Deals Falling Through

We rarely see deals fall through in our Toronto market, and people from other markets – specifically those south of the border, will marvel at how we operate, and how many “agreements” turn into “closings.”

But deals do fall through, now and again, so let me go through some of the reasons why this happens, the circumstances we might find ourselves in to necessitate walking away from a deal, and the verbiage in the Agreement of Purchase & Sale.

DealsFallingThrough

Yes!

I found it.

Not to sound too cheezy, but this came to me in a dream last night.  Not a real dream, but one of those “I’m almost asleep, and my mind is wandering” dreams that insomniacs like me have for two hours before actually falling asleep.

I had the idea for this blog post a few days ago, and somebody in my office said, “You gonna write about bum deals?”

Then I was laying in bed, and the “bum deals” got stuck in my head.

I remembered something from childhood.  Something from Nintendo.  Something from…..

…..well…

I can’t just give it up that easily.  That would take the fun out of it.

So how about this, folks – free $50 Home Depot gift card to the first person who can:

1) Name the video game this is from.
2) Name the protagonist from this video game.
2) Name the cartoon television show which included the main protagonist from this video game, as a character.

Post your answer in the comments section below.  And feel bad for using Google, because that defeats the purpose.  First correct answer wins, and all the comments are time-stamped on the back-end of my site, don’t worry.

Anyways

How is that for a tangent to start this blog post? 🙂

So far this year, I have had three deals fall apart, and that TRIPLED the amount of deals I had fall through in the previous ten years of my career, combined.

I don’t think it amounted to anything more than luck, or coincidence, but all three deals fell apart for different reasons.

Two deals were with my buyers, and one was with my seller.

Every deal that falls apart has a story, and believe me, they’re all different.  There are a host of thirty-parties that are involved as well, from lawyers, to inspectors, to family members.

Deals rarely fall through, but when they do, you can be completely defeated, or feel like you’ve won the lottery.  It all depends on which side you’re on.

Back in 2005, I submitted an offer for a home on Willard Gardens in the Kingsway area, and we lost to a competing offer.

My clients were absolutely crushed.

I asked them if they wanted to go out that weekend and look at more houses, but they said they wanted to “put the search on hold” as they needed time to mourn!

I was only a couple of years into the business at that point, and I started to daydream about getting a phone call from the listing agent, telling me that the deal had fallen through, so I could get my clients back on paper and be their knight in shining armour.

It was a daydream, for sure.

But five days later, my old Blackberry 7200 buzzed, and it was the listing agent.  To my absolute shock and awe, she told me that the deal had fallen through, and wanted to know if my clients were still interested.

Interested?

One of them cried into the phone when I told her!  We bought the house about three hours later.

That’s an example of when you’re on the right side of a deal falling through, and it doesn’t count as one of “your” deals.  As for the three of “my” deals that fell through in 2015, they were all different cases…

The first deal I had fall through this year was a strange one.

A young buyer purchased a condo in a building where no deal has fallen through, from what I can tell.  It was a very popular building, in a very popular location, and there didn’t seem to be any issues.

There were three offers on the condo, and we had the highest, and “won” in competition.

The lawyer reviewed the Status Certificate and gave it the proverbial thumb’s up, and I figured we were good to sign the waiver and move forward.

But that’s when my buyer-client, who was an incredibly intelligent young woman working in finance, sent me an insane spreadsheet with numbers and formulas that would have stumped Einstein himself.

She basically forecasted the price of natural gas into the year 2065, and that was just one worksheet in the file, which could have crashed my hard drive.

It didn’t make sense to me, considering she would probably only live there for 3-5 years, but she had all kinds of objections to the financials of the condominium corporation.

The lawyer who reviewed the Status Certificate simply said, “I’m in no way qualified to get into detailed financial forecasting models,” and said that in his opinion, as a real estate lawyer who closes hundreds of deals per year, that there was nothing wrong with the building.

In any event, my client didn’t feel comfortable moving forward, so we signed a mutual release, and sent it to the listing agent.

We got out of the deal, and the listing agent sold the property to the buyer who had the second-highest offer a few hours later, and it firmed up three days after that.

I can’t say my client was wrong in her desire to get out of the deal, but let’s be fair and say it was likely a combination of her detailed financial analysis, and a bit of cold feet.

Cold feet isn’t the best reason to get out of a deal, but believe it or not, it’s a valid one.

The second deal I had fall through this year was with a client who never really seemed certain on his life’s plan.  He seemed to be in between ideas of how to spend the remainder of his life after he retired, and was between both ends of the country, and various relationships.

He bought a condo, was excited as hell, and then the very next day, he simply said, “I gave it a lot of thought, and I’m not going to proceed as planned.”

It was probably less than twelve hours after we signed the acceptance, and he hadn’t procured a deposit cheque, let alone handed one over to the listing brokerage.

