Are Escalating Contract Failures a Problem?

by Houston Agent

If only it were as easy as signing on the dotted line! Contract failures have been a recurring issue for agents the last year.

An interesting nugget of information was tucked away in the National Association of Realtor’s latest press release on existing-home sales. Amidst the details on sales (which were down 0.9 percent monthly but up 8.8 percent year, in case you were wondering), NAR reported that 31 percent of its members experienced contract failures in February, a level that is three times what it was just a year ago.

NAR has been sounding the warning bell on contract failures the last few months – hardly one press release is printed by the association without mentioning it – and we decided to take a deeper look at what is causing contract failures and why.

One of the more common causes of contract failures are appraisals, a highly contentious arena of real estate that we have covered on a number of occasions. As a recent piece by the Hartford Courant pointed out, appraisals pose problems for agents during the final stages of a home sale. Thought the buyer and seller may have agreed upon a price, appraisers will often use distressed neighboring properties as comparables, and the appraised value for the home will be substantially lower than the agreed price; the seller, already having compromised on the price, refuses to go any lower, and the sale is aborted.

Another cause for contract failures is strict underwriting and documentation requirements by lenders, and not just the common ones, such as sky-high credit scores, high minimum down payments and extensive paperwork requirements. As the Courant writes, there are also new rules and regulations from the FHA and the GSEs that are posing problems for contracts. For instance, a rule at the FHA puts limits on condo loans based on the percentage of existing residents who are delinquent on their condo dues. Though the FHA has announced it will review the policy, it has posed problems for prospective buyers looking for condo loans.

The final main reason for failures, poor service by lenders, is self-explanatory, though an agent quoted by the Courant does make a valid point: “‘Agents can be part of the problems’ — and the solutions — when it comes to moving the financing along”, the agent says within the piece.

And its not all doom and gloom. Even within NAR’s original study, for instance, the association’s chief economist, Lawrence Yun, said that buyers have persevered after experiencing a contract failure.

“Many buyers are staying in the market after experiencing a contract failure and making an offer on another property, showing their determination to take advantage of the favorable conditions, but the cancellations are contributing to an uneven sales pattern,” he said.

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