My Greatest Fear #9 – What If My Buyer Doesn’t Close?

At some time in their career every real estate investor will be faced with this situation.  For reasons unknown, your buyer doesn’t return your call before the closing or simply decides he no longer wants to buy it.  If you are lucky, he will at least tell you ahead of time instead of the day before closing.

Having gotten the bad news you are now faced with the dilemma of having to resell the property before the closing, if you are wholesaling, or going back to retailing the property.  If you are wholesaling, it means you have to either close on the property and you’ll need money for that, or lose your deposit and not close.

First, let’s discuss how to handle the wholesale property that isn’t going to close.  You have a couple of options which include:

  1. Find another buyer very quickly, preferably from a back-up contract or by contacting other investors who can “close in your shoes” on short notice.  This will cost you ½ or more of the profit, but it will ensure you get paid.
  2. Borrow private money to close which you should have set up previously in case this sudden surprise occurred.
  3. Ask a local hard-money lender if he will do the closing.  It will be expensive, but again, better some profit than none at all.
  4. Ask the seller for an extension so you have time to find another buyer AND ask for a price reduction at the same time because “of conditions to the property that you were not aware of originally.” Figure out these conditions before you call the seller!
  5. Don’t close and lose your earnest money deposit (EMD) – however, your end-buyer should have put up a larger deposit and he will forfeit his.  For example, you put up $1,000 as EMD but you had your end-buyer put up $3,000.  If he doesn’t close you will make $3,000 – $1,000 = $2,000 despite never closing and reselling your wholesale deal.

Whenever you get a deal under contract that you intend to wholesale, you should not stop marketing it when you get a contract from a buyer.  Keep trying to find future buyers and explain you are taking “back-up contracts” in the event your other buyer doesn’t close.  I usually add that the other buyer may have a funding problem and this back-up buyer may get the deal.  This makes it easier to go back to the back-up buyer if the first investor doesn’t close.

What about a retail buyer who doesn’t close?  In these situations, you could have a cash buyer or a buyer who needs conventional financing.  If he is not a cash buyer you will become involved with an institution giving your buyer a loan.  Your contract with the buyer will be contingent on his ability to get financing – not the issue with cash buyers in wholesale deals.

There can be many reasons the lenders will reject your buyer for a loan, the most common of which are: your property didn’t appraise, the buyer didn’t qualify credit-wise, your profit in the rehab is too large for the bank to accept, the amount of time you have held it (seasoning period) is too short or just because the bank officer didn’t get the complete documents from the buyer or get them timely enough.  Whatever the reason, you are now stuck with a retail property and looking again for another buyer.  Your profit is being squeezed but this is more of an emotional issue than monetary.  Settle down and start looking for another buyer the same way you found the first one.

Now that you buyer couldn’t or didn’t want to close, you have learned something about your property, appraisals, seasoning issues, interest rate that your buyer didn’t like, buyer didn’t have enough funds to close or the buyer caught a near-fatal disease called “Buyer’s Remorse”.   I hope that you also learned not to trust what buyer’s tell you.  There is an adage in real estate investing that says, “Buyers are liars and Sellers are liars!” You’ll discover how true this is as you do more and more deals.

On this retail property your EMD was most likely contingent on the buyer getting financing and he couldn’t so his deposit is refundable.  If he chooses his mortgage broker he will ask him to say that he couldn’t get funding for any number of reasons even if he simply got buyer’s remorse.  Whatever the reason, his keeping his EMD is contingent on his not getting financing and not personal reasons.

This means that you have an opportunity to keep his EMD.  Usually a clever Realtor® or mortgage broker will write in the Financing Option in the contract a specific interest rate, number of years for the mortgage, points to close and other specific parameters required initially by the proposed lender in the deal.  If any of these parameters are not the same at the closing, it is grounds to cancel the contract and for the buyer to keep his EMD.  A simple solution is to put “prevailing rates” in the blanks for the parameters of the financing part of the contract.

Whenever you get a deal under contract that you intend to wholesale, you should not stop marketing it when you get a contract from a buyer.  Keep trying to find future buyers and explain you are taking “back-up contracts” in the event your other buyer doesn’t close.  I usually add that the other buyer may have a funding problem and this back-up buyer may get the deal.  This makes it easier to go back to the back-up buyer if the first investor doesn’t close.

What about a retail buyer who doesn’t close?  In these situations, you could have a cash buyer or a buyer who needs conventional financing.  If he is not a cash buyer you will become involved with an institution giving your buyer a loan.  Your contract with the buyer will be contingent on his ability to get financing – not the issue with cash buyers in wholesale deals.

There can be many reasons the lenders will reject your buyer for a loan, the most common of which are: your property didn’t appraise, the buyer didn’t qualify credit-wise, your profit in the rehab is too large for the bank to accept, the amount of time you have held it (seasoning period) is too short or just because the bank officer didn’t get the complete documents from the buyer or get them timely enough.  Whatever the reason, you are now stuck with a retail property and looking again for another buyer.  Your profit is being squeezed but this is more of an emotional issue than monetary.  Settle down and start looking for another buyer the same way you found the first one.

Now that you buyer couldn’t or didn’t want to close, you have learned something about your property, appraisals, seasoning issues, interest rate that your buyer didn’t like, buyer didn’t have enough funds to close or the buyer caught a near-fatal disease called “Buyer’s Remorse”.   I hope that you also learned not to trust what buyer’s tell you.  There is an adage in real estate investing that says, “Buyers are liars and Sellers are liars!” You’ll discover how true this is as you do more and more deals.

On this retail property your EMD was most likely contingent on the buyer getting financing and he couldn’t so his deposit is refundable.  If he chooses his mortgage broker he will ask him to say that he couldn’t get funding for any number of reasons even if he simply got buyer’s remorse.  Whatever the reason, his keeping his EMD is contingent on his not getting financing and not personal reasons.

This means that you have an opportunity to keep his EMD.  Usually a clever Realtor® or mortgage broker will write in the Financing Option in the contract a specific interest rate, number of years for the mortgage, points to close and other specific parameters required initially by the proposed lender in the deal.  If any of these parameters are not the same at the closing, it is grounds to cancel the contract and for the buyer to keep his EMD.  A simple solution is to put “prevailing rates” in the blanks for the parameters of the financing part of the contract.