When searching the internet, you’ll find hundreds of articles on what to do if your home sale fails. Each supply virtually the same tips and revolve around the traditional means of selling but few offer insight into what to do if your home sale fails with an investor. This article fills that void.
According to the National Association of Realtors, a total of 5.64 million homes were sold in 2020 with 733,200 sold off-market. This means that more than 1 out of every 10 were to institutional buyers and local investors. While it’s true that 96% of pending home sales get to the closing table, according to Forbes, the number of failed home sales have risen dramatically year after year and the rate at which home sales fail with investors is even higher. Knowing what could go wrong will increase your chance of completing your deal or help to get your home sale back on track.
What’s in it for you:
Understanding each of these scenarios will help you close your deal but as the adage goes - you should prepare for the worst and hope for the best.
Most entry level investors are known as real estate wholesalers. They enter a contract to buy a home, then assign their purchase rights to another party at a higher price and pocket the difference at the expense of the seller. The issue is that many wholesalers convince homeowners that their home is worth more than it is, and they have little-to-no experience estimating repair costs. As a result, no real homebuyers step forward causing your pending home sale to fail with these “investors.”
When buying houses, most investors don’t use their own money, they use OPM – other people’s money – to take advantage of the economies of scale. For instance, investor Gil has $100,000 and buys a house without financing that’s worth $100,000, his money is gone. Instead, investor Gil puts 20% down ($20,000) and uses OPM to finance the remaining 80% ($80,000). The result is that Gil now has five houses instead of one. If your home sale fails with an investor, it may be due to the investor not having an established network of lenders or he is inexperienced at applying economies of scale.
Some investors will agree to a seller’s asking price regardless of the home’s market value. They then have “friends and family”, who are really contractors, visit the house. After these visits some investors will claim that their “friends”, one of whom is an electrician, noticed the home will need to be completely rewired and it will cost $10,000. Another “friend” who used to own a roofing company noticed that the roof must be replaced, and it will cost $15,000. Due to these “new” costly repairs, the investor claims they cannot close unless the homeowner agrees to lower their price by $25,000 to offset the repairs. Unfortunately, this scenario is common and results in wasted time, hard feelings, and can cause your investor home sale to fail.
The issue is that many wholesalers convince homeowners that their home is worth more than it is, and they have little-to-no experience estimating repair costs. As a result, no real homebuyers step forward causing your pending home sale to fail with these “investors.”
Now that you understand how your home sale can fail with investors, let’s investigate how you can protect yourself before you agree to work with one:
1. Be selective – offer price isn’t everything
The highest offer usually receives the most attention, but you should consider the likelihood of the deal closing. Does the contract include contingencies like “subject to approval by buyer’s partner”? Is the contract assignable? These are red flags that can cause home sales to fail with investors.
2. Ask for proof of funds. No, demand proof!
Before signing a contract, require copies of the investors two most recent monthly bank statements. Any legitimate investor should have more cash on-hand than they are offering to buy your home for.
3. Supply a home disclosure notice to the investor
Sellers should (ideally) give this notice to investors before signing a contract. If this isn't possible, wait no more than a few days after signing. This shows good faith by you to close the deal. It also cuts out the investor’s ability to claim that “new” costly repairs were discovered so they must reduce your offer.
If you find yourself the victim of a failed investor home sale, there is hope for successfully closing your very next deal. Here's how to protect yourself this time around:
1. Not all investors are created equally
You probably received several offers from multiple investors but as is human nature, you were drawn to the highest offer. Once your investor home sale failed, you may be felt cheated, and even embarrassed. It would be untrue to say that all investors fail to close but for each successful closing there are two more that never happen because of dishonesty and corners being cut to chase a quick buck. The good news is that investors with high character, standards of professionalism, and ethics do exist. The trick is to run them through the screening process discussed above. So, go ahead and call the investors who previously gave you offers to request that they resend them.
2. Add a kick out clause to your next investor contract
Remember, an offer is just that – there’s no strings attached and zero obligation to accept. When you do accept, an option is to require that the contract have a “kick-out” contingency. This keeps your options open as it allows you to continue to market your property and accept other offers. If another favorable offer is received, you would give the investor a pre-specified amount of time, such as 7-days, to match the new offer.
3. Consider listing your home
Selling traditionally involves extra time, extra money, and complexities that go well beyond selling to an investor. There are mortgage approvals, home inspections, certified appraisals, surveys, and contingencies that the traditional buyer sell their current home before closing on yours. If you’re ok with the sale taking several months, your home is in good condition, and you’re willing to navigate the twists and turns of a traditional sale, then listing your home could be a good choice. Reputable investors will openly and willingly discuss this option with you, without any hassles or harassment to accept their offer.
4. Only sell to proven investors
It’s easy to know the reputable investors from the scammers. Here’s how: reputable investors like Good Vibes Homebuyers have an established, proven track record, their own financing (and proof of it), a quality website, and offer value-added services like free local moving, extended stay options, cash advances, and help with finding a new home.
1. How much time should a contract allow for closing?
It depends on the property’s title. If there’s no known liens or heirship issues, investors can close in 7-30 days (Good Vibes Homebuyers can close in 5 days). If the property’s title has issues, we recommend 30 days to allow time for the investor to solve these problems on your behalf (and they should solve problems for you, if they don’t it’s a major red flag).
2. If I have concerns about my home sale failing with an investor, should I ask for a higher purchase price?
Determining the value of a home is a straightforward process and proven, experienced investors know how to accurately value homes. So, if you’re working with a reputable investor they will not pay more. On the flip side, predatory investors will, and this is the first sign your deal could go south. Instead of a higher purchase price, ask the investor to deposit more money into escrow (commonly 0.5%-1%). You could instead request 1.5% to 2%. This will help you gauge the likelihood of your home sale failing with an investor.
3. What else can I do to ensure my pending home sale does not fail?
Any legitimate investor should already own properties. Ask for their addresses and look them up on Google Street View. Then check your appraisal district’s ownership records. Does the owner’s name match what the investor told you?
Another telling option is to call the title company where you’re scheduled to close. Have they worked with your investor before? Did those deal’s close?
Sellers who work with Good Vibes Homebuyers are guaranteed to get a better deal. You’ll understand all your options and can freely choose what’s best for you. After seeing your house, we'll make you firm offers and guarantee that the price you accept will not change. Other investors can't promise you the same. It’s time for you to get high fives from Good Vibes Homebuyers, see how much you could get and compare us to others with our free net proceeds calculator!
Free closing costs. Free Local Move. Zero fees. Sell in 5 days. Sell and stay for 180 days. No equity? Still get $10,000 cash!
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