While it is unsurprising that California is currently experiencing a buyer’s market, the extent to which many buyers are currently going to purchase a house at the perfect, rock-bottom price is borderline ruthless. Buyers who were once squeamish about buying during the battered real estate market of 2007-2009 are now mercilessly seeking the best deal from desperate sellers.
Last minute demands in escrow for price concessions are causing a high percentage of deals to fall out of escrow. Buyers are banking on a seller’s reluctance to refuse a deal and have to put the house back on the market. However, many sellers literally cannot afford to meet the buyer’s demands, as another few thousand dollars will leave their home underwater and destroying their profits.
However, many buyers do not feel as if their actions are particularly aggressive. Many have the perception that if the seller is not willing to come down, they will simply move on to the next of many available houses. While buyers truly do have the option to simply move on, this take-it-or-leave-it mindset is leading to disenchanted buyers and embittered sellers.
Even the lowest home mortgage rates in 45 years are not enticing buyers to settle down and purchase a home. According to the Mortgage Bankers Association, applications for home loans are down by a third compared to last year, and 30 year rates are now at 4.6%, down 75% from one year ago.
In Sacramento, the number of sales that went to escrow is down by 10% compared to last year. This may have more to do with the government’s stimulus program for new homebuyers having run out in April than with picky buyers. Pending contracts usually take between six to eight weeks to finalize, so deals done in April are still being completed and are not tallied in these numbers.
first tuesday take: One Sacramento agent estimates that 15% to 17% of sales — one in six — are falling apart at the last minute. During a seller’s market, the figure is closer to 5%. Buyers are assuming that anyone selling during this depressed market must be desperate to cash out.
However, what these picky buyers do not understand is even the most desperate homeowner isn’t going to sell his home for less than what he owes. The low-ball offers, unless they are accepted and close escrow, only serve to upset the homeowner that rejects them.
Buyers have begun to understand that purchase agreement contracts, as presently prepared by agents, tend to tie down the seller, but do not tie down the buyer. The past 15 years have been a seller’s market, a virtuous cycle of rising prices. Buyers either closed escrow or someone else would buy the property and pay more.
Agents must now learn to tighten up their use of contracts, an art form that has been lost due to the extended rise in the market since 1997. Brokers and agents will learn a lot about contracting to buy and sell real estate during this vicious phase in the cycle.
When properly structuring a purchase agreement, the goal is to eliminate all possible buyer concerns which may cause a cancellation of the contract. To do this, the listing agent must explain to the seller why it is necessary to authorize the agent to order all disclosure reports upfront. This is the antithesis of present agent training and conduct.
When the buyer’s offer to purchase is accepted and after all reports and disclosures were previously delivered and no contingencies exist in the purchase agreement, he cannot cancel without breaching the contract should the seller reject an inquiry to reduce the price.
After an unexcused cancellation, the breaching buyer is responsible for his selling agent’s fee which was to be paid by the seller at closing. He is also exposed to liability for any financial losses for causing the property to be lost to foreclosure or on a resale of the property should the resale produce less net proceeds than had the breaching buyer closed escrow. This is the primary reason the good faith deposit exists.