Why Real Estate Deals Collapse

30.10.2015

Quite often during this busy East Van real estate market, properties will have an accepted offer within a few days of listing, giving that Buyer a few days to go through their due diligence on the purchase: mortgage approval, a home inspection and time to read the strata docs. Usually, this means that the property will eventually sell, however, there are situations where the original Buyer decides not to go through with the purchase, making the property available again! Why do real estate deals collapse? There are a few reasons..

1. Financing isn’t Approved

If Buyers need to get a mortgage on the property, then they have to go through their bank/lender/mortgage insurer in order to get official mortgage approval. Since the bank/lender/mortgage insurer is taking on the property (through their loan) they have to approve the property, which may include getting a third party appraisal (opinion on value) and reading through some of the strata docs. I’ve seen quite a few situations where the property is undergoing a major maintenance project (i.e. a rain screen) or is about to go through a major project, that the lender isn’t comfortable going forward and terminates the deal. Other times, the building will be “red flagged” due to previous issues, making a mortgage lender uncomfortable going forward.

I’ve also had Buyers who had to cancel a purchase contract because they were expecting part of the down payment from a family member who wasn’t able to provide the funds when it came time to getting mortgage approval. I’ve also seen situations where the Buyer had not spoken with a mortgage broker prior to getting an accepted offer on a property and either didn’t have enough time to secure financing, or wasn’t approved for the financing they thought they would get.

2. Something was off in the Strata Documents

Every Buyer will have a chance to read the strata documents for the building, which includes two years of minutes, Engineer’s Reports, Depreciation Reports, Property Disclosure Statements, Finances, Bylaws and Rules. If you read something in the documents that you aren’t comfortable with – say the building doesn’t allow BBQs on the patio, or the Contingency Fund is really low, or the Buyer did renovation without permits, etc – you can cancel the deal.

3. The Home Inspection didn’t go well

Buyers can have a home (and building) inspection done before going through with a purchase. Along with the strata documents, the home inspection offers a full picture of the building, and gives you a good idea of how the building has been maintained and what type of work the building will need in the next few years. I’ve been involved in a few situations where the home inspector finds a few too many issues with the building – that would not be known to someone who little knowledge on building construction – to the point where the Buyers aren’t confident in the building and the future costs.

4. An Unknown

Every so often there could be other interesting conditions on a potential real estate deal. I’ve seen situations where the Buyer is given the chance to show the unit to a family member who approves or disproves the unit (killing the deal if they don’t approve it). An accepted offer may have a subject to sale of the Buyers home, which often has a time limit for the sale. If the Buyer can’t sell their current home by that time limit, the contract to purchase the new home terminates.

At the end of the day, if you love a unit that already has an accepted offer – find out when the subject removal date should be and what the subjects are. If the Seller is still willing to show the unit, it might be worthwhile to see so that you can be prepared to write a quick offer on the unit if the original accepted offer collapses. You can also consider a back up, which would immediately come into play if the initial accepted offer collapses.

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