Learn from Other’s Past Failures

A very common situation being seen more today in our every tight housing market, are offers being accepted in a backup position. Talk to any real estate agent, and they will tell you of the transaction that fell out of escrow – meaning the deal didn’t go through. This makes sense in a tight market like Hawaii’s, where the good properties seem to get swept up right away.

If you are the lucky buyer who placed a backup offer and get that happy call from your agent saying they the first deal went south, spend the first few minutes rejoicing. What you should do next rarely happens. What should happen is to find out why the original transaction died. In most cases, it has to do with financing. Buy why did the financing not happen? I can tell you from our company’s perspective, if a loan is ultimately denied, in almost all cases, something’s up with the property itself.

I say this because all good lenders, by the time the file is submitted to underwriting, has locked down the income, assets, and credit of the buyer. If there was any ambiguity, we would have never issued a Pre-Approval letter. We are certain that based on the income, assets, and credit of the buyer the loan will go through, because we have already run their file through either Fannie Mae’s or Freddie Mac’s automated underwriting system, and received an approval. After all, that’s why the seller accepted the offer, because the buyer’s mortgage lender said they were pre-approved. Sure there are instances where mistakes are made in calculating income, or something new popped up on the credit report, but those situations should be rare.

The majority of the time, even if the reason the transaction fell out of escrow, is due to the buyer ultimately not being able to get financing, if you dig in deep, it is always something to do with the property itself. The most common is that the property appraisal doesn’t meet the agreed upon sales price. That’s the danger in low and zero down payment programs. If the appraisal comes in low, the buyer in almost all cases doesn’t have the ability to come in with any additional funds. Another very common reason for a transaction going south happens with condominium units. The buyer can have great credit, lots of income, and more than sufficient funds on hand, but if the condo project has issues, the loan will not go through. Lenders review the project for owner-occupancy, maintenance fee delinquencies, a single entity owning 10% or more of the units in the project, pending litigation, are sufficient funds being put into the reserve account, or maybe the project allows short-term rentals – a condo-hotel project. And with all properties there can also be a whole host of title issues dealing with encroachments, setbacks, easements,

The condition of the property is another very common reason why a loan application is turned down. Residential appraisers are required to issue a condition rating on a scale of C1-C6. C1 is brand new construction. C6 is a disaster. Lenders can only accept properties that are C4 or better. I am surprised how many people never think about this one simple thought when trying to buy a property with major condition issues: The bank is lending me money for 30 years. If the home is this bad off now, now bad will it be in 30 years? The banks don’t take favor on a new home buyer having to face major improvement costs. Having to fork out for a new roof after a heavy rain, could cause many to end up in foreclosure due to lack of funds. That’s why the condition of the home today, should have at least 30 year of economic life remaining.

Where I am going with all of this is if you are in the backup position and suddenly find yourself getting the call that it’s your turn, it would be a really good idea to find out why the first transaction didn’t go through. If you are the seller or the agent representing the seller, you should press hard to find out why the deal went south. There are privacy issues with personal data contained in a mortgage application, but if the issue surrounds the collateral itself, it would be helpful for all to know the truth. You would never want to going into escrow for a second time, only to have that transaction die as well. Knowing what went wrong, and sharing that information with the backup buyer would be immeasurably helpful to make sure the new buyer has the ability to overcome that obstacle. After all, why waste everyone’s time hoping this time it will be different?

If the issue was appraisal value, it will probably happen again in transaction #2. If the home’s condition is poor, another appraiser is not going to see the property as being in better condition. If there’s title issues, they won’t go away on their own. If the condo project has issues, those issues don’t magically go away either.

On the lending side, knowing up front of potential issues can allow us to target a possible solution to get the financing done. There are all types of lenders out there that allow for certain issues. Not one specialty lender allows for every collateral issue, so knowing where to go is vitally important. Maybe the solution is a renovation loan versus conventional financing. Portfolio lenders often overlook picky issues with condo projects. Whatever the issue, a competent mortgage professional can quickly determine if the issue is unsurmountable or not.

So please take my advice: After the joy of finding out you can now buy the home you really wanted but were sitting in second position, do some digging to find out why you were so lucky.