Collapsed Real Estate Deals: More Common Than You Think

Hi everyone, I’m James Garbutt. And I’m Denny Dumas. And this is the Garbutt Dumas Real Estate Podcast.

Denny: Market’s a little slower, we’re in a high interest rate environment where consumers are a little confused where Bank of Canada is going with interest rates and as a result, there is less buyer demand, there are less listings, the market overall there’s less sales, it is just a little bit sluggish. And temporarily how long it’s gonna last? We don’t know. 

But in these lower markets, what is more common are offers with subjects and as a result, collapsed deals. And I think a lot of consumers don’t understand how often this actually happens because Realtors don’t talk about it on social media. 

Monica: Yeah, because they get so, a lot of Realtors, get really many Realtors get a little bit upset or feel bad when their clients collapse a deal. Maybe they feel bad for their fellow colleagues to have to continue to grind to try to get something together. But collapsed deals right now are very common, but they always have been, in a normal market conditions and they’re even more common in market conditions that are uncertain. And you have uncertain market conditions when you have rising interest rates and things like that. 

We saw so many collapsed deals back at the beginning of locked down in 2021.

Denny: 2020.

Monica: 2020. We saw a lot of collapsed deals then because of market uncertainty and we’re seeing it surface a little bit more now because of market uncertainty. And when I say market uncertainty, I’m only referring to interest rates. The market is strong in terms of prices. We don’t, we’re not seeing, we saw some market correction last year but we’re not seeing any decrease in values really right now. At least I’m not.

Yeah, so market uncertainty is, is one of the components that leads to collapsed deals. But honestly, like we’re in a market with very low inventory. A lot of our inventory is older. A lot of our inventory was built, you know 50 years ago, 30 years ago. 20 years ago, and when you have homes that are older, there are maintenance items that get uncovered through due diligence, and those are usually the reasons for collapse deals. 

I actually very rarely see collapsed deals due to financing even though that’s the number one thing you hear when you hear a collapsed deal. Oh yeah, it collapsed, the buyers couldn’t get financing. That’s actually for me, it’s very uncommon. I don’t think I’ve ever collapsed a deal, or at least not recently, where it came back and the buyers were like, Oh, our bank said no to this one. Usually the bank says no, it’s because there’s uncovered maintenance items in the depreciation report. That’s why they said no, it doesn’t mean the buyers cannot get financing, it means that there’s a maintenance issue.

Denny:  A lot of consumers don’t know like, or let’s maybe first define a collapsed deal. A collapsed deal is when you have an accepted offer, with subjects and the offer and on the subject removal date you do not remove subjects and put your deposit in which means the property is now available for sale again. 

A lot of consumers don’t know that even in busy years when you have accepted offers with subjects in them. Only about 65% of those offers remove subjects, six, six or seven out of 10. So there are three or four out of 10 that do not remove subjects which is significant and a lot of consumers don’t know that because Realtors don’t talk about it. 

Realtors don’t prep sellers so often and this is a big thing from a listing agent perspective is preparing a seller. When you are negotiating an offer and coming to an accepted offer, at that moment, you are stating that let’s hold our celebration until the subject removal date that is here for any reason essentially, this buyer can elect not to remove subjects, the deal is not firm until the deposit goes in which is due next week or whatever that may be.

Selling and buying real estate is an emotional process especially when we are selling family homes where people have been there for 30 years and there are a lot of memories in those homes. And often they are mentally ready to downsize and a collapsed deal to an unprepared seller can be extremely frustrating. 

Monica: It’s really important to prepare your seller and you should know by time you get to the offer day. You should have spent some time with your seller, you should know the type of personality they are and you should definitely definitely well warn them that an offer with subjects. 

I mean this is why subject free offers are the holy grail of offers. This is why people often take subject free offers that are $10, $20,000 less even sometimes even $100,000 less the subject free offer is better than an offer with subjects for this very reason. It’s because one is a sure thing, and one isn’t that’s it. 

And because I mean we have offers frequently where if they want subjects they do pay a little bit more, if they want to subject to sale, they’re definitely paying more like there’s a reason why the subject free offer is the Holy Grail and it’s because of the certainty that we can give the seller even now with a rescission period at least the buyer that offers a subject free offer has some skin in the game, they have to pay a small fee is quite insignificant really in the grand scope of real estate costs, but at least it’s something. 

Yeah, preparing your seller before they even look at offers that offers what subjects have a due diligence period. Anything can come up in inspection, especially in a home this age. You know, anything can come up with buyer finances in climbing interest rate environment, especially if we know an interest rate announcement is happening two days after receiving offers or the day that offers are being received warning your seller that you know, if depending on what stage these buyers are at in their financing, if interest rates rise, it might affect their pre-approval it could affect the monthly payments which could affect whether they’d be willing to purchase this property or not. 

So yesterday we received multiple offers on a property, seller gets really excited. And the first thing that we say to them is fingers crossed for a smooth subject removal. Like don’t get too excited. We have five days, they can, anything can happen between now and then and that is like the words that come out of my mouth every single time. Anything can happen. They can just change their mind. You can have the house looking perfect, the inspection can be flawless, their financing could come back great and they could just change their minds and it happens.

