Thursday, March 28, 2013
As I'm sure we've all experienced, the Buyer comes to the table with an Offer and we think the terms and price are good, so we agree to move forward but the deal doesn't end up closing. What can we do to avoid this unpleasant result?
Ideally, the Buyer should have a very short due diligence (DD) period to limit their control on the property. Then they should close within days of the DD period expiring. The reason is that we do not want our property tied up for any extended period of time because there is always a possibility that we will miss another deal. This is why it's crucial to do our own due diligence on our Buyers. Do they have the ability to close? Are they serious? Will they close? These are all questions that we need answered before we agree to a contract and what they say is not necessarily the truth, so we need to dig further and ensure that we have a solid deal when we sign that contract to sell.
Ask for proof of funds at the time of Offer. As our deals are always solid for the investor, we ask for non-refundable earnest money deposits as well. Yes, non-refundable! If the Buyer sees they are getting a "smoking" deal, then they should have no difficulty with this and should really do their due diligence prior to contract. By providing a non-refundable EM deposit, they are showing they are serious and in this case it's probably not necessary to ask for proof of funds, just ensure that the due diligence period is reasonably short such as 3-5 business days. This is enough time for an inspection, which should be the only contingency they need to be satisfied with. Now if they don't close, they pay a penalty by forfeiting their EM deposit. We must of course provide Clear & Marketable Title and this is the Closing Attorney's job. Once this is confirmed, the deal is then firm and the Buyer must proceed with Closing by providing balance of funds and we then transfer title to them at Closing. If they don't Close then, then we do have legal recourse if we choose (consult with your Closing Attorney for options if your Buyer does not Close but has waived all conditions / contingencies). It's probably best to move on if this happens and at least you have the EM deposit as a penalty paid to you for wasting your time.
You don't have to ask for non-refundable EM deposits, but it doesn't hurt to do so and is indeed a preferred method of showing how serious the Buyer really is. It shows commitment and that the Buyer is serious. Refundable EM deposits are good as well as long as the contract due diligence period is not protracted to the benefit of the Buyer and the detriment of the Seller (in our example, YOU).
It's always best to deal with cash Buyers (theirs or someone else's, such as a hard money lender).
Hope this helps with the thought process of getting the next deal closed quickly and avoiding the walk-away non-serious Buyer who is looking to flip your deal and does not intend to buy at all, or a similar type of person.
Until next time.....