Oct 19, 2022
For the past few years, anyone who wanted to sell their home was pretty much guaranteed a buyer, but that’s no longer the case.
During the height of the COVID-19 pandemic, a seller’s market reigned, where buyers would do just about anything to get a house, from offering way over the asking price to waiving contingencies. But the real estate landscape has changed a lot since then.
In fact, one recent survey by home warranty company Cinch Home Services of 1,000 Americans who tried to buy or sell a home in the past year found that 1 in 5 seller’s deals fell through.
The reasons these deals are failing run the gamut, but one common theme is economic uncertainty. According to the Cinch survey, 16% of deals fell through due to buyer’s job loss and in 23%, buyers pulled out because they were afraid of a recession.
“Consumers are feeling uneasy about the current state of housing and the economy,” says Ali Wolf, chief economist for Zonda. “Today’s market is different than it was just six months ago.”
Since selling a home today is no longer a given, sellers whose homes are on the market right now might be worried. While not all contracts can be saved, many can if sellers know how to properly vet a buyer and make sure they’re prepared for any curveballs that might hit before closing day. Here’s where those deal-killing pitfalls are hiding, as well as how to avoid them so your own contract crosses the finish line.
1. Higher interest rates interfere with buyer financing
Back when the market was booming and mortgage interest rates were low, many buyers could finance a home purchase without a problem. But now that interest rates have essentially doubled in the past year (from the 3% to 6% range), buyers can’t afford what they used to. In fact, the Cinch survey found that of the real estate contracts that didn’t close, 42% was due to the mortgage application being denied and 31% was due to higher interest rates.
How to save the deal: “The best bet for sellers is to require a recent pre-approval letter from the lender, written within the last 30 days,” says Elizabeth Sugar Boese, a real estate agent with Coldwell Banker Realty in Boulder, CO. “This helps the seller by preventing a contract termination based on the loan’s monthly payments.”
And whenever interest rates are rising fast, sellers should ask if their buyers have a lock on their interest rate, which makes them immune to fluctuations within a certain time period.
“Buyers that have a mortgage rate lock are more likely to close the purchase versus those that still need a rate lock,” says Wolf.
“Home sellers should also be aware of some signs that a homebuyer is at higher risk for not closing on the deal,” says Jason Gelios, author of “How to Think Like a Realtor” and a real estate agent with Community Choice Realty in Southeast Michigan. “These signs are a smaller down payment, a need for concessions or seller credits, and/or a pre-approval from an unknown lender.”
2. Homes aren’t appraising for what buyers offered
Another problem with loans today is that even if the buyer is solid, the property itself can throw a wrench in things if the appraisal falls short of what the buyers offered to pay. This is known as an appraisal gap, and it’s a huge problem for sellers—and buyers—right now.
According to the Cinch survey, 35% of deals that fell through during the past year were because a home appraised for significantly lower than the purchase price.
“Home sales are falling through because sellers are still pricing their homes as if it was six months ago, thinking they are going to be getting lots of offers over asking price,” says Nathaniel Hovsepian, co-founder of the Expert Home Buyers in Augusta, GA.
Even if sellers luck out and get a sky-high offer, a lower appraisal means the homebuyer has to figure out how to make up the difference. If the buyer can’t, or doesn’t want to, the deal is off.
How to save the deal: When you’re looking to price your home, make sure you’re on target with what similar homes in your area have appraised for within the past three months. In general, you want to price your home within 10% of those numbers.
But then also consider that the market is cooling.
“A seller reluctant to price their property at the lower market price may find themselves chasing a declining market,” says real estate agent and lawyer Bruce Ailion, of Re/Max Town & Country in Atlanta. “And that can become extremely costly.”
3. Buyers are driving a harder bargain
When the market was red-hot, buyers were willing to give up a lot to win the bid. In many cases, that meant giving up contingencies for appraisals, financing, and home inspections.
But now that buyers have a bit more leverage with negotiations, contingencies are back—particularly home inspections. And if your own home’s inspection uncovers termites or a leaky roof, know that buyers will dig in their heels today.
According to the Cinch survey, 38% of home purchase deals that didn’t close in the past year was due to something found during a home inspection.
How to save the deal: As a seller today, you just have to accept that buyers will no longer throw caution to the wind and waive all contingencies. They have the leverage today to do their due diligence—and if a home inspection turns up problems, you may have to make repairs or other compromises to keep the buyer happy.
Gelios had a deal almost go awry recently when, upon inspection, it was discovered that the shower in the primary bathroom would not be operable until it was remodeled by the new owner.
“After the inspection was completed, I reached out to the listing agent and stated that we needed to adjust the offer price to reflect a newly remodeled walk-in shower,” says Gelios.
Fortunately, Gelios says, the seller agreed to renegotiate a lower price and the deal was saved. And that is what is needed by sellers who don’t want the contract to fall apart.
“One of the most common ways to save a deal from dying is to renegotiate fairly for both buyer and seller,” says Gelios. “Whatever the buyer is looking to renegotiate should also be fair to the seller—avoiding any overabundant requests or higher price adjustments that are way out of whack.”
As a seller right now, you’ve got to be willing to give a little.
“Sellers that want the contract to move forward should be willing to work with the buyer,” says Wolf. “Consider helping with the closing costs or addressing many of the items on the home inspection list.”