Real estate question

Factual Questions
1

Let’s say I am selling my house, and it goes on the market in the standard way most of us are used to (in the US).

Someone puts an offer in and I accept. I move out, buy a new house, and life goes on. But then my realtor calls and says "the people who put the offer down did not qualify for their loan. What they actually have qualified for is about 5% less than we agreed to.

You can take the new offer, or we can put the house back on the market.

Is this scenario possible? Or, when you are selling a house and sign with a real eatate company, are some protections built in?

I know you can buy a house with the contingency that you sell your current house first, but can I be stuck with two mortgages if the accepted offer on my old home proves to be invalid for whatever reason, or would the real estate company have to buy the home at the agreed to price?

I would think that if a person says they are going to buy a home, before the real estate company takes the sign down, the new buyer would have to have a letter from their lender saying they can afford the cost of the home. Once that occurs, as the seller, I should be free and clear of the home, regardless of what happens to the new buyers, correct?

2

No. They would have had to qualify before the sale went through–and it’s not an uncommon occurrence that this happens (the buyer and seller agree on the sale but the financing doesn’t go through for one reason or another).

3

Happens all of the time.

Not the kind of protection you are envisioning where the real estate company is going to have to make up the difference or anything like that.

You might be confusing “accepting a purchase offer” with “closing the sale.” There can be a long period (as much as two months or so) between these two events, during which the property is still legally yours, and your responsibility. “Closing” is when ownership, money, and keys change hands. Until then, all sorts of things can happen to derail the deal. Had it happen to me twice on the same property sale. Barring some sort of outright fraud on the part of the real estate company, I can’t think of any situation in which the real estate company is going to actually be compelled to step in and complete the purchase or otherwise compensate you for a deal falling through, although there might be some sort of highly unusual circumstance in which that could happen. A professional will probably come along and tell you better than I can.

4

In your example your sale is subject to the buyer’s financing contingency. If their contract didn’t include the financing contingency then theoretically you could sue them for specific performance of closing with cash, but if they don’t have it then it’s pointless.

5

In England (different in Scotland), we have ‘gazumping’. This is when you accept an offer and, on the strength of that, make an offer for your new home.

Neither of these offers are binding and either party can drop out right up to the point of exchanging contracts. If the buyer of your house tells you, at the last minute, that for whatever reason, he can only complete with a £5,000 reduction, you are in a bind.

Accept the lower offer and swallow the loss, or tell him to stuff it and start all over again - obviously losing the house your dearly beloved is already measuring curtains for.

It also happens in reverse, when the seller tells the buyer at the last minute - pay another £5,000 or I walk away. The buyer may already have invested £hundreds in the purchase for surveyors and mortgage advisors etc. All of which he will lose.

The current shortage of houses means that I get one or two leaflets a week from Estate Agents saying that they have a buyer for my house.

6

This would seem to be a fairly simple problem to solve. Just refuse to give or accept an offer without a price guarantee, that is, a kind of pre-contract contract, listing all the appropriate contingencies.

I’m sure any competent real estate lawyer could start drafting these and generate a ton of business.

7

According to the OP you bought a new house based on an offer with nothing down, and nothing to lose for the purchaser. You can require some ‘good faith money’ with the acceptance of the offer but states will vary on how that works and whether you’d be able to keep it if the purchaser reneges.

8

Not correct at all. Almost all real estate contracts have a financing contingency. If the lender doesn’t approve the buyer, then the buyer can back out of the contract without penalties.

There are steps you can take to mitigate that risk. You can ask for a pre-approval letter from a major lending institution, or a pre-approval letter from a mortgage broker that a Realtor has a good relationship with. You can also look for someone who is not taking out a riskier loan, such as a loan with a low downpayment.

If you are trying to sell a place and then buy a new place, it can be difficult. If you need the money from the sale to purchase the new place, then you would have to make your purchase contract contingent on your sale going through. The problem with this is that most sellers will not accept a contract with a sale contingency. It will make your offer a lot less competitive and you might end up paying more for property because you need the contingency.

