Gone are the days of contracts being written without inspection contingencies. As the housing market continues to cool, more and more homes that were once in contract are now “back on market.” The main driver of this latest trend is the impact higher mortgage rates are having on affordability. Higher rates can add hundreds of extra dollars to a monthly loan payment. In addition to higher mortgage rates, many buyers are questioning the timing of their purchase and some are looking for any excuse to get out of the deal. Following are tips on how to avoid buyer back-outs in a cooling housing market. These practices will help eliminate surprises and keep your deal moving forward to closing.
The appraisal process has never been an exact science and usually matches the loan amount on the contract. However, the current declining market is making the appraisal process less sure-footed than usual. Sellers hope for a value at least at the contract price, and buyers may be hoping for a lower appraisal as a way to lower the sales price. Meanwhile, lenders want to see a valuation in line with their in-house AVM numbers (Automated Valuation Models). AVMs can be a challenge since they typically run a few months behind. With sellers already feeling the pinch and buyers pushing for lower prices, an appraisal problem can spell doom for a deal.
HOW TO FIX IT: Eliminate surprises by having a discussion with your sellers beforehand. Remind your sellers that even though they may need to lower the price, the cost and time of going back on the market as it’s declining could result in an even greater loss.
GENERAL HOME INSPECTIONS
A general home inspection done ahead of time by your sellers is a pivotal way to avoid buyer back-outs. This should be included in the general disclosure package from the get-go. A home inspection usually covers the structure, roof, foundation, drainage, plumbing, heating system, central air-conditioning system, visible insulation, walls, windows, and doors. Only those items that are visible and accessible by normal means are included in the report. If the inspection reveals big problems—like foundation issues—it’s always best to deal with those ahead of time. Significant issues with any of these aspects of the home could spell disaster for your deal.
HOW TO FIX IT: Eliminate surprises and get a home inspection. When big problems are discovered–like foundation issues–your seller should consult with a certified specialist and figure out how to either fix the issue or adjust the price of the home accordingly. When this is done proactively, the chance of your deal falling out of contract is greatly reduced.
Another great report to have at the ready prior to going live with your listing is a pest inspection. Although this inspection mirrors that of a home inspection to a certain degree, its main purpose is to focus on pests. Pests can contribute to structural damage, in addition to unhealthy home environments. In particular, the surprise discovery of termite or rodent infestations can easily kill a deal.
HOW TO FIX IT: You did a pest inspection and discovered the worst. Now what? The type and extent of infestation present will determine the cure. At the least, disclosure is key and eliminates surprises once you are in contract.
There is no place on earth that doesn’t have a few natural hazards. Whether it’s wildfires, flooding, tornados, or hurricanes, the list is long and possibly getting longer as the climate changes. Laws vary from state to state, with states like California mandating by law that sellers provide Natural Hazard Reports (NHDs). These reports give information on the property’s proximity to earthquake fault zones, flood zones, dams, wildfire zones, potential ground liquefaction, and so forth. These reports should always be ordered before a contract is ever written. Often, the existence of extreme natural hazards will affect the ability to have the property insured. The inability to obtain affordable home insurance is not something you want to discover after the contract is written. Avoid buyer back-outs by having natural hazard reports at the ready.
HOW TO FIX IT: Regardless of the state you do business in, encourage your seller to prepare a detailed disclosure list of known natural hazards in the area, especially if it’s likely to affect insurability. Have that included in the general disclosure package. In this way, you can head off potential issues prior to writing an offer.
Nothing is worse than spending money to market your listing, getting it into contract, and then discovering it has a clouded title that can’t convey. It’s surprisingly common for mistakes to happen when recording loan payoffs, refinancing, divorce, death, and so forth.
HOW TO FIX IT: Order your preliminary title report before the listing documents are signed. You want to make sure at the beginning, before you begin any marketing, that your seller has clear title and the ability to sell. Then make sure you include the “prelim” in the disclosure package.
It’s common to discover that many “upgrades” done to the property have been done by the homeowner without the requisite permits. Sometimes this is not an issue, as long as the upgrade is fairly small or insignificant. However, things requiring electrical and plumbing or structural upgrades will be a problem. These upgrades can cause serious problems for the new owner and lead to lawsuits down the road. Local building departments have the authority to red flag illegal upgrades and have them go through an investigative process to obtain correct permits. Worse, they can require them to be torn out altogether. This gets very expensive. Once the buyer purchases the home, they are now on the hook for any mandated corrections.
HOW TO FIX IT: There is no good answer to this one. Permits should have been obtained and remediation could get very expensive. The best solution is to disclose the situation and hope to find a buyer that is okay with absorbing the risk.
WATER AND SEPTIC ISSUES
If you are dealing with acreage and “country” properties, chances are you are dealing with wells and private septic systems. These two things will often be deal breakers if significant problems are discovered.
HOW TO FIX IT: Make sure you have well and septic inspection reports on hand before a contract is written. Redrilling a well or re-engineering a faulty septic system can be prohibitively expensive. This is not something you want to discover after the contract is written.
PEACE OF MIND
Finally, you can offer both sellers and buyers extra peace of mind by ordering a home warranty. A Sellers’ Home Warranty will help protect your seller during the listing phase with protection for things like HVAC systems and appliances. A seller’s warranty will then automatically transfer to the buyer at closing, helping to protect them against unforeseen problems as well. In addition to being an added incentive for a seller to list with you, and for a buyer to buy the home, a home warranty also helps to protect you from being on the hook should things go wrong during the listing or after closing. And if you do obtain a seller’s home warranty, make sure you get a rider on your sign highlighting that feature as an extra marketing boost.