When the seller has an expected shortfall, ensure arrangements are made early to prevent settlement falling over.

You can help reduce the risk of a fallover by asking sellers to ensure they are able to pay out any loans secured to the property.

A shortfall occurs when the value of a seller’s remaining mortgage is greater than the sale price of their property, forcing the seller to pay the difference in order to discharge the mortgage. Without the money to pay the shortfall, settlement will need to be delayed while the seller sources the required funds – and if they can’t, the deal may fall over altogether.

Most sellers are aware of whether they have a shortfall or not, but occasionally a seller will overlook the issue until well into the settlement process, leading to a last-minute scramble to obtain the necessary funds.

For example, in a recent settlement case, the seller didn’t start to make arrangements to cover their shortfall until shortly before settlement date. When they eventually attempted to cover the shortfall by refinancing, the bank advised them that their finances could not support the new loan, and they were forced to cancel settlement.

When the buyer found out the seller couldn’t proceed, they issued a default notice which terminated the contract after 10 business days, and they had their deposit refunded to them.

In a separate case, our client is under contract to buy two adjoining properties using a single loan, but can’t proceed as one of the sellers has delayed settlement while they source additional funds to cover their shortfall.

In this situation, the seller is accumulating hundreds of dollars of penalty interest each week while they attempt to find a solution to their shortfall.

To help avoid unfortunate situations like these, ask sellers at the time of listing if there is likely to be a shortfall between the sale price and their remaining mortgage. While it’s ultimately up to the seller to provide the extra funds, prompting the client to make arrangements early will help to avoid delays or a fallover later in the sales process.

Image by Stuart Pilbrow via Flickr.