Have you ever had a problem in a real estate transaction? Of course not. Problems never happen, right?
In reality, problems are very common and they happen all the time. The good news is that many of them are predictable. When investors understand what typically goes wrong in a deal, they can take steps to avoid those issues before they become major obstacles.
Here are seven very common problems that show up in real estate transactions and what you can do as an investor to avoid them.
1. A Buyer Backs Out of the Deal
One of the most common issues is when a buyer flakes out on the property. Sometimes buyers will tie up a property under contract while they investigate the deal. Later, they may decide that the property does not work the way they expected and attempt to back out.
The best way to protect yourself as a seller is to make sure the buyer is serious. One of the most effective ways to do that is by requiring a meaningful deposit upfront.
Even if a buyer claims the deposit is refundable, it still serves an important purpose. If the buyer fails to uphold the terms of the agreement, that deposit can serve as compensation for the seller.
2. Buyers Renegotiating at the End of Due Diligence
Another common issue happens during the due diligence period. Sometimes a buyer will hold a property under contract for weeks or months and then return at the very end asking for a price reduction.
This strategy, often referred to as “re-trading the deal,” can be frustrating for sellers. One way to reduce the risk is to investigate the buyer ahead of time.
Understanding who they are, what they plan to do with the property, and whether they have a reputation for renegotiating deals late in the process can make a big difference.
3. Financing Challenges
Financing can also cause problems in a transaction. A bank may initially indicate that they are willing to finance the deal one way, but once the buyer is under contract the terms can change.
When that happens, the buyer may suddenly need additional cash or different loan terms to move forward.
As a seller, it helps to stay informed about the buyer’s financing situation. Sometimes being creative can also help save a deal. For example, if a bank requires the buyer to put more money down, a seller might consider leaving a portion of the equity in the property temporarily until the buyer can refinance and pay it back.
4. Title Issues
Title problems can also derail a deal if they are not handled carefully. Different title companies may interpret issues differently, and sometimes a problem that appears serious at first can actually be resolved.
The key is to make sure you understand the issue completely. Having an attorney who is experienced with title matters can help investigate and determine the best path forward.
It is also important to remember that a second opinion from another title company may sometimes lead to a different result.
5. Lack of Disclosure
Disclosures are another area where problems can occur. Some sellers assume that if they are selling a commercial property they do not need to disclose anything to the buyer.
However, environmental issues must still be disclosed. Even beyond legal requirements, it is usually better to be upfront about any known issues.
If a buyer discovers a problem after settlement and believes information was withheld, that can lead to disputes or even lawsuits.
6. Insurance Underwriting
Insurance has become a significant issue in many transactions recently. Insurance companies are underwriting much more aggressively than they did in the past.
Buyers may find that insurance costs are much higher than expected, even if the seller has had the same policy for many years. Older electrical panels and other safety concerns can also create challenges when buyers attempt to secure coverage.
If a buyer struggles to obtain insurance, it can become a serious obstacle to closing the transaction.
7. Tenant Turnover
Tenant turnover can also create unexpected problems during a transaction. Sometimes a property is under contract and several tenants suddenly give notice that they are leaving.
Tenants often become nervous when they hear a building is being sold. When that happens, it is important to communicate clearly with the buyer.
You may want to ask whether the buyer prefers that you fill the vacancies before closing or leave them for the new owner to handle. Being transparent about these changes can help avoid misunderstandings.
Final Thoughts
Real estate transactions often come with challenges, but many of the most common problems can be anticipated. Buyers backing out, financing complications, title issues, and tenant turnover are all situations that investors encounter regularly.
Many investors we work with appreciate having guidance on how to navigate these situations before they become obstacles. If you are looking for investment properties in Pennsylvania or Maryland, reach out to us and we would be happy to help.
