Palos Verdes Real Estate

The Top Ten Reasons Escrows Fall Out

When I got into this business 35 years ago, my office couldn’t help but notice that my escrows almost never fell out.  They were so impressed that they had me give a series of classes on the subject to the newer agents.  500+ escrows later, my escrows still almost never fall out.  What follows are the Cliff Notes on why that is, without giving away all my trade secrets.

First, by way of general explanation, every contract provides a buyer contingency period (normally 10-20 days) at the beginning of the 30-60 day escrow period, during which they are expected to do their “due diligence”:  inspect the property, sign the disclosures, nail down their loan, etc — generally satisfy themselves that the property is what they thought it was when they made the offer.  During this time, they can walk away from the deal with impunity.   So as the newly-in-escrow happy seller, you don’t want to be picking out champagne quite yet.

So, that having been said, here are the Top 10 Reasons Escrows Fall Out:

1)  Buyer Gets Cold Feet:  This most common reason is tough to avoid up to a point, that point being the day the buyer must release his contingencies.  Under the old system (10+ years ago), where the buyer had to give a valid reason for withdrawing, Cold Feet was hard to act on without some other credible reason.  There are lots of drawbacks to the current system, and the buyer’s right to walk with no questions asked is one of the big ones.  The best antidote to this is to keep the contingency period for removing all contingencies short (I like 10 days vs the boilerplate 17) and be, as the seller, prepared to cancel on Day 11 unless the buyer has a real good reason for not signing the contingencies off as agreed.  I see too many sellers dragged on for weeks because either they or their agent are afraid to make the buyer “fish or cut bait”.  The longer this goes on, the more you may feel you have “invested” with the buyer, making cancellation progressively more unattractive.  If the buyer won’t sign off contingencies and won’t tell you why, Cold Feet is indicated, and you want to know now — not after having wasted 45 days with him.

2)  Buyer Can’t Get the Loan:  With rare exceptions, there really isn’t any excuse for this one.  When the offer is presented, the listing agent should verify that the buyer can get the loan specified in the contract.  That does not include accepting a “pre qualification letter” from a Mortgage Broker at face value.  Unless the listing agent knows the mortgage broker who wrote it, or the letter is direct from a major direct lender (Chase, Wells Fargo, etc), unquestioning acceptance of it is risky.  I won’t get into all the reasons — just trust me on this one.  There are ways to minimize this risk, but I warned you I wasn’t going to give away all my secrets.

3)  The Inspection Turns Up Bad Stuff:  Might even be (in fact, usually is) that the seller didn’t know about it — the foundation is cracked, the furnace has a cracked firebox, there’s [gasp!] asbestos in the ceilings, the roof has developed skylites, and on and on.  This is where having someone in the deal who understands this stuff can be invaluable.  Most Realtors, either due to fear of legal action or lack of understanding, don’t get involved past telling you to find someone to look at it, which usually means Yellow Pages and $$$.  Your agent should have tradesmen he or she has picked up over the years that can provide competent, reasonable repairs to such as the roof, heating system, concrete work, etc, plus cosmetic changes you may want to make such as carpet, paint, and remodeling.  The hysteria that can occur when a) no one understands the issue, b) the inspector is trying to be a “hero” by telling the buyer how he’s saving him from this horrible house, or c) the guy from the Yellow Pages (who therefore knows you didn’t have anyone to call) quotes a confiscatory rate, can often make an escrow go south.

4)  The buyer does not attend the inspection:   This may look innocuous, but if you think about it, if a buyer is sufficiently invested in buying the property, he should be interested enough to show up at the inspection to see what is actually discovered and to ask the inspector a few questions.  If he doesn’t show up, that’s a bad sign right there.  But the real problem comes when he gets the written inspection report.  These almost invariably look worse than reality because a) the pictures of defects, no matter how minor, always look ugly, and b) there is a lot of verbiage in there, the primary purpose of which is to cover the inspector’s rear end in the event the report ends up as Exhibit A.  Much of the stuff doesn’t even apply to the property, but that isn’t always clear in the written report.  I always insist that the buyer be at the inspection to avoid this avoidable issue.

5)  Aunt Millie (the real estate expert from Ft Smith, Arkansas) comes to see the house:  Oy.  Doesn’t matter that Aunt Millie hasn’t seen a single other house in the area — she doesn’t “see how you could buy a house for this price with a kitchen that needs remodeling”, not understanding that, all else being equal, the same house with a remodeled kitchen would be $50K over your budget.  As a buyer, it is important to get all “decision makers” into the process early, which includes getting Aunt Millie out of her double-wide.  They must see enough homes that they have some perspective on what you get for your budget; otherwise, you as the buyer will knock yourself out to find the “deal of the century”, only to potentially have a completely unqualified 3rd party kill the deal.  If Aunt Millie is not willing to go out looking at houses with you, then she doesn’t get to criticize the decision.