9

Another possibility that might occur after the offer is accepted - what if the buyer’s inspection turns up a major problem with the house (e.g. foundation failure, not uncommon where I live)? They’re going to ask for major concessions to get it fixed (and their bank may well not be willing to finance at all it if it isn’t), or walk away outright.

10

An offer to purchase is just that - “I will buy this house if you accept my offer of $X; subject to the following”

The following usually includes approval for financing (if it as not happened already), if I sell my old house, if the house passes the inspection, if…

IANAL but as I understand, this is a contract. Both sides have an obligation to deal in good faith, although proving bad faith in some situations may be tricky. Once an offer has been made and accepted, the only question is satisfying the conditions. It’s a contract. meet the terms, and the other side must meet theirs.

If on or the other side tries to change the price, that requires a new contract - and either the old offer fails because the conditions were not satisfied (didn’t get financing, failed inspection, etc.), or both sides have to mutually agree to cancel the contract.

Coming back with “I have financing for $5,000 less” can be countered with “If I sue and put the banker on the stand, will he testify that you asked for financing for the full price and he turned you down? Or will he say you failed to ask for the full amount, which would be an indicator of bad faith?”

Counter-offering after wasting your time is a tactic that some sharp and unethical players may try - perhaps you feel you’ve waited long enough and would rather take a lower amount than go through the whole sales cycle looking for a new buyer. Another one is the “bad home evaluation” - The building inspector says the roof is old, knock $20,000 off the price because I need to re-shingle the roof soon. The basement wall is cracked - please take $10,000 off the price. And so on… you’ve lived with the issue for a decade, they probably have no intention of fixing it unless it becomes a real problem, but if they can leverage it to reduce the price, then you’re the sucker. IMHO the appropriate response to tricky dealing is “Good bye” only stronger language. If they break a contract, sue.

Typically an offer is accompanied by a payment of good faith - IIRC when I bought my house, about $500. Not much, but enough to hurt if I walk away.

11

Some countries/states have eschrow system kick in when that happens, the vendor can agree to it, to get the sale… What happens then is substantial funds are put into a trust fund, to cover the repairs if it turns out the vendor is liable for it. This can happen where the vendor’s builder isn’t insured and the vendor then becomes responsible for anything insurance would have covered.

Norway has this for example. What happened was that a house had been renovated by the owner. The buyer did a post-contract inspection, and found renovations weren’t precisely to code, a lesser standard of artificial wood was used near a bathroom, or something, standing a 1% chance of being a problem in the next 30 years. So the buyer reduced the offer a substantial amount, eg $100,000 . OR hold it in eschrow. So the vendor declined to be hit with a $100,000 drop in price, and chose eschrow of that amount… it was meant to be just for significant problems… Then the buyer went through the whole house and found every little problem, too many layers of paint here, foam underlay 1mm too thin there, 11 not 12… Grout not waterproof grout at that place , sealant not UV stabilised, as per code, but it was a very very shaded outdoor area, so why bother ? etc etc. and spent the $100,000 …

12

That would be called counting your chickens before they hatch.

Lots of people do it, and accept that they may have to put the house back on the market. They may get bridging loans to help buy the new place before sale, Why ? perhaps due to necessity such as moving for work, or due to illness or death in family, or perhaps just because they think its easy to sell if they move out first.

