Real estate deals sometimes fall through, as every investor knows. While some reasons are hard to avoid, there are others that certainly can. When you’re finding real estate deals, and you don’t want to risk getting sidelined, you need to be vigilant. Here’s how you can avoid five of the most common causes of a failed real estate deal.
1. Last Minute Credit Issue
Your loan underwriter may check your credit score hours or even minutes before the real estate deal is set to be finalized. A last-minute credit issue can throw a monkey wrench into the situation, wreaking havoc with your real estate investment plans. What kinds of last-minute credit issues could be a deal breaker?
- Last minute collection report unbeknownst to you
- Recent late payment just reported
- Too many hard inquiries—and denials—relating to this investment
While a credit issuer won’t have definite proof of denied credit, multiple credit requests for the same deal indicate that you were still looking because you kept being turned down.
Avoid last minute credit issues like these by staying on top of your credit report as recent as the day of your closing. Start paying any outstanding debts you have and make sure every past and present creditors are settled with correctly. Leading up to your request for funds, ensure that all your payments are made on time to prevent a late payment report from popping up at the last minute.
2. Unforeseen Circumstances
One of the worst times for real estate deals to fall through is after you and your partners have already put your money in and started renovations. In engineering terms, unforeseen circumstances are the stuff of nightmares. Unforeseen circumstances commonly happen when walls are opened up, and problems like asbestos, dry rot or black mold present themselves. Your partner backs out, and you’re left holding the reigns of what could be a very pricey solution.
Sometimes there’s little you could have done to prevent a situation like this. But there are some precautions you and your construction team can take.
- Ensure you’re working off current blueprints. In complex projects, revisions to blueprints often happen, so make sure your subcontractors have the latest version.
- Invest in geological surveys. Geological surveys can unearth potential hindrances like bedrock, shifting soil, water table problems and more.
- Hire an inspector of your choosing. Of course, your lender will have an inspector come out to cover their interests. But you’re entitled to hire an independent inspector to ensure you protect your investment and interests and not only that of the lender. When you hire your inspector, you can be a little more choosy about how the inspection is carried out.
3. Material Delays
Real estate investment loans typically include milestone dates. Material delays can hinder or wreck those plans, leaving you and your partners left to pick up the pieces after the loan conditions are unmet, causing the loan offer to disappear. Material delays can occur suddenly and unexpectedly, from something as innocuous as a truck breakdown, or something more ominous like a manufacturer that suddenly goes out of business. Whatever the cause, careful planning can help avoid material delays.
Order, pay for and set delivery dates for materials well ahead of time. If you’re ordering materials for storage in climate-controlled areas, such as hardwood flooring, invest in a climate controlled storage unit until your local team is ready to take possession and install. Also, by ordering and paying for materials well before you need them on site, you’ll lock in your price and avoid sudden market increases that could blow your budget.
4. Unforeseen Market Conditions
You can’t beat Mother Nature, as the residents of Houston during Hurricane Harvey in the fall of 2017. Nearly $199 billion worth of damage occurred, and home-displacement occurred for over 30,000 people. An unforeseen market condition is a disruption no one can anticipate or avoid.
When caught in the crosshairs of catastrophic events beyond anyone’s control, keep calm. You might have to put plans on hold, but if you’re upfront and rational, you’ll probably find that others are more than understanding of the situation. Lenders and partners will likely all be patient as you ride out the storm until things are stable again.
5. Drop Out Partners
Whenever humans are involved in an equation, unexpected behavior can happen. One reason that some real estate deals fall through is that one or more partners drop out. When you’re counting on someone to provide something—like a portion of the down payment—that drop out can spell the end of the real estate deals.
Communication, compromise, and negotiation are the keys to solve this puzzle. Stay in touch with partners enough so you build a rapport where everyone can be honest about their situations. If someone has something personal come up, they should feel free to tell the others without judgment. Compromise on the drop out date, and consider negotiating for a lesser monetary contribution. After all, less is better than none.
These five reasons for why real estate deals fall through are all able to be handled as long as you keep your cool and plan accordingly. Of all the reasons to miss out on a real estate deal, finding money shouldn’t be the obstacle that ruins your plans.