An interesting nugget of information on contract failures, was tucked away in the National Association of Realtor’s latest press release on existing-home sales. Amidst the details on sales (which were down 0.9 percent monthly but up 8.8 percent year, in case you were wondering), NAR reported that 31 percent of its members experienced contract failures in February, a level that is three times what it was just a year ago.
NAR has been sounding the warning bell on contract failures the last few months – hardly one press release is printed by the association without mentioning it – and we decided to take a deeper look at what is causing contract failures and why.
One of the more common causes of contract failures are appraisals, a highly contentious arena of real estate that we have covered on a number of occasions. As a recent piece by the Hartford Courant pointed out, appraisals pose problems for agents during the final stages of a home sale.
Though the buyer and seller may have agreed upon a price, appraisers will often use distressed neighboring properties as comparables, and the appraised value for the home will be substantially lower than the agreed price; the seller, already having compromised on the price, refuses to go any lower, and the sale is aborted.
Another cause for contract failures is strict underwriting and documentation requirements by lenders, and not just the common ones, such as sky-high credit scores, high minimum down payments and extensive paperwork requirements.
As the Courant writes, there are also new rules and regulations from the FHA and the GSEs that are posing problems for contracts. For instance, a rule at the FHA puts limits on condo loans based on the percentage of existing residents who are delinquent on their condo dues. Though the FHA has announced it will review the policy, it has posed problems for prospective buyers looking for condo loans.
The final main reason for failures, poor service by lenders, has been a constant problem for Lori Wyatt and her agents. Wyatt, the managing broker at Coldwell Banker Lincoln Square, said her office often deals with “crazy last minut details” that no only reshuffle the entire closing process, but threaten to derail the entire purchase.
Wyatt mentioned one sale that was nearly compromised because of a small 401K loan the buyer had taken out that the bank failed to initially notice. Although the loan was incredibly small (Wyatt said it probably amounted to no more than $150 a month), the bank had to reorganize all of its systems for the loan, and the closing was prolonged as a result.
All of those experiences though, Wyatt said, pale in comparison to short sales, where contradictory and negligent messages from servicers can prolong transactions for months, if not years. One of Wyatt’s short sale properties has been in flux for 16 months and is now on its third buyer (the first two became frustrated with the process).
Often, Wyatt said she’ll meet the bank’s requirements, find a cash offer at the agreed amount and settle all the necessary documents…only to find the bank has adopted a new policy that renders much of the previous work obsolete. Ultimately, Wyatt said she remains an optimist, and does see a much greater level of activity in the marketplace, but she does not deny the frustrations inherit in such situations.
Its not all doom and gloom, though. Even within NAR’s original study, for instance, the association’s chief economist, Lawrence Yun, said that buyers have persevered after experiencing a contract failure.
“Many buyers are staying in the market after experiencing a contract failure and making an offer on another property, showing their determination to take advantage of the favorable conditions, but the cancellations are contributing to an uneven sales pattern,” he said.