AMA - The Buyer Needs An Extension

Kara from Ottawa Canada asks.

I have a firm agreement with a buyer for the sale of a property. Two weeks before closing the lender for the buyer indicated that they want to order a new appraisal and therefore the closing date cannot be met. The Buyer is proposing that we close the transaction with seller financing, or that we simply extend the closing date. I have very real carrying costs for the property and I don’t like the idea that this delay could cost me money. What do you suggest?

Kara, this is a great question, and an extremely common situation. You’re based in Canada and closings generally happen on time. In the US, it’s much more common to have delays on closing. A failure to close on a transaction in Canada usually results in litigation. In the US, delays are part of the fabric of real estate investing. In my experience, more than half of the transactions I’ve witnessed over the past decade have been delayed for one reason or another. Sometimes the cause is a delay with the title insurance. Sometimes it’s a delay with the lender. I’ve even seen delays at the closing table when the lender for the buyer requests additional documentation on closing.

You’re correct to be concerned about carrying costs. The daily and monthly carrying costs are real, and you should be compensated for the delay. The agreement for purchase at this point is not conditional. So it stands to reason that the buyer should pay for those carrying costs because they were going to own the property from the closing date anyway.

I don’t know exactly how much extra time the buyer will need, but let’s say for the sake of argument that they need an extra 30 days to close.

Let’s imagine that those costs are $2,000 a month. I don’t know the exact numbers so I’m making them up.

You have a couple of choices. You could increase the purchase price to compensate you for the added costs. But that runs the risk of causing the buyer to prequalify for a new loan amount. That could introduce even further delay. But you would be within your rights to ask for that. The second option, which I prefer is to ask for an increased deposit.

You could agree to, say, a 30 day extension under the following conditions:

1. If your carrying cost is $2,000, I would as for a little more because you’ve probably forgotten something. I would ask for something between $5,000 to $10,000 in additional deposit monies.
2. The Buyer should increase their deposit amount. But in this case, unlike the original deposit that was placed in trust with the real estate agent, this deposit will be non-refundable, and released immediately to the Seller. The purchase price won’t change, but you will get a chunk of cash immediately.

The added deposit will be deducted from the cash the buyer needs at closing since it was pre-paid. But it is reducing your risk.

I’m not a fan of closing with Seller financing. It puts too much of the risk in your hands. Let’s say that the lender for the buyer backs out of the deal. Now you’ve conveyed the property and you would need to go through a huge and expensive legal process to get the property back. This would involve a foreclosure or a power of sale, depending on where you live. In Ontario this would be a power of sale, but could only happen after the Buyer is in default on the terms of their Seller financing agreement. Meanwhile you’ve got a ton of cash tied up and you’re working with a buyer who is not capable of closing. You don’t have the flexibility to simply put the property back on the market.

I want to thank you Kara for a great question. I hope this gives you some ideas on how you can negotiate the situation.