Homebuyer contracts falling apart

Debt ceiling gridlock, pending short sales, appraisal problems causing homebuyers to walk away: brokers

New York /
Jul.July 29, 2011 11:01 AM

Are homebuyers walking away in droves from the contracts they’ve signed? Or are they essentially
fouling out of the game, unable to close deals because of financing and credit issues?

Whatever the answer, this much appears to be certain: Exceptionally large numbers of signed real estate
contracts fell apart last month, failing to reach settlement. According to the National Association of
Realtors, one of every six real estate agents polled in June reported having signed contracts canceled
before closing — up from just one in 25 the month before. The typical monthly cancellations rate over
the course of the past 16 months has ranged in a narrow band between 8 percent and 10 percent.

What’s going on here? Lawrence Yun, the chief economist of NAR, said the sudden spike is surprising
and worrisome, and that there are no hard statistics available on the causes. The most likely suspects,
Yun said, are lowball appraisals and tough mortgage underwriting rules that knock buyers out of
contracts through mortgage contingency clauses.

But a series of interviews with real estate brokers around the country suggests that there may be other,
subtler forces at work that are busting up real estate deals.

Buyers’ confidence about the direction of the national economy has been badly rattled in the last
six to eight weeks by the ongoing gridlock in Congress over raising the national debt ceiling and cutting the deficit. That, in
turn, brokers say, is making buyers less willing to risk a major purchase, making them pickier and
more demanding when defects are found in home inspections, and frequently is leading to contract
cancellations for relatively minor reasons.

Jessika Mayer, manager of professional development at Coldwell Banker Plaza Real Estate in Wichita,
Kan., said she is seeing more well-qualified buyers — who would have proceeded to closing in past
months — suddenly “feeling very worried and uncertain because they don’t know” if the country is
headed for an economic disaster that would make their new purchase difficult to sustain.

Chad Ochsner, broker-owner of RE/MAX Alliance, a 20-office firm based in Denver, said his agents
are also “seeing buyers feeling remorse” and unusual trepidation because of national economic
uncertainties. As a result, he said, “they’re terminating contracts that in the past would have gone to
closing.”

Inspections almost always turn up problems of one type or another, Mayer said, “but lately buyers seem
to be holding out for perfection.” Maybe the inspection report estimates the remaining useful life of an
air conditioning system in a resale house to be two to three years. Or maybe a floor covering is worn and

should eventually be replaced. Whereas previously buyers who truly wanted a house might let those
issues pass, now they want the contract price reduced in compensation or they want the replacement
or repair made before closing. Some sellers are willing to negotiate but others feel the contract price on
the house is as low as they can go. If the parties can’t bridge the gap, the whole deal disintegrates.

The surging numbers of pending short sales clogging local markets are another cause of contract
cancellations, brokers say. Buyers negotiating with banks often wait months to get answers from the
bank on their offer, triggering repeated time extensions on the contract terms. Eventually buyers lose
patience, throw up their hands and say forget it.

Charlie Bengel Jr., CEO of RE/MAX Allegiance in Fairfax, Va., said that offices in Richmond, Va., and
Annapolis, Md., report “a significant increase” in short-sale related cancellations, primarily because of
buyer frustration with the “lengthy short sale process,” and “banks not approving short sales.”

Finally, appraisal problems in many parts of the country continue to bedevil real estate transactions,
especially when inexperienced appraisers working for low fees overuse distressed property sales as
comparables for non-distressed listings. For example, Rod Smith, director of general brokerage at
Coldwell Banker Chicora in Myrtle Beach, S.C., said a recent signed contract on a condo blew up when
an appraiser valued it far below the agreed-upon sales price. That price, Smith said, was well in line with
recent sales of similar units.

A subsequent review of the appraisal report turned up numerous errors, but the buyers chose not to
appeal, and pulled out of the contract after the lender urged them to refuse to pay the price they had
previously agreed to.

“The realtor is trying to sell you a property at 40 percent over what it’s worth!” the lender reportedly
told the buyers. No wonder they walked.

Ken Harney is a syndicated real estate columnist.


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