DISCLAIMER: this is not going to be a general indictment of purchasing real estate through zero-down financing. In many cases, zero-down is a viable option and transactions financed through a zero-down program are completed with issue.
Having said that …
Today, for the second time in two months, a buyer using zero-down financing to purchase one of my listings failed to qualify for their loan. In Arizona, if a buyer cannot qualify for a loan after a “good faith and diligent effort” they can cancel the contract and regain their earnest deposit. End of story.
In both of these cases, the buyers had requested repairs and my sellers have agreed to make those repairs. In both of these cases, the repairs were completed before the buyer canceled. In both of these cases, the sellers are out the money spent on the repairs.
These cancellations are part of a larger trend of zero-down purchases falling through before escrow is completed – whether due to poor credit, insufficient income, etc.
Counter-argument: “the seller would have to make those repairs anywhere.” This is not a given. Another buyer could have been willing to purchase the home without those specific repairs, or others for that matter.
Fair question: “didn’t you as the listing agent check with the lender?” Absolutely. In the most recent case, I sent the lender a local “Loan Status Update” form and the last update showed the file was in underwriting. It was there that things fell apart.
Contractually, there is nothing that allows the seller to recoup the costs of repairs requested by the buyer from the earnest deposit in the event of a cancelation.
And so, from now on, buyers’ agents will be seeing one of two possible clauses appearing on counter offers in an effort to protect my sellers (exact language pending, but here’s the gist:)
1) Repairs will be made after buyer has received final loan approval. (The current Arizona contract stipulates repairs need to be completed four days before the close. I’ll be overwriting this section with the free-form language.)
2) In the event of a cancellation of escrow after requested repairs have been completed by the seller, the cost of said repairs will be deducted from the earnest deposit and awarded to seller after receipts have been provided.
As Ardell continues working to save the world on behalf of buyers, it’s worth nothing that the sellers need protection too. Especially in a state like Arizona where the standard real-estate contract is almost completely weighted to the buyers’ benefit