The listing agent was disappointed, but she was very understanding.  Her exact words on the phone were, “Oh, shoot.”  Technically-speaking, we had a valid contract, but it had two conditions, and there was no cheque, so we basically just walked away from it.

The third deal I had fall through this year was with one of my listings, and happened just two weeks ago.

I had two offers on a condo listing in Liberty Village (which is very rare), and we sold it for over the asking price (which is also rare).

It was conditional on Financing and Status Certificate, and while there were no issues with the Status, the buyer agent started to make a bit of noise about the financing.  He said he “might” need an extension on the condition, and then the next day, he simply said, “I’m sorry, but we’re going to send you a mutual release.”

It turns out his client was self-employed, which the lenders never like to see, and had a 5% down payment.  He couldn’t get approved by the bank, and the fact that he was on vacation in the Dominican Republic probably didn’t help with the approval process either.

I got the second-highest offer back on side, and the buyer agent and his buyers were ecstatic.  Just like I was back in 2005 when I got “the call,” these guys were super-happy, and jumped at the second chance that maybe one out of every thousand buyers gets.

I had the good fortune of being able to email my clients to effectively say, “The bad news is, we have to sign a mutual release with the buyer of your condo because he couldn’t get financing, but the good news is, I already have another offer in hand – both documents are attached.”

Amazing.

Three deals falling through in one year, after only one deal falling through in my entire career before that.  That first deal, about 4-5 years ago now, was one I wrote about on my blog at the time.  Let me see if I can find it……..nope, sorry.  I looked for 20 minutes, for what it’s worth…

As far as conditional agreements go, I often tell my clients, “One condition is as good as ten.  The way conditions are worded, you can get out of a deal for any reason.”

And it’s true.

Here is the typical condition for Status Certificate:

“This Offer is conditional upon the Buyer’s lawyer reviewing the Status Certificate and finding the Status Certificate satisfactory in the Buyer’s lawyer’s absolute and sole discretion.  Unless the Buyer gives notice to the Seller not later than 6:00pm on the third day following receipt by the Buyer of the Status Certificate, that this condition is fulfilled, then this Offer shall be null and void and the deposit returned to the Buyer in full without deduction.”

There are a dozen different clauses that all effectively say the same thing.

The key word here is “unless.”

Unless the buyer delivers a waiver or a notice of fulfillment of condition, the deal automatically terminates.

Do nothing?  Sit back and turn off all forms of communication?  The deal terminates.

So if a buyer wants out of a deal, he or she need not “prove” anything.

People often ask me what they need to “provide” to the seller or the seller’s lawyer after a home inspection, if they don’t want to move forward, and if the inspector needs to “pass or fail” the home.  In reality the way the clause is worded means you don’t have to do anything.

You don’t have to take a step to have the deal fall through.

You DO have to take a step to firm up the deal.

If you DO want to move forward with a conditional deal, then you send in a “Waiver” of your conditions, or a “Notice of Fulfillment,” which is the same thing, but few agents use that form.

As I said: one condition is as good as ten.

So I’m shocked when I get an offer with ten conditions.  All it does is weaken your offer, by making the seller and listing agent question your sincerity and/or ability to firm up the deal, and thus it costs you money in terms of the sale price you could have settled on.

Now, some of the people who commented on Friday’s blog about ethics might ask, “Do you include a condition on cold feet?”

No, you don’t.

But if you have a condition on Financing, or Inspection, or Status Certificate, and you change your mind, you get out of the deal by simply not sending in a waiver of your condition.

Or, if you have a condition on Status Certificate, and you can’t get your mortgage approved and can’t move forward with the deal, there’s nothing to stop you from not waiving your condition on Status Certificate.  It’s up to you, as a buyer, with an iron-clad condition.

In reality, very few deals fall apart in our market.

But the ones that do fall apart happen so seldom that they often turn a mundane story into something seemingly-incredible…

22 Comments

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  1. Mike says:

    Now don’t take this as negative but what you’re describing David is not actually a “deal” but a “conditional offer”. You don’t actually have a deal until the conditions have been waived to which you’d have an agreed transaction or a “deal”. Have you ever had someone actually back out of a deal? One where the deposit would be contested?

    As for your client who backed out because of her spreadsheet, I think I can speak to that (not just because I model everything on Excel). Gas futures (price in which natural gas will trade at a future date) only goes out 10-years at AECO (Alberta, Canada) and Henry HUB (Louisiana, US) any other market would be lucky to go out 2-years. Anything else would be a projection based on speculation and not really valid, your client had cold feet.

  2. @ 2 Low Bro

    How ironic – a link on TRB to a site that “specializes” in pre-construction.

    Could there possibly be a more anti pre-construction website in Toronto other than TRB?

  3. Toronto Real estate says:

    “Soft market” is a term that gets thrown around a lot in the financial sector, though if you’ve never before heard of such a thing, it’s nowhere near as arcane as it might sound. You may be more familiar with the concept when it’s referred to as a “buyer’s market.”Here are some more info, [http://www.jalilirealty.com] Toronto Real estate

    1. 2 Low Bro says:

      WTF??? You’re looking to get traffic from THIS web site???