6)  The Appraisal Is Low:  Prior to the current financial excitement, this wasn’t a problem; if the walls were close to vertical, you were fine . . . which is one nearly unmentioned reason we got into this mess.  But that’s a subject for another article which, come to think of it, I have posted at “The Problem With Appraisals“.   The appraisers are now operating under [occasionally hilariously illogical] tightened rules handed down from the

Ivory Tower, almost none of which actually address the fundamental problem with appraisals, but which can serve to make the appraisal an anxiety-inducing event.  There is little control over who the appraiser is, but the lender should help out here, and the listing agent should meet the appraiser at the property to make sure he is looking at the relevant other sales (aka “comps”).  One of the problems with appraisals not addressed amid all the recent handwringing in Washington, is that appraisers are, generally, completely unfamiliar with the recent sales to which they are comparing the subject property.  My article gets into this, so I won’t here.

7)   The Buyer Can’t Come Up With His Downpayment:  Now seriously, is there any excuse for this?  No, there is not.  Prior to jumping into bed with a buyer, it is incumbent upon the listing agent to verify the buyer’s source of funds.  Acceptable answers do not include that it is in the Bank of Kandahar or in derivatives invested with Bernie Madoff.  As a seller, you want that money liquid and in this country.  If the buyer can’t demonstrate that he has the downpayment, he probably doesn’t and won’t when it counts.  As attractive as that over-asking-price offer is, it means nothing if it doesn’t close escrow, and this is a big red flag that it probably won’t.

8)  The Buyer Won’t Release His Contingencies:  OK, you better be in the first two weeks of escrow when you’re confronting this.  As mentioned above, the buyer generally has 10-20 days (preferably 10 if you’re the seller) to release all contingencies.  And I mean all contingencies.  If you’re at the deadline and he won’t do it, red flags and distress flares should be going off.  After having settled into the escrow for 10-12 days, gotten to know the buyer, his agent, had tea and crumpets during the inspection . . . it can be difficult to hold his feet to the fire but, barring a very convincing story as to why he won’t/can’t remove contingencies, you’re better off giving him his “24-hour Notice to Perform” and being ready to pull the plug.  The problem is that the buyer can walk from the deal and get his money back as long as there is even one contingency open, right up until the day you’re supposed to close escrow.  This is not good.  And it doesn’t matter which contingency is still open — if it’s the inspection contingency and he can’t get his loan (even tho he signed off his loan contingency weeks ago), he’s out of the deal if he wants to be.  I see far too many escrows where either the agents don’t understand this (the contingencies are not a sunset like they used to be, where silence at the deadline is deemed approval) or are afraid to confront it, and let one or more contingencies stay open until the close of escrow.  This is a lot like driving out on a frozen lake without testing the ice — you may discover your mistake after you’re far enough into it that the consequences are unpleasant.

9)  Buyer Won’t Prove His Ability To Buy:  Certain cultures view it as an insult to be asked to prove their ability to perform (both downpayment and loan).  That’s fine, but they’re not buying your house unless this issue is addressed.  Rather than walking away from a potentially viable buyer, I have a very effective way to handle this, by which we discover at the outset whether this is just a cultural issue or a negotiating tactic, and protect you either way.  You should not even open escrow without this having been satisfactorily addressed.  Finding out that the buyer’s lender misled him as to the terms of his loan is not something you want hanging over the deal during the last week . . . when you’re packing.

10)  Buyer Wants To Re-negotiate the Contract:  This is frequently also a cultural issue with people who come from cultures where the written contract means nothing.  The jungle-like business environment created by such a system probably does much to explain why they’re here, not there, but that’s the point:  they’re here.  In our system, the contract governs the transaction.  Discovering that the buyer expects to re-negotiate the contract 5 days before close of escrow (he often thinks he has you over a barrel at that point), is not pleasant.  If you have not taken precautions against it, court may be your only [unattractive] option.  I’m not as dumb as I look and, having run into this before, I again have a very effective means to avoid this while not jeopardizing what may otherwise be a viable deal.   But it must be part of the deal from the start; it’s not something you can do when the buyer suddenly pulls this stunt on you 5 days before close of escrow.  At that point, what you’re thinking of doing might get you five to life.

OK, there are

11)  Buyer Can’t Sell His House:  This is #11 because you should not jump into bed in the first place with a buyer who has a house he must sell to buy yours. It is not that his house won’t sell, per se; the problem is that, having not had his house for sale in the current market, he is probably predicating the price he’s willing to pay you on what he thinks he’ll get for his house and, when he can’t, he also can’t reduce it and still buy yours. From your point of view, apart from this issue, you lose all control over who he sells to and the viability of that deal which, if it falls out, causes the collapse of the whole thing.  There are ways to address this if the parties are both focused on selling/buying the house, but just taking your house off the market hoping the buyer’s house will sell is not one of them.

The buyer for your house never wants your house as badly as he does when making the offer, and it is important as the seller to use that initial enthusiasm to make the contract as airtight as possible.   All of the above catastrophes can be avoided if sufficient focus and knowledge is applied at the outset.  My clients tell me I’m real good at this.

Call me at 310 613-1076 or email [email protected] and we can discuss how all this applies to you.

This entry was posted on Thursday, February 9th, 2012 at 5:14 am and is filed under Buyers, Everything I've Written, Real Estate General Info, Sellers. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

1. danagraham said at March 12th, 2013 at 7:45 am

   Thank you. This all comes from 30 years of experience doing this, during which one cannot help but notice a few common themes. I appreciate you passing my site on to others.