I’ll be perfectly honest. I don’t know exactly why. I just know that more and more home sales are failing. I did some research online and the national numbers support this. According to a report by Trulia, nationally 3.9% of sales failed in 2016, up from 2.1% in 2015. The Park City Board of REALTORS does not collect this data, so I don’t have local hard data. I can only report that based on my own recent experience and that of my colleagues, home sales are failing at an increasing rate in Park City.
Examples of Home Sales Falling Through
Here are some examples. Some are my own and others are stories from my colleagues:
- In the excitement of multiple offers, the buyer agrees to terms he can not execute. He doesn’t make the earnest money deposit and wants to renegotiate after his offer was chosen.
- Over the course of a year, the same buyer has put 4 properties under contract and backed out of each one during the due diligence period.
- A buyer who is relocating from another state says he can buy a home without selling his home in the other state. The lender confirms he is qualified. After tying the house up for 3 weeks, the buyer decides he doesn’t want to own 2 houses.
- A buyer cancelled on the last day of due diligence after tying up a property for 2 weeks. He still wasn’t completely sure he wanted to buy it.
The psychological harm to the sellers is devastating when transactions fall through, especially when they fall through at the last minute. It pains me to tell a client, “I’m sorry, we have to start over.”
One Park City agent told me she had $20M in pending sales last year that never closed. REALTORS, who work on 100% commission do not get paid for their work when sales fall through. But it’s not just the agents who have wasted their time. The title companies, loan officers, transaction coordinators, and controllers (who manage the earnest money deposits) are doing work that becomes completely unnecessary when the contract is cancelled.
Why Home Sales are Falling Through
Based on my research and experience, here are the top reasons why sales fall through:
- Buyers get cold feet. During the “Due Diligence Period”, a buyer can cancel the contract for any reason or no reason and have their earnest money deposit returned. This gives the buyer a “free look” while the home goes off the market. In the above real Park City examples, cold feet was the most common reason for the sale to fall through. Buyers are nervous because home prices are now at all time highs. And no one wants to be that person who overpays. I also think the low inventory creates a “Fear of Missing Out” mindset, encouraging buyers to write offers they later reconsider.
- Home Inspections. The purpose of the home inspection is for the buyer to understand what they are buying and identify anything major that is broken. It is not for the seller to fix every small nail hole or replace a perfectly functioning water heater just because it is “old”. Even a brand new house will have inspection issues. Sometimes buyers panic over flaws pointed out by an inspector and cancel the contract. Sometimes buyers ask for unreasonable credits or repairs. When the seller refuses, the transaction falls apart.
- Low Appraisals. I just had my first experience since 2012 with a low appraisal. I wrote about this in an a blog several years ago. This time, even though we appealed the appraisal, the appraiser did not change the value. If the appraisal comes in at less than the sale price, here are the buyer’s options:
- Appeal the appraisal. Sometimes this works.
- Pay the difference between the appraised value (for which the lender will provide financing) and the sale price.
- Ask the seller to reduce the price to the appraised value.
- Ask the seller to take a second mortgage.
- Cancel the contract.
- Rejected for Financing. Did the buyers’ situation change after the offer was accepted? If a buyer takes on debt during the loan approval process, loses his job or there is some other change, a loan that was pre-approved could end up rejected by underwriters.
- Contingent Domino Effect. If the sale is contingent upon the sale of the buyer’s home and that sale falls through, there can be an ugly domino effect.
- Experience of the Buyer. A first-time buyer does not fully understand the home buying process. I don’t see this as a big reason for failing sales in Park City, but it’s worth mentioning.
As a real estate professional, I can ensure my listings go under contract only with pre-qualified buyers. I can also work with my buyers to make sure they write offers on properties they can qualify to purchase. I can solve almost any problem that comes up during the contract period. However, “Cold Feet” is more difficult to determine up front. This is the issue rearing its ugly head in the Park City real estate market. It seems to be even more common in the luxury market. If anyone has additional insights into why sales are falling through at an increasing rate, I would love to see your thoughts in the comments.