If you enter into a purchase agreement during the COVID-19 pandemic and you or your buyer become fearful of COVID-related concerns, it might not be so easy to pull out of the transaction. The standard California Residential Purchase Agreement (RPA-CA) doesn’t contain a Force Majeure clause by default, so unless it was built into the contract from the start, your only choice may be to move forward as carefully as you can.
However, if you’re fully on board with selling your home and moving on from your divorce during this weird, historic time, there are a few other ways COVID-19 could get in your way. To help prevent some of these problems, make sure you have an experienced divorce real estate professional on your side, and be watchful for signs of the following snags:
Let’s assume your buyer is as on-board with the transaction as you are. Short of getting sick and being physically unable to go through with the transaction, here are some other ways COVID-19 may tank the sale:
The buyer’s work hours get cut – Maybe your buyer is a stellar employee who works for a fabulous company who loves them and would never consider terminating their employment. But, the company’s owner has noticed an alarming downturn in sales since the pandemic hit the area, so in order to stay in business, he or she has no choice but to cut back on staffing hours to stay afloat. This is not your buyer’s fault, but the lending bank will recalculate the buyer’s income to determine whether they’ll still qualify for the loan.
The buyer gets laid off – If the buyer’s company isn’t fiscally able to keep the doors open, even after cutting hours, some—or all—of that staff is going to be facing layoffs. Again, this is not your buyer’s fault, but unless the buyer is a couple whose income can withstand the loss of this job, the lender will almost certainly refuse to grant the loan.
The buyer’s debt-to-income ratio increases – Let’s say your buyer’s company remains healthy throughout the pandemic and your buyer stays gainfully employed. As comfortable as they are, they’re probably aware that things could go wrong at any time. So, to protect themselves, they may take steps to shield the cash they have on hand by either using credit cards to make purchases they usually make in cash, or by reducing the size of the monthly payments they used to make to those credit accounts—or both. By changing the way they handle their funds, they could upset the debt-to-income ratio the bank used to make their initial approval determination, and once the bank comes in to re-check the buyer’s financial situation, their new debt-to-income ratio could cause them to lose their loan.
The buyer’s credit score changes – Credit scores are changing all the time, and right now, banks will be looking for ways to shield themselves from loss. In an effort to do so, a credit card company may decide to reduce your buyer’s open credit line on a card they haven’t used for several years—an action that can upset the “credit utilization” factor on their account. Your buyer could also see a sudden drop in their FICO score if a very old debt-in-good-standing has aged off their credit file, especially if most of their other debts are much newer. For more information on other changes that can affect your buyer’s FICO score (or your own), visit https://www.doughroller.net/credit/7-things-cause-credit-score-fluctuate-month-month/.
Remember: real estate transactions are a lot like dominoes. Even if you do everything correctly on your end, that doesn’t mean somebody else won’t make their domino fall.
When you entered into this transaction, you really wanted the sale to go through; there was absolutely nothing that could make you stop this transaction in its tracks. Well, assuming you haven’t gotten sick, here are at least two problems that could surprise you:
The inspector finds major deferred maintenance – Oops! You were so busy meticulously sanitizing your main living areas that you didn’t notice a spot in the back corner of a long-forgotten closet that had developed a mold problem. And you never even saw that crack in the foundation behind your azalea! These and other home maintenance problems can pop up unexpectedly to threaten your real estate deal. Problems like these are why it’s important to have an experienced divorce real estate expert on your side. The right agent can anticipate and respond to major problems before they get in your way.
You could refuse to allow inspectors in – We all start out with the best of intentions, but when reality sets in and there’s actually somebody asking to come into your home during a pandemic, will you be ready to cooperate? And even if that answer is yes, of course, if you’re shopping for a new home of your own, what will your seller do? Will they be as cooperative with your inspector as you’re willing to be with your buyer’s? And if not, how will that affect any contingencies you have attached to the sale of your existing home? Remember: real estate transactions are set up like dominoes. Even if you do everything correctly on your end, that doesn’t mean somebody else won’t make their domino fall.
So, you’ve done your part to prevent any seller-side problems, and you’ve made it past the buyer-side problems. Great job! But you’re not out of the woods just yet. Here are a few issues that could still pop up to frustrate you:
Loan policies could change – Laurel Starks, the CEO and Founder of The Ilumni Institute, an organization founded to equip real estate professionals with the tools and experience to effectively represent divorcing homeowners during the sale of their homes tells us, “It’s not abnormal for the loan policies themselves to change, potentially stopping a loan in its tracks due to no fault of the borrower. Additionally, if other agencies or companies slow or stop their operation, lenders will be impacted. For example, when the IRS recently stopped accepting new 4506-T orders, lenders were no longer able to verify the accuracy of tax returns or W2s.”
Relevant agencies could close – The organizations and agencies that support the Bay Area real estate market have quickly retooled and found ways to keep real estate transactions moving forward. However, in the face of a global pandemic, there’s really no way to know what might happen next. While the area’s real estate pros aren’t expecting any more calamities, it’s important to set your expectations realistically and go into your transaction knowing that, really, anything could happen.
Your home’s value could fall below the sales price – The Bay Area’s real estate market is constantly fluctuating, which means your home’s value is a little bit different every single day. That’s a completely normal state of things, so please don’t worry. Where trouble could arise is if the market incurs a sudden overall drop in value. You might hear some people say it’s coming, but as of this writing, prices are holding strong (in April 2020, the sale to list price ratio of single-family homes was 105.5%. That means the average home sold for 5.5% more than its listing price).
Having the right partner by your side can make navigating these potential problems seem breezy. Selling your house is not impossible during a pandemic, so if you have any questions or need help navigating your next real estate divorce transaction, contact me. I’m a Certified Divorce Real Estate Expert, and I can help turn your real estate dreams into reality.