Denny:  From a seller perspective, that period from an accepted offer to subject removal. Keep details of the offer to yourself. Don’t tell all your neighbors that you’ve sold and the price because things can change. Inspections happen, renegotiations happen, buyers walk away from deals for any reason.

And in that, let’s say a week, in that week, it is still important to show the property. So often sellers think okay, we have an accepted offer. I don’t have to clean my house anymore. We don’t need to do any more open houses. We don’t need to accommodate showings and that loses momentum, especially if you have an accepted offer after week one. 

There will be trickle in buyers that maybe we’re away that week or whatever the case may be, did miss that open house that want to see your property. It is important to keep showing because it really for the listing agents it what it does is just allow us to continue to collect contact information so that if that buyer does not remove subjects we have people to call immediately. And that is from a listing agent perspective. 

If you’re a new listing agent, this is one of the most valuable, easy things you can do to stir up another offer if something collapses is to continue to market the property on social media, continue to get people to see it, continue to get people to reach out, continue to reply to touchbases, often people don’t stop replying to touchbases when you have an accepted offer, and they’ll just say no more showings, which can hurt your momentum. 

Here’s an example: We had a listing in New West a few weeks ago. Single family home. First week, busy week of open houses, we had three offers, accepted offer with subjects. That buyer does not remove subjects seven days later.

I probably have 15 realtors to reach out to that day. That was on a Thursday. All of them we reached out to, held an open house on Friday, which was less than 24 hours after the collapsed deal. We had nine people come through that open house on the Friday and then we actually got more offers the second time which was the Friday evening, the day after, we got five new offers and got a subject free offer instead of the first week we did not.

But that wouldn’t happen if you are not able to accommodate more showings and you don’t continue to take Realtor contact information. And let’s say, I didn’t reach out to anyone. I just post another open house on MLS for the Saturday. My guess is the turnout would have been less because you didn’t individually reach out to Realtors who then inquired on that property that week. 

Monica: Right. And I’ll say this is one thing that I rarely see other teams do. I really love that our team does this and we’ve been such heroes to some of our sellers, which I love. Like the whole thing that gets me really excited in this industry is when my seller can be like heck yes, Monica like we have another offer that one just collapsed and you brought me another offer like 10 minutes after you told me the first offer collapsed. 

And it’s because we keep showing the properties just like you said. I have some Realtors that I’ll reach out to that say oh we have an accepted offer and I’m like Okay, great, when are you showing it next? Oh, the seller doesn’t want to show it, they want to wait and see how this offer plays out. That tells me that they did not properly educate their seller on the possibilities of this offer collapsing, especially heading into a long weekend. Especially heading into, like December or something.

I’ll never forget last year. I really wanted to get my client and to see this property and the agent didn’t show it, wouldn’t show it. And the deal collapsed and they were into Christmas, New Years and that property didn’t come back on the market until mid January. And I remember the agent being like oh, this was a rough one. Like they really wanted to move before this certain day. And I was like What? What happened? Like why? Why didn’t you keep selling? Showing it? I wanted to bring my clients in to see it and my clients ended up being the ones who bought it. We just had to wait three weeks because of the holidays it was and yeah, so long story short, educate your sellers. Don’t just say hey, well we have the accepted offer, do you want to keep doing showings? Well, no. Yeah, of course not. I’ve got kids and dogs and everything. Well, if this collapses, we’re gonna lose momentum and there’s a long weekend coming up. The day after this deal is supposed to remove subjects so we’ll lose that weekend too. Like you need to kind of take them through the scenarios and explain to them what could happen if, if this deal doesn’t go through. It’s a risk. It’s a big risk not to continue to show it.

You might be canceling and relisting, which is even worse, and takes a lot more work. 

Denny: You may just miss people. That’s the important part of continuing to field inquiries and you’re letting a buyer’s agent know hey, we have an accepted offer. We’re happy to show it we’re planning to do another open house and as a seller, the process is not done until subjects are moved and deposit is in. 

So doing another open house is beneficial because you’re gonna have more people come through the door and you’re gonna collect more contact information so that if subjects are not removed, you have a long list of people to reach out to rather than just starting from scratch next week.

Monica: Yeah, I’m getting a backup offer is a pretty Rockstar move. Get a backup offer. Even if you feel like the first offer is solid, you know that Realtor, you’ve done deals with her in the past, still try to drum up a backup offer. You might not have to use it. But what it will do is if that inspection comes back with a little bit of work, you can say hey, I know that you guys are asking for $5,000 off for these maintenance items but our backup offer is you know the price is pretty good and you know if I go to the seller, they may not want to take off five grand they may just want to go to the backup offer. Then the first position offer is to say okay, crap like let’s just remove subjects.

So you’ve saved your seller five grand by continuing to show it.

Denny: Gives you leverage and it puts a little bit of pressure on the buyer.

Monica: Keep showing the properties. 

Denny: Keep showing the properties. 

Monica: Keep working. It’s not sold yet.