Why Do Some Properties Fall Out of Escrow?
Updated: Apr 22, 2020
This past week, Incline Village and Crystal Bay has seen a handful of properties fall out of escrow or had escrow deadlines extended out 30 days.
When buyers and sellers open escrow everyone is always hoping for a smooth transaction. There are a number of contingencies during the due diligence period that give the buyer an opportunity to learn more about the property. Inspection reports, the cost of homeowners insurance, loan approval, review of the preliminary title report and homeowners association documents are all important aspects of the process.
Every step of the way there is information to be analyzed and judgments to be made as to whether to proceed with the escrow process, do further investigation of a particular issue or back out of the transaction. Cautious buyers use the due diligence period to learn as much as they can and allay any concerns they may have about the property they are hoping to purchase.
While everyone uses their best efforts to nurture a transaction in escrow towards a successful closing, sometimes issues arise that cause the deal to fall out of escrow. This can happen for many reasons and in a buyers market it tends to happen a bit more often than in a sellers market.
With the limited inventory available, buyers have been flexible on “wants vs. needs” the past 3 years when it comes to making purchases of vacation and primary homes in the Tahoe Basin. As a result, Sellers have been more open to renegotiations during the escrow period, based on a Buyers finding. Buyers still need to be satisfied with every aspect of the due diligence process or they will use disapproval of one of the contingencies as a reason to cancel the transaction. Simply saying that you think the cost of homeowners insurance on the property is too high is enough of a reason for a buyer to cancel the escrow in Nevada.
Sometimes inspection reports come back with unforeseen repairs that will result in costs well in excess of the amount budgeted in the purchase contract. In that case, the parties may either renegotiate or the buyer might simply choose to walk away from the deal. In Nevada, even if the seller offers to repair everything noted in the inspection reports it’s still not good enough. The buyer can simply disapprove of the inspection reports, cancel the escrow and get their earnest money deposit back minus the cost of inspections.
The loan approval process has become much lengthier and strict during the COVID-19 epidemic. A buyer can have a sufficient down payment and good credit, but the lender will now question smaller items or expenses. Lenders will need to see those IRS TAX transcripts which normally have a 2-3 day turnaround time but now they are taking 2-3 weeks. If the lender feels you are too leveraged during this time of uncertainty, lender might not approve the loan.
And on some occasions (like the past two weeks), buyers simply change their mind that they don't want a property or they want to keep cash on hand and release the liquidated damages specified in the purchase agreement to the seller. For all of these reasons and many more, a transaction can fall out of escrow even if everyone involved has worked hard to make it succeed.