How to lessen the odds and/or impact when a home Buyer defaults?
“I want to lessen the chances of a buyer default when selling my home”, says every home Seller!
So what happens when you’re selling a home and the Buyer defaults? What could you have done differently to avoid such a scenario? Ouch. Just the thought of it catches you off balance. You’re uneasy…I understand!
The word default never paints a bright picture. However, when selling a home there are a number of things that you can do to lessen the risk of such an event. I’m sure you’ll want to know what those things are, right? Keep reading.
When putting your home on the market for sale, you can avoid a lot of headaches simply by knowing what to be on the lookout for come home selling time. And, while it is not foolproof, it can go a long way in securing a qualified home Buyer. Nothing is ever 100% guaranteed, yet setting yourself up for optimum results should always be top of mind. By the way, whenever anyone offers you a 100% guarantee be very leery. In fact, run.
What should you be on the lookout for in order to lessen the odds of a home Buyer’s default?
Require a Mortgage Pre Approval
What exactly does that mean – a mortgage pre approval? A pre approval from a Bank or a Mortgage Broker is going to be your best chance in feeling confident of the home Buyer’s ability to purchase your home. Please understand it is not a guarantee, yet it can increase the likelihood of closing on your home – being your greatest assurance. Best chance to close, avoiding horror.
You need to make sure that the Realtor you’ve chosen to sell your home advises the Buyer’s Agent that you want to know that the Buyer’s Lender has reviewed the Buyer’s income, assets and credit, which amounts to; pay stubs, bank/asset statements/, tax returns and credit report being reviewed. This does not mean that the Buyer had a conversation with the Lender telling them they have $300,000 in a savings account, has excellent credit and makes $180,000/year. No, it means that the Buyer had gathered up their most recent pay stubs, their most recent bank/asset statements, last year or current year tax return and provided authorization to access their credit reports from the reporting credit bureaus and provided these financials to the Lender. The Lender will review the documents to determine the Buyer’s ability to buy your home in being able to afford the mortgage and determine their creditworthiness. A simple conversation about these documents not yet submitted, doesn’t matter. Get assurance that these documents have actually been received and reviewed.
Also a common tactic from Buyer’s Agents is to present your Real Estate Agent with a DU (Desktop underwriting approval). This is a document in which the Buyer’s Lender inputs information into a software program that runs numbers to determine a Buyers eligibility according to Fannie Mae guidelines. Useless again, if it’s simply from a verbal conversation between Buyer and their Lender. It’s only as good as the data entered. If the Buyer’s Lender has actually received the Buyer’s financial documentation from which to enter data, then yes, a DU is valuable.
Review contingency time frames
There are a number of typical contingencies within a Real Estate contract. You’ll find the most common ones are a financing contingency, an inspection contingency and an appraisal contingency. However, there are always other contingencies that can be added to a contract by the home Buyer. It’s the financing contingency that is of most relevant when it comes to a possible Buyer default.
Shortening contingency time frames can be good advice. Shorten them up. In doing so, you’ll discover any problems early on that could affect selling a home. Lessen the impact, should there be a resulting default. Time is money when it comes to selling a home.
Real Estate contracts offer an automatic, predetermined time period and can be altered by simply filling in the blank changing the time period. The financing contingency time period lets you know, as a home Seller, whether the buyer is going to be able to secure financing. For example, here in Southeast Florida where I sell homes from Coral Springs to Boca Raton, the standard Florida state Real Estate purchase contract has the financing contingency time periods defaulting at 30 days; the contract is contingent upon Buyer obtaining a loan approval by said date. Why do you want to wait 30 days to find out that a Buyer cannot secure financing? Ideally, reducing that to at least 20 days would be better for you, as a home Seller. If the Buyer has already been pre approved for their mortgage (which they should be), the Lender then has already had to retrieve and review the Buyer’s financials and credit, so a 20 day period shouldn’t be too hard to achieve. As a home Seller, make sure your Real Estate Agent understands this.
Also, make sure that contingency time frames are not in conflict with other time frames within the contract. For example, you don’t want a financing loan commitment to coincide with a closing date or to occur after closing. Crazy, you think. Yes, but I’ve seen it where a Real Estate purchase contract is submitted where the dates are indeed in conflict. Conflict is never a good thing when selling a home.
Require an adequate earnest money deposit
What is an adequate earnest money deposit you wonder? Well, it certainly is not defined by a couple of thousand dollars on a $400,000 priced home, for example. A lot will depend upon what type of loan they’re securing, how much they’re financing and the purchase price. You’ll want to grab ahold of a lot of money in the way of their deposit to be held in escrow.
A Buyer may be obtaining a loan with a down payment as low as 3.0% on upwards of 20% or more. Expecting a minimum of 50% of their down payment is not unreasonable and a $10,000 minimum can even be often requested. And of course, it’s not cast in stone and will be dependent upon all terms of the contract. At a minimum it should be 2%-3% of the purchase price. And of course, such terms can also be very local in what the typical earnest money deposit rate is for your area. Ask your Realtor.
