Experienced realtors and real estate lawyers understand that many factors can cause a real estate transaction to fail to close. In most cases, the issue lies with the Buyer — such as an inability to obtain financing, concerns arising from a home inspection, or issues identified in a condominium status certificate that the Buyer is unwilling to accept.
However, in today’s challenging real estate market — where prices have softened and demand has slowed — another problem is emerging: Sellers who are unable to close because the debts registered against their property exceed the sale proceeds.
This issue can create significant complications for both Buyers and realtors. Understanding how it happens — and how to identify the warning signs early — can help listing agents avoid deals collapsing late in the process.
When the Seller Cannot Close
Traditionally, failed closings are associated with Buyers. In the current real estate market financial pressures on homeowners have created a growing number of situations where Sellers are unable to complete the transaction.
The problem arises when the proceeds from the sale are insufficient to pay off all of the debts registered against the property.
On a typical closing, the Seller receives the net sale proceeds after payment of:
- the mortgage(s)
- real estate commissions
- legal fees
- adjustments for property taxes or condominium common expenses
If the sale proceeds are not sufficient to cover these obligations, the Seller must bring additional funds on closing. If the Seller cannot cover the shortfall, the deal cannot close.
A Real Example
Our office recently encountered this exact situation.
The Buyer signed an Agreement of Purchase and Sale for a residential property. However, the listing agent had not made inquiries with the Seller about the total debts secured against the property.
When a title search was conducted, it revealed:
- a first mortgage that was almost equal to the purchase price, and
- a second private mortgage registered against the property.
Once both mortgages were added together, it became clear that the debts exceeded the sale price.
This issue was immediately raised with all parties. Negotiations took place with the lawyer acting for the second lender, but they were not prepared to provide the discharge required to transfer clear title to the Buyer.
As a result, the Seller could not close and the transaction collapsed.
Fortunately, the Seller agreed to sign a Mutual Release, allowing the Buyer to recover their deposit. Had the Seller refused, the Buyer’s deposit could have remained tied up until a court order was obtained — an expensive and time-consuming process.
Lessons for Realtors
There are several important lessons for realtors — particularly listing agents — in today’s market.
1. Do not assume the Seller can pay off the mortgages
When taking a listing, ask the Seller:
- How many mortgages are registered against the property?
- What are the current balances?
Remember that mortgage payouts often include penalties and discharge fees, which can add thousands of dollars to the amount required to close.
2. Be aware of private loans
Many Sellers take out private loans secured against their property. These are often registered on title and must be paid out on closing.
3. Ask Seller about Property Tax condominium arrears
Outstanding debts that must be paid on closing can include:
- property tax arrears
- unpaid condominium common expenses
These can significantly reduce the Seller’s net proceeds.
4. Judgments and liens must also be paid
If a judgment or lien has been registered against the Seller, it will typically need to be paid out in order to transfer clear title to the Buyer.
5. Vacant Home Tax issues
In some municipalities, if the Seller has failed to file a required Vacant Home Declaration, the Buyer’s lawyer may require a holdback of sale proceeds until the issue is resolved.
6. Non-Resident Seller
If the Seller is a non-resident of Canada, there is a mandatory 25% holdback of the sale price which will great reduce the amount of funds available to pay out debts.
Due Diligence for Listing Agents
If a Seller appears financially distressed or behind on mortgage payments, listing agents should perform some basic due diligence.
Before investing time and money in:
- staging
- marketing
- photography
- advertising
a prudent listing agent may wish to pull the parcel register or title search to confirm what mortgages or debts are registered against the property.
With that information — and a realistic understanding of closing costs — the listing agent can determine whether the Seller is likely to have sufficient funds to complete the transaction.
Unfortunately, Sellers under financial pressure may sometimes fail to disclose the full extent of their debts in a desperate attempt to sell.
The Risk to Buyers
There is surprisingly little protection for Buyers who enter into an agreement expecting the transaction to close, only to discover that the Seller cannot complete the sale due to insufficient funds.
In the example above, the Buyer was understandably frustrated when the deal collapsed. The only positive outcome was that the Seller agreed to sign a Mutual Release so the deposit could be returned. Without that agreement, the Buyer’s only option would have been an expensive court application.
The Bottom Line
Some Sellers who purchased properties during stronger markets — and at higher prices — may now find themselves unable to sell without adding additional funds for the closing which they may not have.
For realtors, particularly listing agents, extra due diligence at the beginning of a listing can prevent significant problems later on.
In today’s market, it is no longer safe to assume that every Seller will have sufficient equity to close the deal.