  4. Fro Jo says:

    Thanks David. It’s a topic that s not talked about in a hot market (that and power of sale…).

    Is it fair to say that deals increasingly fall through in a heating-up market (sellers tend to back out) and in a cooling market (buyers tend to back out)? And as the rate of heat/cool rises, the more spurious/desperate the reasons for backing out become? Any real estate litigators in the crowd?

  5. Kyle says:

    Probably over-analysis on my part, but i suspect deals falling through will be on the rise:
    1. Overall there are more transactions now than ever
    2. The sales mix is becoming increasingly more heavily weighted towards condos, where status certificate review can be used as an out.
    3. The condo building boom downtown started about 10-15 yrs ago, so many downtown resale condos are aging and and are going to start needing work. We will now see which ones were well-built and well-managed.
    4. Banks are getting tougher with their lending practices
    5. Lives are just more complicated these days. I’ve lost out once when trying to buy a property, because one of the seller’s six Ex-wives, claimed through her lawyer that he didn’t have the authority to sell the place.

    1. Joe Q. says:

      I think Kyle’s points 2 and 3 are very pertinent — we are probably entering the era when downtown condos really start showing their age (in terms of fixtures, mechanicals, and condo-board governance).

      1. GregariousDan says:

        That’s certainly my concern after learning the appalling level of shoddy construction allowed in Toronto via “The Condo Game”.

  6. Chris says:

    1. Castlevania II: Simon’s Quest
    2. Simon Belmont
    3. Captain N: The Game Master

  7. Noel says:

    It’s interesting how, no matter what type of relationship you are getting into, be it a financial contract or something personal, when you get close to having it finalized your gut, which has been silent up until then, starts giving its opinion. Gut feel is a very important factor in any decision. I’ve often thought something was a good idea until commitment time comes and then my gut causes me to re-evaluate it. Sometimes it results in cold feet.

    Btw, you said that getting two offers condo listing in Liberty Village was rare and so was above asking. What is it about LIberty Village that people don’t like?

    1. Squidward says:

      I live near LV and think it has a couple of issues from a liveability perspective:

      1. Traffic is a nightmare as the area is really only accessible via Strachan or Atlantic Ave. (and you can’t turn left onto Atlantic during rush hour).
      2. It’s a whole lot of people jammed onto a relatively small chunk of land that can feel claustrophobic because it’s ringed by high rises and transit corridors.
      3. There are a boat load of dogs and very few green spaces where they can relieve themselves.
      4. Not a lot of adjacent services like community centres or libraries, never mind schools.

      On the RE side, there’s an awful lot of inventory, but a lot of it is small in sq footage, which will likely keep growing families out. Not sure how much of a demographic mix is in there now, but it looks to skew pretty young and childless.

      On the plus side, it has a good retail mix with some restos and an LCBO, the Ossington bus is an amazing connection to the Bloor line, and the lake is 5 minutes away.

      1. Jim B says:

        @Squidward

        Exactly! My brother lives just north of LV (Sudbury between King and Queen) and getting in/out (even at 2 AM) is a friggin’ nightmare! Not to mention the lack of street parking (virtually none) and the cabs racing up and down the street 24/7. But my bro’s below-street-level TH, purchased for about $140K in 1999, could go for $320K or so now. Go figure.

  8. Noel says:

    Whoops, only answered the first one above:

    1) Castlevania: Simon’s Quest
    2) Simon Belmont
    3) Captain N: The Game Master

    1. Dan says:

      damn. too slow.
      Love this game

      1. Dan says:

        though I never would have gotten the cartoon show.

    2. @ Noel

      You sir, are correct. 8:35am.

      Chris – 9:27am, sorry buddy!

      Noel, I’ll send you a the Home Depot gift card via email.

      Dan – you gotta get up earlier! 🙂

  9. Noel says:

    Simon’s Quest?

  10. Paully says:

    The house beside mine sold during this summer…three times in six weeks…before the fourth and final deal actually stuck!

    Leisure Suit Larry???

    1. Kyle says:

      What did you do to scare off the first three buyers? 🙂

      1. Paully says:

        I told them that I was “Appraiser.”

      2. Paully says:

        …but seriously, I heard that two of the deals flaked on inability to secure financing, and one did not like the home inspection. That is not the first story that I have heard recently about the banks becoming much tougher on mortgage approvals.

        I consider that we won the lottery though, because the new neighbours are great! I believe that the most valuable feature that any new home can have is a good neighbour. Period. You can paint, pave, shingle, furnish, renovate, and landscape to your heart’s content, but you can’t get rid of a neighbour who is a prick.

  11. Long Time Realtor says:

    Incredible.

    That’s as rare as making 3 errors in a row, in an MLB playoff game!

    Hard luck, Mr. Fleming.

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