Getting your clients under contract on a property is a feeling like no other for real estate agents. But next comes the escrow process, bringing with it its own set of potential challenges.
Escrow is the process of transferring the funds from the buyer to the seller through a third party. While the escrow process should go smoothly, some common escrow problems include:
- The house has major inspection problems
- The property is valued less than it’s selling for
- The buyer backs out of the deal
- The buyer is no longer eligible for a loan
Throughout your real estate career, you will likely experience one or more of these problems.
As you and your clients navigate escrow, here are some of the most common issues you could encounter and what you can do to save the transaction.
The House Has Major Inspection Problems
Suppose the buyer has included an inspection contingency in their offer. In that case, they have the right to bring a third-party inspector to the property, and potentially back out of the deal depending on the findings.
In a property inspection, the home is examined thoroughly for various issues like structural damage, electrical, plumbing, and HVAC systems.
Depending on how the purchase contract is written, a buyer can back out of a home purchase if the severity and cost of the issues are more than they want to deal with.
Usually, with an inspection contingency, a buyer can indicate how much they’re willing to pay towards inspection repairs before they have the option to walk away.
However, if a buyer decides they still want the house despite the inspection report, there are still options! Using your negotiating skills, you can work with the seller’s agent to try and agree on the repairs.
If the buyers are still interested in the house, you can go back to the seller to determine if they’ll lower the cost of the house or potentially contribute to the cost of repairs.
The Property is Valued Less than It’s Selling For
The appraisal is an evaluation of the property's value from a third party to gauge whether a buyer is paying a fair price for a home.
There are a few reasons why a house could potentially appraise for less than your purchase price. In competitive markets with low inventory, it’s not uncommon for homes to sell for more than they’re listed.
Sometimes when this happens, the appraisal value hasn’t yet caught up with the market’s value. Other times, a real estate agent has priced the home too high, and the listing price will have to be lowered to meet the appraised value.
If your client's home appraises for less than the purchase price, you have a few options. You can negotiate with the seller to either lower the listing price or the buyer can make up the difference in the amount of down payment they offer.
If neither option is available and your buyer has an appraisal contingency in place, your client can walk away from the deal without losing any deposits.
In some cases, you might be able to appeal or dispute an appraisal in which the buyer’s lender submits a request to re-evaluate the home.
The chance an appraiser changes their decision is slim, but in some instances, it can work to correct the low appraisal value.
The Buyer Backs Out of the Deal
Buying a home is a stressful and intense process that some buyers don’t anticipate when starting their home-buying journey.
A lot can change in a buyer’s life - both financially and personally - from the time they start the search to when they’re under contract on a property. Sometimes they can get cold feet, resulting in buyer’s remorse after the contract is already in place.
Ultimately, homebuyers could decide for reasons outside of the real estate agent or seller’s control that they no longer want to purchase that home.
It could be because they weren’t able to sell their current home in time, or perhaps they found a house they like better. Whatever the case, staying positive and empathetic with your client is important.
The Buyer is No Longer Eligible for a Loan
Getting a loan today is much different than in past decades. There is intense scrutiny into every aspect of the loan applicants' finances and strict guidelines on debt, income, job verification, and more that can result in funding being revoked.
During the escrow process, it’s important to counsel your client to make no major changes to their current financial situation. They shouldn’t make large purchases or suddenly change jobs, as it could change their loan eligibility.
Sometimes these things are out of your clients' control, like if they lose their job or have an unexpected medical bill.
One way to avoid this is to have your clients get pre-approved by a lender before they write a contract. This can prevent any surprises and give your clients a good idea of what they can afford.
How to Avoid These Escrow Problems
You can certainly take steps to avoid these escrow problems and save the deal from falling through — and it starts with your negotiating abilities.
When these issues arise, it’s crucial to utilize the power of negotiating to help find a middle ground between the buyers and sellers.
Communicate with your clients to understand what their needs are and what is the best way to support them during this time.
You’ll likely have to work with the seller’s agent to find a middle ground, or the deal might not succeed.
Clear communication and transparency can go a long way in working to settle the problems.
Final Thoughts on the 4 Most Common Problems During Escrow
No matter how good of an agent you are, these problems can pop up in any transaction. How you handle them will indicate how confident of an agent you are.
As you navigate your clients through the escrow process, remember to stay positive, communicative, and solutions-driven to provide the best service possible.