With Terry Story, 28-year veteran Real Estate Agent with Coldwell Banker in Boca Raton, FL
Home Sale Agreement Cancellations Higher in 2016
During the past year, home sale agreements failed at higher rates throughout the country. According to Trulia data, home sale agreements in 2016 fell through at a rate of 3.9%, twice the clip of 2015. This is a very broad phenomenon, which is being seen in different price categories, and in 96 of the top 100 largest metro areas. Steve and Terry try to get to the bottom of this troubling trend or, at least, to shed some light on some of the common scenarios which lead to sale agreements being canceled.
First-time Home Buyers and FHA Mortgages
Terry notes that many of these home purchase agreement cancellations are occurring with first-time buyers who have (or believe they have) a pre-approved mortgage but end up being denied a loan. To some extent, this stems from the type of houses that first-time buyers are trying to purchase: relatively older properties that often need repairs to pass inspections. Newer homes offer a more straightforward transaction, but they tend to cost more. In competitive, appreciating markets, this problem is exacerbated by the fact that many homes on the market are attracting multiple would-be buyers, thereby driving up bids. First-time buyers with minimal cash for a down payment—sometimes as low as 3%—are stretching their budget by raising their bids, and this puts them in a riskier position as far as being able to afford higher mortgage payments and expensive repairs. The FHA (Federal Housing Administration) which underwrites many first-time buyer mortgages is balking at closing these loans for over-extended buyers, even when those buyers have been pre-approved. In many cases, buyers have gone through the process of signing a purchase agreement and have made a deposit, only to find out days later that their mortgage request has been denied. This, of course, impacts sellers and makes their lives more complicated as they have to change the status of their homes from pending back to “for sale,” and perhaps renegotiate with other bidders, if there were any.
FHA Appraisals & Failures to Close Sales
One of the most important factors driving these types of broken sales agreements—aside from the FHA’s risk-aversion towards low down payment buyers—is the stringent and, at times, seemingly arbitrary way the FHA performs appraisals. FHA appraisers approach their work a bit differently than other appraisers and their criteria are different. Terry describes a couple of examples of FHA appraisers somewhat high-handed approach: they require that homes in Florida have a working heating system, and also flatly reject properties with window air conditioning units. Perhaps these policies can only be chalked up to bureaucratic rigidity, but, unfortunately, for many would-be home buyers, they have real world consequences. When you combine these kinds of policies with the repairs needed on older homes priced within their budget, first-time buyers are really taking it on the chin. If the seller refuses to pay to fix issues, which the appraiser docked the home price for, and the buyer can’t afford to make those repairs on their own dime, the agreement will most likely fall through.
Another area of complexity attributable to appraisals has to do with a fairly common scenario in which an appraisal of the value of a home for sale comes in significantly less than an offer which has already been accepted. This happens more often in neighborhoods where home prices are rising because appraisals look backward at historic sales of “comps” (comparable properties) in the same neighborhood. If there haven’t been many recent sales, a conservative appraisal will usually come in lower than the offers, especially if there have been multiple competing bids driving up the sale price. Once the accepted offer at top dollar has failed, other buyers have some leverage to beat the price down closer to the appraisal, or to insist on the seller making needed repairs. All of this spells widespread complications for buyers and sellers and failed home sale agreements.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: It’s time for Real Estate Roundup. This is the time every single week we get together with noted real estate agent, Terry Story. Terry is a 28-year veteran with Coldwell Banker, located in Boca Raton, Florida. Welcome back to the show Terry.
Terry Story: Thanks for having me, Steve.
Steve Pomeranz: So, there’s some interesting stuff to talk about this week, and one is that a lot of home sale agreements are falling apart across the United States. Can you tell us a little bit about that?
Terry Story: Sure. This is a report from Trulia, and their analysis is claiming that 3.9% of the homes that moved from for sale to pending have now moved back from pending back to for sale which is actually nearly double of what we saw in 2015. These are failed sales, in essence. The report also indicates that this has increased in 96 of the 100 biggest US metro areas.
Steve Pomeranz: Right. So, this is not just a location-oriented phenomenon. This is actually something that is taking effect across a broad swath of the United States.
Terry Story: That’s right. Different price categories; you take Ventura County, California where their median priced home is $548,000, that’s 11.6% failed to close in 2016.
Steve Pomeranz: That’s a lot.
Terry Story: You see it in a community like Tucson, Arizona, where the median prices is $176,000 and that was still at 10.8%, so it’s not a price point that you see these falling apart.
Steve Pomeranz So we’re going to get into what the possible reasons for this is, but it’s order hydrocodone syrup online really interesting that you have a sale, you’ve put your home up for sale and you’ve got a contract, you’ve got a deposit, and then for some reason, these sales are failing to go through.
Terry Story: Sure.
