Contract Conundrums

It’s not always a scarcity of buyers that’s holding back the housing market.

“I know of one home with an incredible new kitchen,” relates John O’Brien, a real estate attorney who works in suburban Chicago.

Smitten with the kitchen, no fewer than five buyers submitted purchase contracts – but all were then canceled. Five false starts is a bit extreme, O’Brien notes, but aborted purchases are common now.

This past August, 18 percent of members of the National Association of Realtors reported a canceled sale, double the rate from a year ago.

Attorneys, agents and other experts say that several trends can derail sales, from tightened lending and appraisal rules to buyers’ remorse and agents who are ill-equipped to shepherd today’s more complicated transactions to completion.

Here, a look at what’s stopping sales and what determined buyers and sellers might do to keep on track:

Looking For Exit

State laws vary, but, generally, when a buyer puts in a contract, it’s subject to approval from his attorney. That approval marks the first place a buyer who gets cold feet can walk, because an attorney can usually find reasons a contract is unacceptable, especially when the client wants out, O’Brien notes.

For remorse that settles in later, he adds, the home inspection invariably uncovers flaws, and buyers can dig in their heels, saying they can’t live with such shortcomings.

When a buyer cancels, and the seller believes it’s not for a legitimate reason, in practicality there’s little the seller can do, observes Florida real estate attorney Rosa Eckstein Schechter. Recovering the full amount of earnest money, she adds, could involve legal action. “Most of the time, the best that the seller can do is negotiate to keep half [of the earnest money].”

Supporting Value

One common reason, that contracts fall through, according to the NAR, is that appraisal values fall short of purchase offers. O’Brien shares that in the case of the five failed offers, the culprit was appraisals.

But please don’t blame the appraiser, says Little Rock, Ark-based Sara Stephens, president-elect of The Appraisal Institute.

The appraisal isn’t supposed to confirm the purchase price offer, but it’s an independent opinion used by the lender, Stephens says.

Still, she doesn’t like the recent financial reforms that have resulted in more lenders hiring appraisers from areas outside the neighborhoods they evaluate a home in.

Stephens says home sellers and/or their agents should meet the appraiser, point out the positive features of the home, and how the home may be distinct from other homes that have recently sold in the neighborhood.

Follow The Money

When buyers need a mortgage, their contract typically contains a clause whereby if they can’t secure a loan, the purchase is off.

When appraisal values come in under the purchase offer it often means that the lender can’t make the mortgage requested. But buyers also be can rejected just days before a scheduled closing because of their personal finances.

Don’t be too confident that a “pre-approval” means you’ll get the mortgage later, warns Joe Wyrick, president of the Athens chapter of the Mortgage Bankers Association of Georgia.

When you get pre-approval, ask “if you’re borderline,” Wyrick advises. If your credit score or other factors are on the edge, loan rules can subsequently tighten, squeezing you out of the loan.

Keeping It Professional

Alicia Trevino, CEO of Century 21 Fine Homes & Estates, Dallas, believes that many agents don’t see the minefields, and act proactively to save a sale. For instance, an agent should warn a seller about glaring flaws that will almost certainly hold back a sale, she says.

Kathy Dames, a RE/MAX agent in Joliet, Ill., agrees: “FHA mortgages, which many buyers need, have lots of paperwork deadlines some agents don’t meet.”