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Failure to Complete – What’s Going on in Guelph?

This isn’t the way I like to start off my week. I’m drafting a Mutual Release for a property that failed to close. Without getting too far into the details, clients of mine found out, on the day their home was supposed to close, that their buyers were unable to get funding. The process dragged out, but in the end, the buyers had to walk away from the purchase – and, in doing so, they essentially walked away from their deposit.

Months later, after a series of negotiations between the two party’s lawyers, I’m drafting this mutual release – a document that outlines, among other things, hw much (if any) of the deposit will be returned to the Buyers.

It’s by no means the first Mutual Release I’ve drafted this year, and I wonder if it will be the last.

We have a serious problem in Guelph, with unprecedented numbers of home purchases failing to close. Those of us who tend to specialize in listing properties for sale are nervous – literally right up until the date of closing now. Will the property close? Or will the Buyers need an extension – or, worse, request to be released from the transaction.

I sat down with some clients of mine recently. They sold their family home and it closed about a month ago. It was time to catch up and see their new home – and it was only then that I told them that, literally, up until I got the word that the sale had gone through, I was extremely nervous that it, too, might not close. Given that they had used the sale of that house to buy another, the effect of a failure-to-complete would have had a direct impact on the new property. In short, it would have been a hot mess. Thankfully, it all worked out.

Why is this happening, they asked? Here’s what I can gather.

Misunderstanding of Deposits

First, it seems to me that a lot of Buyers misunderstand the general nature of a deposit – as well as the seriousness of putting that money forward. The notion that you always get your deposit back if things fall through is simply incorrect. People can and do lose their deposits. It entirely depends on the circumstances, and on how the two parties (and their lawyers) handle the situation.

Deposits, formerly referred to as ‘earnest money,’ really just mean that: it’s a show of good faith and a promise that you are offering in earnest and intend to buy a property. Deposits are commonly returned in full when a conditional offer doesn’t materialize. For example, a Buyer puts an offer in on a home based upon a Home Inspection Condition. The Inspection goes badly and the Buyer requests a release. In those cases, the deal has fallen apart prior to firming up and a deposit refund is issued – which, by the way, can take as many as two weeks depending upon the Listing Brokerage’s policies.

Poor Buyer Representation

This year, I have seen a level of poor Buyer Representation unlike anything before. We have a great number of people coming in and out of the Real Estate business and, as with any profession, motivations vary – and so does the training out there.

I’ve received Offers to Purchase that are incomplete or incorrect. I’ve asked Buyers’ Agents about their clients’ financing, only to hear that the Agent doesn’t even know who their client is using for a mortgage.

I could go on and on but you get the gist. Finding and interviewing a Buyer’s Agent is so important. It always has been – but even more so today. A good Buyer’s Agent is looking to protect the interests of their clients and take as many steps as needed to ensure deals won’t fall through and put their clients’ deposit at risk.

Lack of Firm Approvals

Getting a mortgage isn’t easy these days, and some lenders are notorious for pulling deals at the last minute. Some lenders offer a truly “firm” approval – meaning that they offer a guarantee that they will not pull funding at the last minute. Others do not, and worse – they are not even conducting appraisals until the final days before closing. If, as has happened frequently in this year’s hot market in Guelph, the bank appraisal falls short of the price the Buyer paid, it’s entirely possible that the Buyer will not be able to make up the shortfall. It’s happened time and time again in Guelph – especially as we see Buyers and Sellers being caught in the in-between stage these last 30-45 days, when we have switched rapidly from a Hot Seller’s Market to a Balanced one.

Because of this shift, some of the prices that were paid for homes two or three months ago now seem inflated. This is leading to appraisal issues. On top of that, some Buyer agents advised their clients to put in cash offers on homes, even while knowing that – in actuality – the Buyer had a home to sell in order to finance the new purchase. Well, the market has shifted and that “easy sale” is anything but now. Many have been caught in this market shift with a combination of bad luck and very poor advice from their Realtor.

For my part, I’ll say this. It doesn’t feel good to see people who probably just got poor advice and didn’t understand the potential consequences lose their money. On the other hand, I watched as my clients went through a period of extreme stress and escalating legal bills and there can be no doubt that they deserve to be compensated for both.

The moral of the story? Be very careful. Deposits are a serious business; they can be and sometimes are forfeited when buyers walk away from a purchase. Further to that, we are seeing a trend in higher deposit requests in Guelph – largely in response to this trend of increasing transaction failures. Eventually, we may operate similarly to many large urban centres, where 5% of the purchase price is a required deposit. This way, sellers have even greater confidence that the homes they sell will … well… sell.