Should Buyers be required to guarantee a timely close?

Buyer Closing Guaranty

One of the most frustrating events that can happen in a real estate transaction is a delayed closing. Frequently, there is a domino effect that is launched when a closing is delayed. Though each party is responsible for their own contingency plans in the event of a delayed or busted deal, I’ve seen delayed closings impact a chain of subsequent transactions and moving plans. I once even reimbursed a seller for a one-night hotel stay and U-haul rental in order to smooth over a bad situation, even though the delay wasn’t my fault and it wasn’t my seller.

The undeniable law of moving says that when you move, for some period of time, you will either have two places to live, or nowhere to live. Period. This cannot be avoided, though many try to limit the overlap to one day.

A common scenario is that you are a Seller in the morning and a Buyer that afternoon, taking the proceeds of the morning sale and using those funds as a down payment on the afternoon purchase. Meanwhile, your U-Haul sits loaded in the parking lot and you eat lunch technically as a homeless person.

Now, imagine if the Seller (of your new purchase) that afternoon is also a buyer the next morning, and you can see how any disruption in a chain of unrelated but dependent closings can cause one or more people up the line a problem.

Delayed closings are almost always the fault of the lender. Sylvia and I don’t tolerate lenders who can’t close on time. It’s one strike and you’re out. Sorry. No excuse is acceptable. We simply don’t tolerate it, at all, and we don’t care what the reasons are or who is to blame. If you’re a lender who can’t get your paperwork to the Title Company on time and fund the deal on time, you are 100% useless to us and our buyers. That’s the bottom line. There is no other way to hold a lender accountable other than promising never to use them again if they let us down.

This attitude is a result of having to deal with the chaos and frustration of delayed closings a number of times in the past. To say it’s a hassle is an understatement. An amendment to the contract is required, which means chasing down signatures at the last minute. Rescheduling of movers. The parties have often scheduled time off from work on the closing date, so work life is impacted. The prorated amounts have to be adjusted on the settlement statement. If the closing overlaps past the end of a month, it can trigger another full month of interest payment on the payoff for the seller (if the seller has an FHA loan). 

Then there are the afformentioned domino deals that create phone calls about “what’s going on with the closing?” from the deal next in line. Plus any number of other unfortunate outcomes or new problems that can also result. In other words, all sorts of trouble and work results from a delayed closing, which is why we view it as an intolerable and unforgivable failure by the lender.

This leads me to the real topic of this blog article. On a recent deal last year, the listing agent, having recently suffered through an unfortunate string of delayed closings caused by incompetent lenders, attempted to insert “buyer guaranty” language into the deal on an addendum.

The deal was already solid, inspections completed, repairs negotiated, appraisal done, buyer fully approved and ready for close. Buyer then offered to close sooner, if it would please the seller. Seller agreed, so we sent over an amendment that simply changed the closing date to a sooner date.

The listing agent returned the amendment with the following language inserted:

“Buyer to guarantee closing/funding on or before {closing date}. If funding is delayed for any reason beyond seller’s control, buyer will cover sellers living expense of $250 per day until complete”

I understood why the listing agent wanted this clause. The seller had purchased a new builder home, which it turned out was going to be ready sooner than expected, and wanted to close on both properties the same day. He would need the sales proceeds to close the new purchase, otherwise he would be stranded in a hotel with all of his possessions in a moving van. Wanting to avoid the “nowhere to live” scenario is understandable, but it’s not the buyer’s problem to solve or pay for.

What ensued was several days of a trip into the Twilight Zone. Not just any Twilight Zone, but a psychedelic, otherwordly journey into another agent’s brain and thought processes. An email debate began between Sylvia and the other agent, with me staying out of it until Sylvia gave up and asked me to take over. The other agent just wouldn’t let it go or listen to reason. Here are some excerpts from the email debate:

I’m disappointed the buyer or buyers lender isn’t inclined to ‘guarantee’ the closing for the {closing date}… that leaves us in a exposed position and frankly, I’m becoming uncomfortable and slightly perturbed….

… Please do me a favor and get the buyer or the lender to expressly guarantee the closing/funding… what’s is their concern if all is going well? I don’t want to expose my sellers to any more costs unnecessarily….

…It’s the least they (buyer or lender) can do for my sellers who are juggling several balls in the air as well….

…I understand you seek to protect your client as do I… some reciprocity is appreciated…

… Let the buyer know the listing agent isn’t being friendly.

None of this guaranty nonsense had been mentioned before, at all, prior to the amendment to move up the closing date. It all just sort of came out of the blue.

And so finally, after a lot of email back and forth by Sylvia and the agent, she asked me to deal with him, and I picked up the phone.

Sometimes email isn’t the vessel through which clarity and resolution can be achieved, because damned if there isn’t always another reply no matter how clearly we state “no, this isn’t going to happen”.

I spoke with the agent and expressed sympathy for how completely intolerable it is when a closing is delayed, and how much hassle, time and money it can cause everyone involved, including buyers who often also have their stuff packed and ready also.

I also thanked him for being such a dedicated defender of his owner’s interests and told him that we respect agents who work hard for their clients and who are willing to fight for what they think will best serve the needs of their clients. I told him the sellers were lucky to have an agent like him.

I shared some war stories stories of my own about botched closings, and we agreed to agree that there are way too many incompetent lenders who cause us way too much trouble with delayed closings, and that something ought to be done about it.

I also expressed a desire to support whatever accountability mechanism might be able to be brought into real estate transactions to hold lenders accountable for timely closings, and that I’d be happy to meet and buy the agent lunch sometime so we could brainstorm and see if we can come up with some good ideas. In other words, I told the agent that I agree 100% in concept with what he wants to accomplish with the “buyer guarantee” idea, and was willing to help make it happen.

