5 Reasons Why Real Estate Deals Collapse

Almost a third of the escrows that open today fall apart, a disheartening fact for buyers, sellers and agents — but mostly sellers, who often have been waiting a good long while for a viable buyer to come down the pike.


The good news is that we know why deals are imploding and have some solutions:

1. Banks aren’t lending money.

Oh, they say they are alright. But we know better, don’t we? Jump through hoops and promise them your firstborn and then maybe — maybe — you can get a loan if you put down 20 percent or more.

Tighter lending standards have made it hard for even credit-worthy buyers to get a mortgage. More than 25 percent of mortgage applicants are rejected and many more are simply afraid to even apply. And despite what you read about cash buyers, they come along as often as the tooth fairy. Less than 30 percent of sales are to cash buyers.

Solution: If you want to buy a house, find out first if you will qualify. Why waste everyone’s time, including your own, if you need to get financing and won’t be able to? Buyers need to get pre-approved by a lender and know once and for all where they stand. And understand that a pre-qualification letter is different from a pre-approval letter. A pre-qualification letter isn’t worth the paper it’s printed on; it is issued by a lender based on your answers to a few questions and maybe a credit check. It doesn’t obligate the lender to give you a nickel. A pre-approval letter means the lender has looked at your pay stubs, your financial records, your tax statements and says you are someone to whom — assuming nothing changes — they would consider lending money.

Another solution for sellers to consider is holding the mortgage for the buyer. Not without risks, but for those in situations with a lot of equity, it’s a choice to consider.

2. Buyers want perfection.

Inspection reports that turned up lots of little niggling things either used to be ignored or — at most — opened the door to some further minor price negotiations. All nickel-and-dime stuff. Today’s buyers, bombarded by bad economic news and consumed with worry about their own situations, get spooked by the smallest loose roof tile and they bolt from the deal.

Solution: Sellers should get their homes inspected before listing them. Fix what needs to be fixed and address everything else in the listing price set. The listing agent should make this inspection available to every serious looker. By doing this, you eliminate buyer surprise. The buyer may — and should — still have his own inspection done, but as a seller, you will be able to point to the report and say “we already told you about that.”

3. Appraisals come in too low.

This happens for a few reasons, but chief among them are appraisal pools — something that was created in 2009 as a result of new rules aimed at lessening lenders’ influence on home appraisers. What the lenders did was outsource appraisals to different firms, and in the process got appraisers who often aren’t as familiar with the communities of the homes that they are valuing.

Out-of-town appraisers who don’t understand local neighborhoods only have the numbers on the books to guide them. That means that short sales and foreclosures that lower your neighborhood comps are counted, but there’s no awareness of the desirability of your street.

Getting a low appraisal is big-time crazy-making. Suddenly the buyer who thought he got a great deal begins to question his wisdom. It also means that a lender might not fully fund what the buyer expected, and the buyer has to cough up some more money — if he even can.

Solution: Bring back the local guys who knew what they were doing. Our rule of thumb: If an appraiser can’t find your house without his GPS, he’s out of our comfort zone.

4. Short sales are a nightmare.

Well, it’s true. Short sales take longer to complete, are frustrating in the process, and while you are waiting for the bank to get its act together, prices around you are dropping further.

In the eternal quest for a bargain, some buyers have focused their home search on foreclosures and short sales. Ultimately, the lower price they may pay comes with a price tag that isn’t always visible: For short sales, it’s lost time. For foreclosures, it’s not knowing what problems the house has because bank-owned properties don’t come with seller disclosures.

Solution: Enough with coddling the banks. Why hasn’t the government set a time frame by which banks must give a thumbs-up or thumbs-down on short sales? Short sales are basically a negotiation between the homeowner and the bank: Will the bank take less than what is owed and leave the poor upside-down seller’s credit and remaining assets intact? Everyone gets that a short sale attempt is the last-gasp breath before foreclosure, so banks know the outcome if they say no. End of story.

Furthermore, why should banks get away with not having to disclose a home’s defects? Banks should be required to have the property inspected and disclose to buyers what they are getting. Even day-old bread in the supermarket gets marked as such. Why not a house costing hundreds of thousands of dollars?

5. Buyers get cold feet.

Buyers are just plain scared, and who can blame them? They could lose their jobs, lose their medical coverage and get wiped out financially because of illness. Truth is, just about anything could happen — to any of us.

Solution: There are many good reasons to buy a home and many good reasons to remain renting. Some of those reasons are financial, but many are not. Homeownership isn’t for everybody, but if it is for you, take the plunge. Talk to a financial adviser, a tax guy, your family, a shrink. Remember: Life is what happens while you are waiting for things to happen.

Article is from AOL Real Estate.