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Increase in canceled contracts surprising, worrisome to Realtors

Spike in broken deals surprising, worrisome

WASHINGTON — Are home buyers walking away in droves from the contracts they've signed, unable to close deals because of financing and credit issues?

Exceptionally large numbers of signed real estate contracts fell apart in June, failing to reach settlement. According to the National Association of Realtors, one of every six realty 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? Lawrence Yun, the chief economist of the realty association, says the spike is surprising and worrisome, and that there are no hard statistics available on the causes. Yun suspects lowball appraisals and tough mortgage underwriting rules that knock buyers out of contracts through contingency clauses.

But there may be other, subtler forces at work.

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, say brokers, is making buyers less willing to risk a major purchase, making them pickier and more demanding when defects are found in home inspections, leading to contract cancellations for minor reasons.

Jessika Mayer, manager of professional development at Coldwell Banker Plaza Real Estate in Wichita, Kan., says she is seeing more well-qualified buyers — who would have proceeded to closing in past months — "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, says his agents are also "seeing buyers feeling remorse" and unusual trepidation because of national economic uncertainties. As a result, he says, "they're terminating contracts that in the past would have gone to closing."

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.

Finally, appraisal problems in many parts of the country continue to bedevil transactions, especially when inexperienced appraisers working for low fees overuse distressed property sales as comparables for nondistressed 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 says, 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.

"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.

Kenneth R. Harney can be reached at kenharney@earthlink.net.

Increase in canceled contracts surprising, worrisome to Realtors 07/30/11 [Last modified: Saturday, July 30, 2011 4:31am]
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