Why Are More Buyers Canceling Contracts?

RealtorMag reported this week that a high number of buyers are walking away from purchase contracts.  Their article was based on the research done by Capital Economics, an independent research firm.  They found that nearly 18% of all signed contracts were canceled during the three month period of May, June and July of 2012.  The last time that number was so high was back in May of 2010 when the number reached 23% and before the housing slump, the number never exceeded 10%.

So what does that mean for the buyer looking to purchase Palos Verdes real estate or the homeowners looking to sell their Palos Verdes homes?  When digging into the reasons why, two main categories became apparent.  One is psychological and the other is financial.

Let’s study the psychological reason first.  There’s a balance of power that shifts during negotiations between buyer and seller and when the home is actually in escrow.  In a market such as we are now that is grossly undersupplied (refer back to my blog post of a few days ago for Palos Verdes homes supply), in most cases buyers are competing against other buyers for well priced homes.  Often, multiple offers result.  The balance of power is with the seller in this case and Capital Economics stated, “Ironically, the recent pickup in home sales is contributing to rising contract cancellations. As more buyers compete over a limited inventory of for-sale homes*, some are bidding aggressively to get the seller’s attention, but not assessing whether they truly want the house until they’re in contract”.  Now that buyer has won the house and they’re in escrow, then the balance of power shifts to the buyer who may in fact have buyer’s remorse or tend to request concessions from the seller based on the results of the home inspection.  What are some steps you can take as a seller to help yourself during this natural and organic power shift?  These are the three tips I give my sellers of homes in Palos Verdes and the South Bay when I’m interviewing for the job of marketing their home and getting it sold. 

1. This is why pricing your home fairly is so important.  As a seller, you can mitigate this shift of buyer by causing the buyer to understand that they really did get a fair deal and that if they bail on the deal, there will be another buyer ready to take their place (assuming your broker did a good job in the first place of marketing your property). 
2. Get a presale inspection done.  Before you list your home for sale, hire a professional inspector to uncover defects.  Whether you fix them or not, at least having them out in the open (they’re going to get found out about anyway) available to a buyer considering making an offer, creates a level of confidence in you from the buyer that you are trustworthy.  It manages the expectations of the buyer so that you dampen the “buyer’s remorse” feeling we all get no matter what we buy. 
3. Have all your mandatory disclosure forms completed and available for any buyer to review prior to making an offer.  Why wait?  If you wait and turn over disclosures after you go into escrow, you’re just increasing the chances of the buyer using your disclosures as a reason to bail on the deal.  Again, you’re going to have to, in California it’s mandated by law, disclose to the buyer anyway, why put it off?

The second category is financial.  “Tight lending requirements are also contributing to contract cancellations, says Paul Diggle, property economist at Capital Economics. As more buyers move off the sidelines to purchase a home, they’re finding they can’t qualify for a mortgage, he says.”  And what’s worse folks is that the underwriting criteria are changing all the time, often during the course of an escrow.  Nothing is static, everything is fluid.  There’s a mortgage banker that I’ve counted on for over 20 years, Kent Kirkpatrick at American Capital (he’s one of the partners in that firm) who is one of the elite best in getting the job done for my buyers.  When you’re selling your home in Palos Verdes or anywhere around the South Bay, you need to make sure your agent is properly interrogating the buyer’s agent and the buyer’s mortgage banker on the financial bona fides of the buyer.  As a buyer of real estate in Palos Verdes or around the South Bay, you need to understand that the mortgage banker you choose can make the difference between a deal’s life and death.  These folks are definitely not all the same.  What are some of the things you can do and complete upfront before making an offer as a buyer to make sure your loan goes through and as a seller, what do you need to find out about your buyer. 

1. Complete a loan application form
2. Authorize a credit report (are there inaccuracies?)
3. If you are getting your down payment from a relative, is there a properly formatted gift letter
4. Do you own other real estate?  Did you complete a schedule of real estate owned?
5. Getting “PreApproved” is definitely NOT what it used to be
6. Read Kent’s comments below or don’t read them at YOUR peril.  Folks, I’m not kidding, this is the one of the most knowledgeable expert mortgage bankers in the nation**  On a personal note, I thank Kent for taking the time to provide such a detailed analysis of his business and proving once again his strong commitment to doing right by my clients. 

*How limited are listings in the South Bay?  Study this chart and you will see we haven’t seen this low a level of new listing volume in nearly 20 years.  What is this doing to prices?  What does this mean for your own neighborhood and home?  Send me an email or give me call and we can talk about it.  Follow the link in the orange tab below to get access to real estate charts such as these.  Charts are updated weekly and monthly. 

