Why Home Sale Agreements Are Failing

Published: Jan. 18, 2017, 7:31 p.m.

b"With Terry Story, 28-year veteran Real Estate Agent with Coldwell Banker in Boca Raton, FL
Home Sale Agreement Cancellations Higher in 2016\\xa0
During the past year, home sale agreements failed at higher rates throughout the country.\\xa0 According to Trulia data, home sale agreements in 2016 fell through at a rate of 3.9%, twice the clip of 2015.\\xa0 This is a very broad phenomenon, which is being seen in different price categories, and in 96 of the top 100 largest metro areas.\\xa0 Steve and Terry try to get to the bottom of this troubling trend or, at least, to shed some light on some of the common scenarios which lead to sale agreements being canceled.
First-time Home Buyers and FHA Mortgages
Terry notes that many of these home purchase agreement cancellations are occurring with first-time buyers who have (or believe they have) a pre-approved mortgage but end up being denied a loan.\\xa0 To some extent, this stems from the type of houses that first-time buyers are trying to purchase: relatively older properties that often need repairs to pass inspections.\\xa0 Newer homes offer a more straightforward transaction, but they tend to cost more.\\xa0 In competitive, appreciating markets, this problem is exacerbated by the fact that many homes on the market are attracting multiple would-be buyers, thereby driving up bids.\\xa0 First-time buyers with minimal cash for a down payment\\u2014sometimes as low as 3%\\u2014are stretching their budget by raising their bids, and this puts them in a riskier position as far as being able to afford higher mortgage payments and expensive repairs.\\xa0 The FHA (Federal Housing Administration) which underwrites many first-time buyer mortgages is balking at closing these loans for over-extended buyers, even when those buyers have been pre-approved.\\xa0 In many cases, buyers have gone through the process of signing a purchase agreement and have made a deposit, only to find out days later that their mortgage request has been denied.\\xa0 This, of course, impacts sellers and makes their lives more complicated as they have to change the status of their homes from pending back to \\u201cfor sale,\\u201d and perhaps renegotiate with other bidders, if there were any.
FHA Appraisals & Failures to Close Sales
One of the most important factors driving these types of broken sales agreements\\u2014aside from the FHA's risk-aversion towards low down payment buyers\\u2014is the stringent and, at times, seemingly arbitrary way the FHA performs appraisals.\\xa0 FHA appraisers approach their work a bit differently than other appraisers and their criteria are different.\\xa0 Terry describes a couple of examples of FHA appraisers somewhat high-handed approach: they require that homes in Florida have a working heating system, and also flatly reject properties with window air conditioning units.\\xa0 Perhaps these policies can only be chalked up to bureaucratic rigidity, but, unfortunately, for many would-be home buyers, they have real world consequences.\\xa0 When you combine these kinds of policies with the repairs needed on older homes priced within their budget, first-time buyers are really taking it on the chin.\\xa0 If the seller refuses to pay to fix issues, which the appraiser docked the home price for, and the buyer can't afford to make those repairs on their own dime, the agreement will most likely fall through.
Another area of complexity attributable to appraisals has to do with a fairly common scenario in which an appraisal of the value of a home for sale comes in significantly less than an offer which has already been accepted.\\xa0 This happens more often in neighborhoods where home prices are rising because appraisals look backward at historic sales of \\u201ccomps\\u201d (comparable properties) in the same neighborhood.\\xa0 If there haven't been many recent sales, a conservative appraisal will usually come in lower than the offers, especially if there have been multiple competing bids driving up the sale pri..."