It’s important to understand that in the event of a Buyer defaulting on the purchase of your home, an adequate deposit can ease your pain in having to have endured a lengthy home sale process only to find out the Buyer won’t be buying your home. In most Real Estate purchase contracts it clearly dictates what happens when a Buyer defaults, a home Seller will certainly be entitled to receive the earnest money deposit as recourse to the Buyer defaulting. Yet, also know that the listing agreement with your Listing Agent’s Brokerage will likely indicate that they are entitled to keep a portion of the deposit also upon a defaulting Buyer.
Now, it likely is a bit clearer on the importance of requiring an adequate earnest money deposit – you’re going to want to be compensated for the errors of the Buyer’s ways. You took your home off the market for this Buyer, endured a home inspection and appraisal only to discover after these periods that the Buyer’s ability to purchase your home came to a screeching halt. Of course, I am by no means providing legal advice, as such a scenario would welcome legal guidance.
Hire a Real Estate Agent who excels in communication
What does this have to do with a buyer defaulting, you wonder…how can it actually lessen a buyer defaulting? Communication…what could this have to do with a Buyer’s default? Let me explain its value.
Your Agent can be diligent in communicating with the Buyer’s Agent to ensure that they have reminded the Buyer on the importance of what not to do when in the process of a home purchase. There are a number of things to ensure the Buyer does not do and helpful reminders can go along way in avoiding any “oops” moments. (Actually it would be a lot more detrimental than simply an “oops”!) Such things as knowing not to make any major purchases during the home buying process, for one. Making any major purchases while undergoing a Real Estate purchase can be a sure fire way to get a loan denied after the loan had been initially pre approved.
This is often overlooked by many and with the number of Real Estate Agents that have obtained a Real Estate license, you may not always have the sharpest tool in tool box representing the home Buyer. It happens, sure. I wish it didn’t, but all Agents are not created equal. You’ve got part time Agents, new Agents and unscrupulous Agents that can and will muddy up the waters in just about any Real Estate transaction. Not to speak bad about Agents, but experience matters indeed.
Punting is likely your best option when a buyer defaults
You’ll need to find a plan B with a defaulting Buyer when you didn’t adhere to the above recommendations or if you did, yet still you found yourself with a defaulting Buyer.
It’s done. It happened. It’s too late. Don’t get to your point of overwhelming desperation. Here, punting to plan B can be your best option. In life, we often learn by our mistakes; hoping next time affords a better outcome.
The only punting or effective plan will be to put your home back on the market, let home showings begin again, and start all over again to find a new Buyer. But, having been through the experience of a buyer defaulting, I would say that now you know what to do the next time.
Better yet, hopefully you’ve read this Real Estate article and have learned before you actually have to learn the hard way; wouldn’t that be ideal…how to avoid selling a home and the Buyer defaults – how great would that be?!
Back to market would be your choice when you’ve decided against bringing suit against the Buyer. You’ve secured the earned money deposit as damages for the defaulted Buyer and prefer to forgo any lawsuit. Always discussing your options with a well qualified Real Estate Attorney is advisable.
It’s all about initially vetting the buyer for your home; checking what they’re presenting. Are they indeed factual or is it all a web of loosely tied together malarkey? Get rid of the uncertainty and demand the facts. You’ll be glad you did.
Fitting Articles to read, include the following:
A step by step home selling guide by Petra Norris
Avoiding Costly Home Selling Mistakes by Luke Skar
What to Expect from your Listing Agent by Sharon Paxson
Sure Fire Ways to Get Your Mortgage Pre Approval Revoked by Bill Gassett
Can a Buyer back out of buying a home? By Kevin Vitali
Helpful Advice as to Why It Matters Who You Hire to Sell Your Home by Jamohl DeWald
Today’s Real Estate article “Selling a Home and the Buyer Defaults [Now what?]” was written by Lynn Pineda a top Coral Springs Realtor and Boca Raton Realtor. You’ll find Lynn selling homes in Southeast Florida in the cities of Boca Raton, Boynton Beach, Coral Springs, Delray Beach, Coconut Creek, Deerfield Beach, Margate, Parkland, Pompano Beach, Tamarac, Sunrise, Plantation and Ft Lauderdale areas within Broward and Palm Beach counties. Call Lynn at 954-464-1100 if you have questions about how to avoid a buyer default when selling a home in Boca Raton to Coral Springs and around!
Lynn Pineda, a licensed Southeast Florida Real Estate Agent serving Southeast Florida since 2005 Keller Williams Coral Springs Realty. Real Estate Promises Delivered. You can speak with Lynn by calling/texting her at 954-464-1100 or you can email her at: LynnP@ImagineYourHouse.com if you need to buy or sell a Southeast Florida home. Your local, trusted professional when it’s time to buy or sell a home. Real Estate promises delivered.