Steve Pomeranz: So then you have to put them back on the market, and Trulia can capture that. Let’s talk about some of the reasons this may be happening.
Terry Story: Sure. They’re seeing a higher percentage of this in the startup homes—your first-time home buyers. That’s where the homes are less expensive and typically cheaper. Homes that were built in the 60s, they have one of the highest fail rates while sales of newer homes—because of their condition most likely—have been able to get through to successful sale. The buyer’s mortgage doesn’t come through. What happens is, buyer applies, they think they’re pre-qualified, then they start to get into a bidding war, they stretch themselves to pay as much as they can, they go to contract, and then it falls apart. That’s one of the huge issues. Basically, buyers not being able to get their mortgages to come through.
Steve Pomeranz: I’ve also heard that a lot of mortgages these days are to first-time home buyers that only put down about three percent. Banks may be a little tighter—or FHA itself rather not banks—but the FHA is going to be a little bit more circumspect and a little tougher in giving mortgages if there’s only three percent down as equity.
Terry Story: Yeah. That’s right. FHA has certain requirements. They have FHA appraisers that come out and look at the house, Steve, and they look at it differently than a regular appraiser. They’ll require…if there’s holes punched in the walls…I’m giving you some examples that I know have been that way in the past…you have to have a working heating system in the house, which doesn’t make a whole lot of sense in Florida.
Steve Pomeranz: …in Florida.
Terry Story: A working heat system. Here in the article that I’m referring back to, they’re talking about window air conditioning units are off limits for FHA, so a lot of people don’t really know what the requirements are for FHA when it comes to the appraisal; and, in some cases, you see, you’re dealing with an older home that has a lot of these issues…get to that stage where the appraiser goes out, looks at it, docks all these items and Mr. Seller says, “Hey, I’m not taking care of this. I sold it as is.” And the buyer is like, “Well, I can’t buy the house unless these items are taken care of.” So, that’s definitely a contributing factor to the percentage of more fall throughs.
Steve Pomeranz: Well, I’m really amazed by this window air conditioning thing. It doesn’t seem to be … I can’t imagine why FHA even cares whether your home is air conditioned room by room or central air.
Terry Story: I know.
Steve Pomeranz: I don’t really get that.
Terry Story: You go up north and a lot of homes don’t have central air conditioning.
Steve Pomeranz: Of course, that doesn’t make sense. Also, I think that since there’s a lot of first-time home buyers—as millennials are starting to get into the home buying market—you find that to keep the price points reasonable, that the homes are older, and, because they’re older, they are in need of greater repairs or even updates, and so I think a lot of these sales are falling through because the inspection reports are not coming back very well.
Terry Story: That’s right, and a lot of times with old homes, just depending on the age of the home, it may need a new roof. It may need a new electric panel, and the buyers aren’t factoring that in and don’t really have the funds to shell out for these items, especially if they’re only putting three and a half percent down and it’s an older roof. The roof may pass inspection, but there’s only, according to the appraiser, a couple years of life remaining, and they have the realization, “Wow. I’m going to have to put on a new roof, and it’s going to cost me $20,000.” That sometimes scares them away.
Steve Pomeranz : Yeah. Sure. If all you can afford to put down is three or three and a half percent, and you’re facing a $20,000 to $30,000 new roof in the next two or three years, you just know that you’re not going to be able to afford that.
Terry Story: That’s right. The other thing that we’re seeing, Steve, I know in our marketplace, the values are still rising. If a home is priced right, we’re getting into multiple offer situations which bids up the price. I’ll give you an example. I just had a home on the market for $415,000. I got five offers on it. It was priced right. One offer came in at $430,000. Now the question becomes, will it appraise? The person that is buying it, were they the best candidate to purchase the house for $430,000? Will they be able to get the mortgage? If it falls short of that 430, do they have the cash to make up the difference between purchase price and appraised value? These are all things that come into play. Mr. Seller may say, “Hey. I’m not going to reduce the price to whatever it appraises for.” So, that would make it fall apart, and now he has to go back to another buyer who may be willing to pay a little bit more than he initially indicated when they put in the offer, but not willing to pay as much as that 430. We’re seeing a lot of that type of activity.
Steve Pomeranz: In a rising market where prices are rising, the appraisals are always lagging because they’re looking at historical data.
Terry Story: That’s right.
Steve Pomeranz: There may be a recent sale in the neighborhood, but there may not be. So, they’re looking back maybe six months. Who knows how far they’re looking back. There’s always going to be this lag between new prices getting higher and people bidding for new prices, and what appraisals will come in at.
My guest as always is Terry Story. Terry is a 28-year veteran with Coldwell Banker located in Boca Raton, Florida. She can be found at TerryStory.com. Thanks, Terry.
Terry Story: Thanks for having me Steve.