However, for the battler who can’t afford the extra costs of bridging loans, or won’t get approval for such an excercise, its common practice that they move out of their home WHEN THEY GET PAID. They go to settlement and the buyer attends, and hands over the money , or receipts for costs paid, and the vendor is then happy to have been paid the price, minus his costs. The mortgage holder and the lawyer and real estate agent may attend or just require that settelement only occur IF their amounts owered are paid up… (Those receipts… the vendor tells the buyer who to pay, and how much. pay off my mortgage, pay my lawyer, pay my real estate agent, and finally, pay me … OR… pay MY vendor, for the house i am buying … a bank cheque please !!).
So then after settlement, the vendor walks out of there with a bank cheque, and minus his title dead… SO then he is homeless ?
So he might drive with the truck load of household contents, or in advance of it , perhaps drops into the bank to convert te bank cheque as needed, and attend a settlement as a buyer… Where he gives over payments and receipts, and collects a title, keys, and the right to enter into a vacant residence… So person A buys from person B… who can then buy from person C… who can then buy from person D… who can then buy from person E… who can then buy from person F… Sometimes when person A delays at the last day, there’s 10 removalist trucks not moving anything until person A gets his stuff together and settles…

What limits the size of the chain ? Someone may have decided to shell out for bridging loans, or may be moving between houses they already own, or selling an investment property… or there’s probably more, deceased estate and so on…

13

What happens if the buyer backs out when the vendor is already at risk of losing a deposit on the house they are buying ? The vendor has to get a bridging loan, in order to avoid backing out, but they have the deposit from the buyer to cover the cost of the bridging loan in that case… Thats what happens… the buyer must complete on time, with some allowance for things like illness, natural disasters or infrastructure problems (blackout, major transport systems disrupted, etc) and human error by gov and bank and lawyer/attorney…, or perhaps lose their deposit, eg 5, 10% … a huge amount to lose…

SO the OP’s situation would have the buyer saying "I offer you 10% less, but I do so knowing I forfeit my deposit… "… The vendor may well say “no I reject your offer, and I take your 5% deposit, get out of my life you annoying loser !”. Because a 5% windfall is not something to get annoyed about … basically the deposit has locked the buyer into buying, allowing the vendor to arrange to buy elsewhere.

14

Thanks all for the replies.

Maybe I didn’t explain my scenario correctly, or maybe I don’t understand some of the responses.

So let me try to tighten up the question.

I am selling a property.

Someone agrees to buy the property, and we agree to a price.

At this point, as the seller, I am NOT taking the “for sale” sign down, because I have no signed contract. There may be a verbal agreement, but right now, either side could walk away with no legal penalties, correct? (This is assuming there is no down payment or show of goodwill for the potential buyers to put down say a $1000 deposit).

As a seller, I could change my mind, my situation changes (say if I was moving to take a new job, but the company went belly up for some reason and I no longer was able to move), or someone else stops by with a big suitcase full of cash and will buy the house “today”.

As the buyer, even if they have an agreement in principle, they could pull out with no penalty (aside from any deposit) if the financing fell through, the home inspection turns up something insurmountable, or they change their minds.

When is the moment that as a seller, I am out of my financial tie to the home (I know the real answer is when the mortgage is paid, but I am asking about what documents need to be in place for me to not be worried about the home any longer… It is now the responsibility of the new buyer.?)

Hope that makes more sense.

Based on the answers thus far there is significant risk in buying a home before you sell your current home. I can see where the potential buyer has a lot of leverage once you’ve moved out and have that second mortgage.

15

That moment is at the closing. That is when the property is transferred to the buyer, you and/or your bank receive payment, and the buyer’s bank attaches their lien to the property.

16

You’re out of a financial tie when you sign over the deed to the house and accept payment for it. in other words, at closing.

The seller has leverage, too – a signed contract. You’ve agreed to sell the house, and the buyer has agreed to buy the house. If either one of you tries to back out at this point (subject to contingenicies) the other party can sue for breach of contract.

On top of that, the buyer usually provides a deposit, sometimes called “earnest money” or “good faith money” to secure the contract (the seller of course, uses the house to secure the contract.) The deposit may be five or ten percent of the selling price – certainly enough to hurt, even if the seller decides not to sue.

