Understanding The Mortgage Market Today
Tables turn. Markets change. And many sellers are shocked to find not only that they are no longer in the driver’s seat, but because of high interest rates, buyers willing to buy a home in today’s market are farther and fewer between.
Realtor’s Kimberly Dawn Neumann reports that a recent survey taken by home warranty company Cinch Home Services of 1,000 Americans who tried to sell a home in the past year found that 1 in 5 seller’s deals fell through.
Of course, there are myriad reasons deals can fail, but one common theme is economic uncertainty. The survey found that 16% of deals fell through due to buyer’s job loss and in 23%, buyers pulled out because they were afraid of a recession. Uncertainty has turned into a market that only six months ago was replete with multiple offers and waived contingencies.
As is common in a more balanced market, selling a home today is no longer a given. Sellers are now just as concerned about how long it will take their homes to sell as buyers are about their ability to go through with the transaction. Neumann explains, however, that while not all contracts can be saved, many can if sellers know how to properly vet a buyer and make sure they’re prepared for any curveballs that might hit before closing day. She illustrates where those deal-killing pitfalls are hiding, as well as how to avoid them so your own contract crosses the finish line.
The first is interest rates, which have doubled in the past year, translating into buyers not being able to afford what they used to. The aforementioned survey found that of the real estate contracts that didn’t close, 42% were due to the mortgage application being denied and 31% were due to higher interest rates. How to save the deal? Neumann quotes Colorado-based Realtor Elizabeth Sugar Boese, who says, “The best bet for sellers is to require a recent pre-approval letter from the lender, written within the last 30 days. This helps the seller by preventing a contract termination based on the loan’s monthly payments.” Sellers should also ask if their buyers have a lock on their interest rate, which makes them immune to fluctuations within a certain time period.
Signs of a high-risk buyer include a smaller down payment, a need for concessions or seller credits, and/or a pre-approval from an unknown lender, according to Boese.
Appraisals are next on the chopping block. Even when a buyer is solid, the property itself can throw a wrench in things if the appraisal falls short of what the buyers offered to pay. It’s unlovingly called an “appraisal gap” and is becoming a huge problem for sellers—and buyers—right now. The Cinch survey indicates that 35% of deals that fell through during the past year were because a home appraised for significantly lower than the purchase price. Sellers can avoid this by making sure they are on target with what similar homes in their area have appraised for within the past three months. In general, pricing a home within 10% of those numbers should help.
Bidding wars are no longer the norm. Now that buyers have a bit more leverage with negotiations, contingencies are back—particularly home inspections. And if your own home’s inspection uncovers termites or a leaky roof, know that buyers will dig in their heels today. Cinch says 38% of home purchase deals that didn’t close in the past year were due to something found during a home inspection. Again, sellers can help to prevent this from happening by paying for their own inspections to be done, showing their home needs no remedial repairs, or offering paperwork showing how all the needed repairs were done. If something does surface, sellers must be willing to renegotiate the sales prices to help the buyer fix the issues after possession, or place a credit in escrow for the work to be done.
Bottom line? As a seller right now, you’ve got to be willing to give a little, even if it means helping with closing costs.