**I hear about these so called “tight lending requirements” and how they are “holding back the purchase market”….  and I am honestly amazed….  Really, tight?  A borrower can buy a $750,000 house with 3.5% down and a credit score of 620…  can get a 3.25% 30 year fixed rate on that…. 3.25% 30 year fixed rate with a tiny down payment, debt to income ratios of 50%… and a questionable credit history to boot….  “TIGHT?”  seriously…. No… it is not… it is still probably a bit loose….  If the government were not backing those FHA loans they would not be out there… no bank would put that program out… not one…. 

I have asked numerous people in the past two years when I am asked about the tight lending standards of banks today to give me an example….  Most cannot come up with a plausible example of where a borrower should have obtained financing and didn’t….. those that do site a borrower who has a large amount of equity, excellent credit history and great cash reserves but lack a solid  or consistent income….  just because you have the first three does not mean you qualify for new debt….  If you rely on equity or existing cash reserves to make payments (on some occasions this can make sense) it does not mean the new loan will be repaid the same as those with solid cash flow from a consistent income… all too often in the past five years we have seen instances where borrowers had the first three and chose to walk away from the new debt rather than liquidate their equity, cash reserves etc…..   it does make sense that in the overall picture, a borrower should have the cash flow to pay for a debt…. That is good lending, sound principal…  it can also make sense that in a case by case basis a lender who specializes in loans not sold to the large government agencies like fannie mae and freddie mac, to step into this area and make these loans to solid borrowers who don’t fit the norm….  it does not make sense for large government agencies to do these as we have seen from the past…. They should focus on exactly the type of lending they are doing today….

Another example that comes up when I ask why they think lending is tight is that their client was just declined for a loan by a bank.  Once we delve into why, the normal problems fall into two categories….  First, the loan officer made the critical mistake of not doing the upfront interview with the client properly…. This is THE most important part of lending… period.  The first five minute conversation with the borrower should be the loan officer asking a myriad of questions from “tell me about what you are trying to accomplish with this purchase or this refinance” to then asking detailed, and I mean VERY detailed, questions regarding the borrowers personal finances….  If this is done properly, it will eliminate 99% of any problems that can come up in the approval/funding process.  This then takes us to the next most important part, which as I write this, I am wondering if I should have made this the number one part….

Choosing the right lender to do your loan….  this is critical as well…. ( and I will disclose who I am….  I own a 19 year old mortgage bank that survived the last ten years after struggling by not doing subprime loans ( which made no credit sense ) that all other mortgage banks did and then watching most normal financing disappear for three years in the resulting financial meltdown)….  it is my belief that most borrowers, wrongly influenced by the media and the government, believe it is in their best interest to go directly to a bank for a home loan.  This could not be farther from the truth.  Banks have one set of products, guidelines and goals….  They take only the types of loans and borrowers that fit their needs…. Mortgage bankers have multiple funding options and goals….  The most important goal is to match a borrowers needs to a funding source and do it in an efficient, compliant, honest and straightforward manner.  Mortgage bankers have better pricing, better operational efficiency and a much larger product diversity to deliver a wider range of options to the client.  While one bank says it will only do loans to 90% loan to value, another might allow 95%… if the borrower apply’ s at the first bank, they may never know that they had an option at 95%…. they may just walk away and say “lending these days is just too tight”….  There are thousands, yes, thousands of examples that are similar to this first one….  the other day a client was referred to me after getting turned down at Wells Fargo…  the issue was the debt to income ratio for the borrower was over 41%… industry standard is 45%… we can even go up to 50% with compensating factors like good credit, strong job stability etc… but Wells Fargo has so much business that they have decided they only want the BEST loans… with lower debt ratios…  this client had perfect credit, 22 years as a teacher, 15 years as a police officer ( husband) and great cash reserves while putting down 10% on the home…  we funded that loan in 9 days at a 3.375% no point 30 year fixed rate.

The third most important part….  LISTEN TO YOUR REAL ESTATE AGENT REGARDING THEIR MORTGAGE REFFERAL….  They know… they do this all day, year, career long…. They are not going to refer you to someone who they don’t trust….  They refer you to who gets the best combination of product, price and service…. Period…

Fourth most important….  Once you have chosen a lender… trust them… trust that your upfront research and conversations have led you to a funding source that is the right one… and then listen to them and let them lead you through the process.

Fifth, expect that numerous times during the process you are going to say “seriously?, you really need that as well?…  I have given you so much already and you just keep asking for more?”    this is the way it is today… to get these great rates, they put you through the ringer and back… every I dotted, every T crossed… and then they want more….

There is so much that goes into mortgage lending… so much is changing… it is the mortgage professionals job to set the right expectation with the client and make sure to follow through on that….  that is what I do.

Kent C. Kirkpatrick, Principal
2121 Rosecrans Avenue, 6th Floor
El Segundo, CA 90245
(310) 640-0100 Fax (310) 524 0336
Cell (310) 283-8662

George Fotion, HomeIsPalosVerdes.com