"Sale Fell Through! Back on Market!"

Cleaning Up After a Broken Deal

If you're seriously shopping for a home, you've undoubtedly seen one of these properties online.

And if you've been selling real estate long enough, you've almost certainly had it happen to you:

What exactly? A not-quite "done deal" . . . that came undone.

Background

First, a little background:

Listing agents typically switch a "for sale" property from "Active" to "Pending" status once the Buyer's Inspection Contingency has been removed (a home goes from "Pending" to "Closed" or "Sold" once the Buyer actually takes title and the Seller gets their money).

So, a deal that comes undone as a result of an inspection issue -- or multiple issues -- usually never goes "Pending" in the first place.

Rather, in today's housing market and economy, when a home that was formerly "Pending" becomes "Active" again, the reason is invariably financing-related.

Financing Issues

"Financing-related" as in, the Buyer couldn't get it.

Just because a bank has issued a pre-approval letter doesn't mean that the Buyer is home-free (sorry, bad pun).

The bank must still vet the Buyer's income and assets, verify the source of their down payment (if it's coming from a third party), and, perhaps most importantly, appraise the home to make sure the bank has sufficient collateral.

Even when all those hurdles are surmounted, if the Buyer loses their job or their credit suddenly deteriorates, the loan can (and does) go "poof!"

Possible Responses

If that happens, it's certainly possible to simply switch the property's status from "Pending" back to "Active."

And many Realtors do.

But the more common response is to explicitly acknowledge that there was a busted deal, in conjunction with a renewed marketing push.

There are two reasons for that.

One. The Realtor needs to find another Buyer!

Just like a price reduction, new staging, or some other change in the home's status, a busted deal ultimately serves as a pretext to re-contact anyone who's previously shown interest in the home (as well as attract the attention of people who've just started looking).

Two. Buyers are going to find out, anyways.

Depending on which online sites Buyers are looking at, or what type of MLS report their Realtor is sending them, the archived "history" of each listing is at most 3 clicks away.

In fact, that's one of the first things I like to look at, to find out whether a listing is fresh or stale, how long it's been since the last price cut (and whether another one is due), etc.

Coming clean about the busted deal helps defuse it, and lowers the odds that the next Buyer will get cold feet if they discover the busted deal later on.

I'm just not sure that I'd put it in boldface and italics -- with lots of exclamation marks (!!!) to boot.

P.S.: Although I (interchangeably) use the terms "busted deal," "broken deal," etc., the more accurate description for most of the foregoing scenarios is that the Buyer's financing contingency failed.

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.