When you’re buying a home, you’re undoubtedly doing everything in your power to make sure the process goes smoothly. But as Tim Walters, broker and owner of The Buyer’s Agent in the Minneapolis metro area, relates, real estate transactions tend to be a bit like airplanes.
"You never hear about the safe landings or takeoffs, but you sure hear about the plane crash," Walters says.
It’s far more common that a home will successfully change hands once an offer has been accepted, but as a homebuyer, you should always be prepared for the worst-case scenario.
There are a number of ways a real estate deal can fall through, the most common of which include a lender's rejection of the mortgage application, the home appraises for less than the sale price and the inspection reveals significant defects in the home. Even if it means walking away from a home the buyer was eager to purchase, he or she continues to have options moving forward.
Depending on the scenario, the buyer can work to move forward with the same deal, though in many cases real estate agents recommend moving on to find a home better suited for the investment. Here’s how you can determine the best course of action, and how you can better set yourself up for success when you find the right home.
When your lender doesn’t approve your mortgage. You may have worked hard to improve your finances and it may have been years since that one credit mishap, but surprises arise that can prevent you from being approved for a mortgage once you’ve entered a contract on a house.
"You can always try another lender, or you can go back to the underwriter" and discuss the reason your application was rejected, says Linda Sowell, owner and principal broker of Sowell & Company, a real estate firm in Memphis, Tennessee.
But when the reason for the rejection has to do with your financial history, it’s often best to move on from the deal and re-evaluate your budget to a home price more likely to be approved by the lender, Sowell says.
To be more confident with your finances on the next home you put an offer on, Walters notes it’s important to seek preapproval – not just prequalification – for a mortgage.
"You really want all your ducks in a row and your finances in [to the lender] right away or even before you make an offer on a house, so you don’t have any surprises," she says.
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When the home doesn’t appraise for the sale price. Your mortgage approval may additionally hit a wall if the appraisal ordered by the lender comes out to less than the contracted sale price. While a seller may benefit from getting a second opinion for a future deal, as a buyer relying on that mortgage approval, you may be unable to convince the lender the agreed-upon sale price makes for a solid investment.
"If [the buyer] wanted to pay the difference between the appraisal and purchase price, they can do that, but many buyers aren’t in that situation," says John Myers, owner and qualifying broker of Myers & Myers Real Estate Inc. in Albuquerque, New Mexico.
You’ve likely set aside money for a down payment on the home and you’ll need to have a budget for closing and moving costs, so in many situations paying extra out of pocket simply isn’t possible. Myers also notes that in a particularly hot real estate market, you may come to expect sale prices to jump beyond what a property appraises for due to bidding wars and stiff competition.
When presented with the appraisal obstacle, Walters says he typically presents his buyer clients with three options: pay the difference, walk away from the deal outright or renegotiate the sale price with the seller. "Being a buyer advocate, I like the [last choice] because the seller’s going to be in the same position again, potentially, if they just cancel the contract," he says.
When the home inspection uncovers problems. Any home inspection will reveal issues or room for improvement in a home – be it a pest problem, dry rot or gutters that need replacing.
Because your home is likely one of the largest investments you’ll ever make, you should carefully weigh every problem uncovered in the inspection, and ask whether it’s something you feel significant enough to either demand a lower price or choose to back out of the deal entirely.
"In most cases I advise my buyers to walk away from a deal and find a home that’s in a much better condition," Myers says.
Not all sellers are willing to put in the effort and money that goes into making a major repair before they hand the home over to a new owner. In that case, unless you're able to successfully negotiate the price down to make up for the cost of repair, walking away will likely be the best decision in the long run. You'd also need to be motivated to make repairs immediately if you stick with the deal – major issues like a leaking roof or asbestos in a popcorn ceiling can become catastrophic if you delay.
If you ultimately decide to step away from the deal due to revelations in the inspection, it should be easy to jump back into house hunting with a clear mind for what projects you would or would not be willing to take on in a new home.
"[The buyer] absolutely should have no problem canceling and moving on, because the last thing you want to do is move forward and be stuck with one of the biggest investments of your life" and it be something you regret, Walters says.
She has appeared in media interviews across the U.S. including National Public Radio, WTOP (Washington, D.C.) and KOH (Reno, Nevada) and various print publications, as well as having served on panels discussing real estate development, city planning policy and homebuilding.
Previously, she served as a researcher of commercial real estate transactions and information, and is currently a member of the National Association of Real Estate Editors. Thorsby studied Political Science at the University of Michigan, where she also served as a news reporter and editor for the student newspaper The Michigan Daily. Follow her on Twitter or write to her at email@example.com.