March 4, 2012

33% of Realtors Report Failed Deals: Debunking The Panic

March 4, 2012

33% of Realtors Report Failed Deals: Debunking The Panic

The chart above shows a trend of increasing home purchase deal cancellations. Time to panic, right? A BusinessInsider headline Friday certainly suggests so.

Not so fast. The stat is cancellations reported by realtors. Specifically, 33% of realtors who are members of the National Association of Realtors (NAR) have reported cancelled contracts in the past 4 months, up sharply from 18% in September and August, and up from a more normal 9% average.

Two problems with this data:

(1) It’s anecdotal. And anyone who’s around dealmakers knows they can be dramatic. Bluster like “I’ve had three deals fall out this month alone” can mean: one was cancelled, one is bumpy right now but will close, and one was never actually in contract but rather the buyers just decided not to write an offer. It looks all official in a chart, but it’s just how NAR realtors are answering survey questions (I should note I’ve asked NAR about exact methodology since I can’t find it on their site).

(2) The reasons stated for cancellations are utterly unreliable. This point should be made clear by the fact that “other” is the biggest category by far. Deals fall out for many reasons, always have, always will. The cancellations I see are mostly based on something buyers didn’t like after inspections or reviewing disclosures—whether single family home or condo, the latter having more disclosures where buyers can find things they don’t like.

I define this as cold feet, which would fall under the “other problems” category in the chart.

But I agree with appraiser Jonathan Miller that appraisals are not the factor they’re made out to be on purchase fallout.

A purchase appraisal is an exercise in vetting the price a buyer is willing to pay for a home on the open market.

Sometimes an appraisal will prove the buyer is overpaying, because the open market contract price is too far over recent sale prices of nearby homes with similar characteristics. But most often, the contract price will be corroborated by the appraised value.

If the appraiser reveals that a buyer is in fact overpaying, the data will be plain, and contracts can be renegotiated to appraised value rather than cancelled.

This is a critical point.

Appraisers use the same data on recently sold comparable homes that the seller used to price the property and the buyer used to write an offer.

So if the buyer is overpaying and the appraisal clearly proves this, the buyer can ask for a price reduction to appraised value. If the seller holds the line and the contract is cancelled, that seller will still face the same issue with the next buyer. Good sellers’ agents know this and if they don’t, good buyers’ agents (and appraisers) can help them understand.

As for the ‘inability to obtain a mortgage’ reason for cancellations, that’s grey because even an unresolved appraisal issue could eventually lead to a cancelled loan. So when the realtors are reporting their reasons, an appraisal issue might be misreported as a loan issue.

And if a purchase loan falls out for a borrower rather than property issue, then the lender didn’t pre-approve the borrower well enough. At this stage of a deal, it’s got nothing to do with the “tight credit” term people like to throw around. If a realtor is allowing a buyer to write a purchase contract without being pre-approved, they shouldn’t be surprised when the borrower can’t get a loan.

Now back to the cold feet or “other problems” reasons for cancellations.

From where I sit, the reasons aren’t appraisals. I have two examples that underscore this point:

(1) In November, one client cancelled his contract to buy a condo for $600,000 even after his appraisal came in at $634,000. Value wasn’t his issue. He went cold because of a new HOA provision that will require owners to live in their condo for two years before they have an option to rent. This type of policy is actually good for long-term value. But it didn’t give him the flexibility he wanted.

(2) Last month, a client cancelled his contract to buy a single family home that appraised for contract price of $560,000. He thought it was worth less because he wanted to rebuild some un-permitted additions with permits, which would cost him $8-10k (by the way: no value was given to un-permitted additions). The buyer’s agent was able to renegotiate for $500,000 but the buyer still walked away. The turn of events led to an amazing deal, but he went cold by then.

In closing here’s the most important point.

These and all my other buyers who’ve cancelled contracts since September don’t exit the market (except one who decided to rent). They just hold for the deal that fits them perfectly and they simply won’t settle.

Not settling on price has been a theme since 2007, and now we can add not settling on condition, location, HOA quality (if a condo), and “my car doesn’t fit well enough into the garage” to the list.

But just because a buyer exits a contract doesn’t mean they’re exiting the market.
Further Reference:
Source of Stat In Chart: NAR Existing Home Sales

Closer Look At Why Deals Are Being Cancelled (Jonathan Miller, appraiser)

Trend That Could Asphyxiate The Housing Recovery (Joe Weisenthal, BI editor)

Current data/trends on: existing sales | pending sales | new sales | home prices