Closing on a home is exciting, but it usually comes with a few complications.
Most closing problems are easy to handle — they’re speed bumps, not brick walls. The best way to deal with them is to avoid them in the first place. Let’s look at some of the most common pitfalls that come up at closing, and discuss the best way to help buyers avoid them.
The appraisal comes in low
Nothing can undermine a smooth closing like an appraisal that comes in under the sale price.
Low appraisals are common in very hot markets with low inventory, where market dynamics have outpaced where properties were valued a year ago. Reassure your buyers that an appraisal is just a number, and that it doesn’t necessarily mean that their dream home is overpriced.
The solution: Try to get a second opinion. The buyer can request a second appraisal, but it has to be approved by the lender. You can help the odds of a second appraisal by getting together a list of comparable properties that are valued closer to what you think the appraisal should’ve been. Then, submit them to the underwriter.
People think of appraisers as infallible experts, but the truth is that they’re doing a job, and they can overlook details, rush things, or simply make a mistake.
If there’s an obvious disparity between the appraisal and the comps you get together, odds are you’ll get your second opinion.
If that fails, your options are to convince the seller to lower the price, or, if your buyer has fallen in love with the home, to make up the difference in cash. If the buyer’s lender won’t let them make up the difference in cash, which sometimes happens, they can offer to pay part or all of the seller’s closing costs.
There are issues with the title
Clouded titles are more common than most buyers realize. Up to 13 percent of closing delays are caused by title issues, according to the Realtors Confidence Index.
Unpaid property tax bills, obscure lawsuits and contractor’s liens are just a few of the unpleasant surprises that can freeze a property transfer if they’re discovered at the last minute. The best way to avoid this is to resolve your title issues well before closing.
The solution: The title company was required to fill out a preliminary title report after escrow opened. You can (and should) acquire a copy of that report from the lender or the title company.
Review this report in detail; if it’s clean, your chances of a smooth closing are good. If there are issues, you can work with the seller and the listing agent to resolve the claims before closing, or you can arrange to have the cost of the claims deducted from the sale price, and the buyer can resolve them.
Buyers will acquire title insurance at closing that protects them from any future claims that the title company might have missed, but it doesn’t work retroactively. That means the title needs to be cleared before closing.
The inspection uncovers defects
A third-party home inspection protects your buyers against hidden flaws in the investment they’re about to make. So if the inspection uncovers defects, this is a good thing — even though it might not feel like it at first. The truth is, most homes have some defects.
In fact, the average home inspection finds upwards of 20 “necessary repairs.” Luckily, most defects aren’t serious enough to endanger the sale.
The solution: Make sure your buyer has a home inspection contingency written into the contract. This will allow them to walk away from the sale without penalty, if the inspection uncovers serious, fundamental problems.
This contingency also gives buyers valuable leverage if they decide to proceed with the purchase. The ability to walk away means they can ask the seller to perform repairs. However, this can lead to a potential conflict of interest. The seller will want to get the repairs done as quickly and as cheaply as possible, while the buyer will want them to be done thoroughly. In this situation, most buyers will prefer a reduced sale price or repair credits.
Cash flow
Bank operations work on their own unique schedule. We’ve all had personal transactions post late, or deposits mysteriously take days to show up.
But these small delays can cause a major problem if it’s closing day, and the seller is still waiting on payment to go through. This often happens when buyers transfer the money the day before, and the funds get held up in the system. It’s not necessarily their fault, but it can lead to an awkward and protracted closing.
The solution: Never wait until the last minute to wire funds. If the buyer insists on transferring the funds electronically, make sure it’s done a few days in advance.
An even better solution is to simply take the money to closing in the form of a certified check or a cashier’s check. Each is instantly transferable and as good as cash.
Cold feet
Buying a home is a huge commitment, but once that commitment is made, it’s legally binding. The sales contract will specify reasons that the buyer can back out of the deal without taking a penalty, but “cold feet” probably isn’t going to be one of them.
The solution: This is one of those instances when an agent has to act as a friend and adviser. Remind your wavering buyers of why they set out to buy this home in the first place — not only general reasons like financial investment, control over their living space and putting down roots, but specific reasons they chose this house, like the neighborhood or special home features. Most likely, they’ll come around.
Leading up to closing, make sure the buyer understands the contingencies and is aware of all the contract deadlines. There’s a window of time when buyers can back out of the deal without losing their earnest money. Once that window closes, they’ll either have to go through with the deal or walk away from the money they’ve put down.
This may seem like a harsh penalty, but the earnest money compensates the seller for the time they’ve put into the sale so far, as well as the time their home has been off the market.
Paperwork errors
Hands down, one of the most frequent causes of closing delays is a paperwork error. Even something as small as a misspelled name or transposed house number can render a document invalid. When these errors are found at closing, everything must grind to a halt until corrections are made, and new documents are produced.
The solution: Review documents ahead of time. Buyers will receive their closing disclosure, closing statement and loan estimate forms three days before closing, and they should immediately review them to make sure they’re one hundred percent error-free. If issues are discovered, you might want to hire a real estate attorney to vet the documents.
Luke Babich is the CSO of Clever Real Estate in St. Louis. Connect with him on Facebook or Twitter.