But then I said that as much as I agree with the intention of the “buyer guarantee”, that this particular deal, at this time wasn’t the appropriate moment to introduce such a concept to the industry and that my buyer was not going to be the beta test subject for such an effort.

I told him I was advising my buyer to drop the proposed change to the closing date entirely, and that we were going to just stick to what was already written and agreed to. I told him this would be the last conversation about it with respect to this particular deal, and I thanked him for his efforts and promised that our lender would close the deal on time, on the original closing date.

The conversation ended on a pleasant note and that was the end of it.

Then a few days later the amendment showed up, signed by the seller, with a note from the agent saying that the seller really would appreciate the sooner close, and wanted to know if the buyer would still do it, and that the guaranty clause had been removed.

The buyer agreed and the sale closed on time.

A couple of things to note here. First, Realtors are not allowed to practice law. Dreaming up and inserting language into a deal, such as that proposed by the listing agent, is a violation of the Realtor Code of Ethics. As Realtors, we are only allowed to insert factual statements or agreements into a contract, such as “seller agrees to have home and carpet professionally cleaned prior to close”.

The proposed buyer guaranty language was very problematic in that it sought to create an open-ended and ill defined contractual obligation for the buyer. Not only that, it sought to have the buyer assume financial responsibility for the performance of a third party. The whole idea was so improper, and stunk so bad, that it’s hard to believe it was so vehemently clung to by the other agent.

The way to bring about such a service guaranty would be to have the lender provide the guaranty to the buyer. Since the lender’s client is the buyer, the lender can only offer to the buyer some sort of performance guaranty and it would have to be a fixed amount.

So, for example, if it were to become common practice for lenders to offer that “your deal will close on time or we’ll waive $500 in closing costs”, that might work. The buyer might then, as part of the offer negotiation, offer to split the guarantee with the seller, in the event of a delayed close.

Frankly, I don’t think anything like this will ever become common practice. It is a shame that there is not a better way to hold lenders accountable to the hassles they cause when they can’t close on time, but when delays do happen, the purchase contract already spells out the rights of each party, and non-lawyer Realtors have no business trying to create new obligations in violation of the Realtor Code of Ethics..

Posted by Steve
7 years ago
Steve

Steve is a Real Estate Blogger, Husband and Dad, UT Austin Grad, Runner, Real Estate Broker and owner of Crossland Team and Crossland Real Estate in Austin TX.

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Julia - 7 years ago

“Sometimes email isn’t the vessel through which clarity and resolution can be achieved”

It would be awesome if every email user understood this! Sometimes picking up the phone or meeting face-to-face is necessary, especially when emotions run high or there seems to be miscommunication. Unfortunately far too many people don’t realize this.

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Jim - 7 years ago

There’s a simple solution. Seller leases the house from the buyer for 1 month after closing, and uses that time to do all the moving. The lease can have the provision for early termination, in case the seller can do all the moving in one week. This way uhauls and all that stuff are hired only once closing is done.

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Steve - 7 years ago

Hi Jim,

A lease-back does happen occasionally, but we advise buyers against allowing a leaseback for the seller. It introduces an entirely new set of variables and risks to the transaction. The buyer becomes a landlord temporarily, for the seller’s benefit, but the buyer assumes all of the risk in the arrangement.

It’s a bad idea for buyers, a great idea for sellers, if the buyer agrees.

Steve

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Julie - 7 years ago

Not all problems are caused by lenders. When we sold our house, the buyer kept delaying the closing because rather than getting a mortgage (his original plan), he wound up selling another property he owned and wanted to wait for that to go through so he could pay cash. We were understandably upset, especially since we’d already moved out so we could clean the house thoroughly. We were paying a mortgage on a house we weren’t living in. We were able to negotiate with the buyer a daily stipend that he paid that amounted to the daily amount of our mortgage so, at the very least, we weren’t paying for HIS house.

My in-laws also had a situation where they were the sellers and the buyer was paying with money from a bank in Mexico. The money kept getting delayed, and so this then delayed my in-laws’ buying situation and inconvenienced that seller. They wound up having to temporarily borrow from their 401k and sit on pins and needles until their sale in California finalized. So you are totally correct about it being a domino situation that really hurts everyone!

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Jim - 7 years ago

Maybe we need to separate closing and funding so they don’t happen on the same day.

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Sarah Beavers - last year

I wonder why the realtor isn’t more proactive in the sale of the home, after all, it is what we pay them for. I’m currently involved in a home sale where the buyer waited till the last 2 weeks (of 1&1/2 mos.) before hiring a termite inspector. Supposedly the one week delay that followed that, was due to a busy season for the exterminators in the area. The buyer had 2 inspectors look at the house and their opinions conflicted, but only one (advising treatment) would do the report. The seller had to hire an inspector of their own, it did require treatment and since it was done last minute, resulted in the home not closing on time. The real estate agent represents both buyer & seller, and as a professional should have known that a termite inspection would not only be required (the home has obvious old termite damage), but could delay the sale of the home. Therefor, the agent should have instructed the buyer to IMMEDIATELY hire any & all necessary inspectors, and told the owner what should be done prior to a termite inspection. The result was more delay, having to pull vines off exterior walls and lower the level of the dirt around the entire perimeter of the house to uncover the slab. This is not something the average homeowner goes through on a regular basis, but an agent should be well versed in these issues and has a duty to their clients to instruct them of such pitfalls. Can you tell me why an agent wouldn’t do this?

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