Deal Crusher
You’ve got a home under contract, and you’re getting ready to close. Everything's running smoothly, and it appears you are about to acquire the property. However, a few days before closing, you get punched in the gut...something comes up and your deal gets CRUSHED.... Deals do get crushed... but knowing how and why they get crushed, will help prepare you for these instances and safeguard you from it happening again in the future.
Deal Crusher #1: Nothing can ruin a deal quicker than an issue with the title. If the property you're trying to acquire doesn't have what is referred to as a “clean title” then the deal might get crushed. A home with a clean title is one that does not have any secondary liens or judgments tied to it — ranging from mechanics liens put on the house by contractors that were not paid, to judgments, or other expenses that a judge linked to the home. A lien that is attached to a home can muddy up the title and make it difficult to close and acquire the property, thus your deal getting CRUSHED. If there is anything attached to a home in terms of a lien, it can follow the home once it sells. It is imperative to do a title search for every home that you purchase so that you’re aware of what pitfalls you may encounter.
Deal Crusher #2: When you assign a contract to someone else, whether you’re intention is to wholesale the house from the start or you determine during due diligence it's not a good fit for you and decide to assign it off and work on another property… you run the risk of the deal being crushed. Anytime you introduce a 3rd or 4th party to a deal, the exposure to risk increases. If you can keep it to just you and the seller, you’re in a better situation. However, there are times that arise where there is a need to assign a contract and involve another party. In these instances, you have to make sure that you know and trust the party. Make sure that your end buyer is someone that has the funds to close, as well as a reputation to get the deal done. While there will be moments where you will work with a new end buyer, make sure you protect yourself and your seller. You are not a fiduciary, however, you do have a reputation. Nothing will hurt your reputation more than losing a deal with a motivated seller. If your end buyer “ghosts” you, that is, stops answering the phone and disappears, make sure you have an air-tight contract and potentially earnest money. (Tip: If a buyer “ghosts” you, consider having some portion of the earnest money as “hard/nonrefundable” from the end buyer, so that if the end buyer ghosts you, you can consider compensating the seller for time lost while you find a new buyer.)
Deal Crusher #3: One of the most common deal crushers is a seller backing out. When a motivated seller suddenly becomes not motivated, you have a problem. Unfortunately, there is not much you can do. If you have an airtight contract, you can sue the seller for specific performance and force the seller to sell the home. Although this is an option, it is typically a last resort. Remember, you put a lot of work into what you’re doing and lawsuits bring up a lot of bad blood and more importantly expense. As I mentioned earlier, you have a reputation to maintain and frivolous lawsuits will damage it and cost you money. The best way to prevent this from happening is to stay on top of your seller. Talk to them every few days and in some cases, over-communicate with them. Keep them in the loop of the entire process and let them know what’s going. Let them know how the title looks. Let them know who the attorney/title company is closing the transaction. Ask them questions about how they want to handle things throughout the deal. The reasons for a seller backing out are numerous, so by keeping the dialogue up with them throughout the process, you can try to prevent “things” from arising. It is imperative that you stay on top of your sellers so they will reach the closing table and the deal will get done, not crushed...
Deal Crusher #4: A natural disaster can be a big-time deal crusher. A fire burning up the house or a tornado ripping through the area and destroying the home is a sure-fire way to crush a deal. In this instance, when the seller is now dealing with a more serious issue than selling the property, you should be empathetic and allow them to either get out of the deal or alter the deal to work with them.
***Remember, real estate is local, so in your local municipality, there may be natural disaster clauses in place on the standard real estate contract or your wholesale contract. If there is not, consider being resourceful and asking other investors, Realtors? or wholesalers what they have as a provision for this kind of deal crushing event. ***
If the home is insured, then the deal can be salvaged, though you may need to get creative. Offer to pay the deductible for them to repair the home and delay the closing until after the work is completed if the seller is willing to do that. Be flexible and empathetic, because the stress the seller may be under in this instance can be monumental.
Solid deals are not immune to deal crushers. Great deals have the potential to fall apart, and although it is not as common, still be sure to stay diligent and overcommunicate. If you run into a deal crusher that we did not talk about, be sure to include that in your next contract or on a process to ensure you're prepared on the next deal.
Remember, as always, listen to Real Life Real Equity Podcast to get more tips on not only real estate, but tips, tools, ideas, and inspiration on all your entrepreneurial endeavors.