.

Financing Failures

So what does that leave?

In the vast majority of cases: the Buyer's financing.

Realtor convention is to switch a home's status to Pending after the Inspection but before the Buyer's financing is finalized, which can take a couple weeks.

The key step in that process is the appraisal, but the bank also needs time to finish vetting the Buyer's finances.

I like to characterize the gulf between a lender's pre-approval letter and a final underwriting commitment as comparable to the one between dating and getting married -- in other words, it's big.

In a rocky economy, there are lots of prospective Buyers who superficially look good on paper, but have credit blemishes (or worse) that pop up when the bank does its due diligence.

Of course, it's also possible that Buyer's finances were fine, but the home didn't appraise; when that happens, the parties can either re-negotiate the price, or the Buyer can increase their downpayment.

If neither happens . . the deal's off, and the house comes back on the market.

Taking Stock

Does that spell opportunity for other Buyers?

It certainly can, for two reasons: 1) to overcome market skepticism, Sellers frequently have to discount the price; and 2) due to the delay in selling, the owner may now have a time deadline that makes them more motivated.

However, the single biggest question after a busted deal (still) is, "how well-priced is the home given its location, size, and condition?" In turn, that depends on the "comp's."

A home that was overpriced before a sale fell through is not automatically a bargain afterwards.