What’s behind the unusually high rate of contract cancellations and settlement delays in the real estate market? With signs of recovery emerging in many parts of the country, shouldn’t deals be zipping along with minimal complications?
Apparently not. Nearly one-third of realty agents in a new national survey reported experiencing contract cancellations – purchases crumbling before going to closing – in February. That’s up dramatically from a similar poll 12 months earlier, when just 9 percent of agents reported cancellations. Another 18 percent reported delays in scheduled closings in the latest study, which involved approximately 3,000 agents surveyed by the National Association of Realtors.
The high reported cancellation rate (31 percent) doesn’t mean that nearly one of every three of all signed contracts is falling apart, according to the association, but rather that more than triple the number of agents and their clients are running into deal-endangering problems compared with 2011. If you are a potential buyer or seller in an otherwise improving marketplace, you need to be aware of the issues that are hampering sales, and be prepared in advance to deal with some of the most prominent.
Tops on the list:
• Appraisals below contract. You may assume that the true market value of a house is what a seller and buyer agree to in a binding contract, but it’s not. The appraiser hired by the bank may come up with a different opinion of value – significantly below what was agreed between the parties – and this is occurring with far greater frequency today than in previous years. Part of the problem is the excessive use of price-depressed foreclosure sales chosen as “comparables” to value nondistressed houses under pending contracts. But some appraisers are inexperienced, unfamiliar with local pricing trends and go far beyond their normal duties.
• Ultra-conservative underwriting and documentation requirements. It’s no longer just towering credit-score minimums, hefty down payments and mind-bending paperwork submissions that get mortgage applicants turned down. “It’s a lot of other stuff, too,” said Melissa Zavala, broker and owner of Broadpoint Properties in Escondido, Calif. Increasingly she’s been running into regulatory hoops and restrictive underwriting rules at FHA, Fannie Mae and Freddie Mac that knock signed contracts off the tracks or at least delay them for months.