If the seller and buyer agree, they can put all sorts of contingencies. What if the house fails inspection? What if the buyer’s financing falls through? What if the seller can’t move into their new house because that owner hasn’t moved out? What if the area the house is in gets annexed by a nearby city and property taxes go up? Whatever you’re concerned about, you can usually find a way to factor it into the contract.

17

There’s a difference between pre-qualified and pre-approved.

Pre-qualified means a bank has reviewed your credit and believes you can get a loan.

Pre-approved means a bank has done the leg work and you have a loan ready and waiting. So you just have to find the house.

Pre-approved means the sale will most likely go through.

18

Of course the law is different everywhere - even between States. As I indicated above, Scotland has a different system where the buyer has to put up a deposit (held by a solicitor) and there are a number of complicated hurdles to jump.

In England it is simpler but more chancy - a lot depends n how the market is moving. Prices are rising… The seller has the advantage and they have been known to demand more at the last minute. If prices are falling, the opposite is true.

If fact, the vast majority of house sales go through with little difficulty here as I am sure they do in the USA. If the law interferes too much, whether for the buyer or the seller, it just causes problems and expense and discourages people from downsizing for example.

19

I’ve been through this. You are not done until closing, as the other people have said. There are many reasons for a buyer to back out besides not getting the loan.
You will take the For Sale sign down, since you won’t want to be bothered by people seeing the house and kicking you out, and realtors in the area are not going to want to show a house on which an offer has been made.
And don’t expect to get the deposit. First, it might be in escrow, and the buyer would have to agree to release it. If the buyer does not, you can sue - but then the house is going to sit empty until the suit gets settled, and time is on the buyer’s side.
When we thought we had sold a house in 1980 the buyer, who was getting divorced, got undivorced and basically backed out. Her money might be sitting in escrow to this day. It was much better to sell it to someone else, which we did by financing him at 12.% interest. We were in an apartment, so it worked out fine for us.

20

The Dopers have it covered repeatedly above, but I will chime in with my experience in that something related happened but we (the seller and buyer in the middle of the chain which went first time buyers -> us -> empty nesters downsizing to condo -> condo seller) were totally unaffected and everyone outside of us ended up making up the shortfall.

in 2008/2009 amidst the full tanking of the market, we started watching a house in our neighborhood as it was a dream house for our next step up- the price kept dropping and going lower and lower (it went pending once or twice but always returned to the market) and finally after 6 months we decided to make a play for it. So we contacted our agent, whom we’d used previously, and put in an offer on the house (5% under the ask but pending our sale, we’d put down 80% cash so only a 20% financing). The seller jumped on it- including all of our conditions (cutting down a couple of trees, fixing some electrical) - if we could close in less than 30 days, 25 by the time everything was settled. So we put our house on the market 4 days later (a mad dash of painting trim and even refinishing some hardwood floors in those few days) and went in with a lower price than the market suggested by a LOT but a ton of conditions mostly regarding speed. We got 5 offers the first day- took the one with a young couple whose parents were cosigners on the loan and fully preapproved for the loan. We refused to budge on anything post inspection as we had disclosed all points in th paperwork and even talked to their inspector about them and why they were there and what specifically needed to be done. We had reservations about the low sale price, but knew that overall we were coming out way ahead.

At the last minute, one of the four parents got cold feet and wanted out of cosigning so their bank wanted to redo their loan and the timing, etc. And we said, “No thank you, we’re happy where we are.” All three sets of real estate agents, but especially ours who was doing a sale and a purchase, and the banks who had no deal flow at the time ate all of the difference out of their commissions, etc. and both deals ended up going through. Even the downstream condo agents took a haircut to get all of the deals done.

I try to tell new homebuyers/remodelers this story all the time- the buyers and sellers aren’t the only ones with skin in the game. Other people also have an interest in deals happening and can sacrifice some of their profit and gain reputation at the same time. Stick to what your gut and your calculations say you can afford and don’t wait to be shopping until you are desparate, leave yourselves options. We’ve recommended our agent repeatedly and will use her again on our next sale as well.