We just ended a year with a huge jump in homes that fell out of contract (“failed sales”) and went back on the market. It’s not clear why this happened but there are several possible reasons, including problems with loans, appraisals and inspections.
According to Trulia, 3.9 percent of homes went from “sale pending” to “back on the market” in 2016. That’s almost double the rate in 2015 when 2.1 percent of purchase agreements fell though.
Trulia pulled the data from 102 of the biggest metropolitan areas in the nation. The data shows that 90 percent of those regions experienced an increase in failed home sales.
Ventura County, California, led the pack with 11.6 percent of sales failing to close last year. That’s up 3.1 percent from 2015, so it appears that failed home sales in Ventura County were already high going into 2016.
It was a similar situation for Tucson, Arizona, which came in second. The failed sales rate in Tucson was 10.8 percent. That’s up 3.5 percent from the year before. But if you look at just the last quarter of 2016, failed sales in Tucson rose to 13.9 percent.
Following those two metros are Atlanta, Georgia; Fort Worth, Texas; Los Angeles, California; Charleston, South Carolina; San Jose, California; Orange County, California; Portland, Oregon; and Akron, Ohio.
Trulia says if you look back over two years, most of the failed sales occurred in the West, with Las Vegas in the number one position. Over those two years, 7.6 percent of home sales in Las Vegas failed to close.
So what’s going on here and what does it mean?
The data shows that sales agreements for new homes and very old homes are the least likely to fail—and, that less expensive homes and those around 50 years old are “most” likely to fail.
Since the data doesn’t indicate why that’s the case, you can connect a few dots by looking at buyer demographics and situations that might complicate those deals.
Trulia says it appears that first-time homebuyers likely played a role in the surge because there were a high number of first-time homebuyers, and a high number of starter homes that didn’t make it to the finish line.
Failed sales rate of starter homes rose from 2.4 percent in the last quarter of 2014 to 7.1 percent during the last quarter of 2016. And, according to the National Association of Realtors, first-time homebuyers accounted for 32 percent of sales in 2015 and 35 percent of sales in 2016.
These homebuyers may have more trouble getting a loan because they lack equity or credit history. But having a loan fall through can happen to anyone, even for people who are pre-qualified—especially when they go beyond their pre-approved limit in a bidding war with other buyers.
Age can be a determining factor
Trulia says the “age” of the home is also a pretty good indicator of whether the sale will go through. Homes that were built last year only failed to close 2.6 percent of the time. The percent of failed sales grows as you go back in time, with homes built in the 1960s experiencing the highest rate of sales failure.
In hot markets where prices have risen quickly and buyers are bidding against each other, an older home may not appraise for the sales price. Most lenders require an appraisal to determine the value of the home and they only like to make loans based on that value.
In that situation, the buyer can put down a larger down payment to make up the difference. But that may be tough in some cases, especially when down payments are often the reason people don’t buy in the first place.
An inspection should be a priority
And then there’s the all-important home inspection. They are not a required part of the sale, but buyers should consider them a priority. They can uncover hidden problems with a home, and even though they cost several hundred dollars, they can be big money savers.
The results of a home inspection are usually listed as a “contingency” on the contract meaning if there’s a big problem that the buyer doesn’t want to deal with or the seller won’t cover, then the buyer can back out of the deal.
When the data shows many “older homes” are failing to close, it could be that inspections are revealing expensive problems.
So here’s the rundown on inspections, according to Real Estate Rama. That’s a website that provides press release services to real estate-related government and public policy organizations.
First, you have the general home inspection. The inspector will conduct a visual inspection of the entire property for obvious issues. If the inspector finds evidence of a problem, the buyer may need to hire another kind of inspector as a follow-up.
For instance, if the general inspector notices evidence of foundation damage, the buyer may want to get the foundation inspected by a specialist. Foundation damage could show up as cracks on the concrete slab, on the wall and around windows, or doors may not shut properly and windows may be difficult to open. These are things the general inspector can see but can’t necessarily diagnose.
The general inspector may also see signs of pests, like termites. Many lenders require a termite inspection, and sellers often provide them in advance. So that’s something the buyer may want to demand if one hasn’t already been done.
You’ll want to take an even closer look
Other kinds of inspections that may be needed include a roof inspection, especially if there are signs of water damage. And “if” there are signs of water damage, the buyer may want to get a mold inspection. Black mold hidden inside walls can be highly toxic.
If the home is built before 1978, a buyer may want to find out about lead paint. And if it’s built before 1980, there could be a lot of asbestos in the building materials.
According to the Asbestos Network, asbestos was often used in floor and ceiling tiles, roof shingles and flashing, siding, insulation, pipe cement and joint compound for sheetrock. The website also says some newer homes may contain asbestos.
Pools, spas, chimneys and septic or sewer systems may need a closer look. And if there’s a potential soil stability problem or the home is built on a steep incline, the buyer may want to call in an engineer to check on that.
With all those “potential” secondary inspections, it’s a good idea to schedule the initial inspection as soon as possible. The deadline to close will come up fast. Contingency periods can be as quick as 10 days. And some sellers won’t even allow contingencies if there are many offers—especially all-cash, “as is” offers.
What you don’t see is still what you get
While some people are willing to buy “as is” with no inspection, this is not recommended unless you are a real estate pro and have walked the property yourself. In that case, you can pretty well gauge future expenses. Otherwise, you have no idea what you’re getting.
Recently, one of our Real Wealth Network members told us she was buying multiple properties out of state, but was not getting inspections in order to save money. We told her that was a terrible idea, and that she would never know down the road—if anything went wrong—whether or not the tenant caused the problem or if it was there before purchase.
And if problems are discovered before closing and during the contingency period, there’s a good chance you can negotiate a discount on price.
You can learn more about how to be a savvy real estate investor—and sign up for a free strategy session with an experienced investment counselor—at www.newsforinvestors.com.
About the Author
Kathy Fettke is the founder and co-CEO of Real Wealth Network, a passive real estate investing club with more than 24,000 members. She’s also the author of “Retire Rich with Rentals” and host of “The Real Wealth Show,” a featured podcast on iTunes with listeners in 27 different countries. Kathy is passionate about understanding real estate cycles so she and her members can invest in the best markets and best deals available today. She is frequently invited to share her expertise on CNN, CNBC, Fox News, NPR, CBS MarketWatch and in the Wall Street Journal. Kathy received her BA in Broadcast Communications from San Francisco State University and worked in the newsrooms of CNN, FOX, CTV and ABC-7. She’s past-president of American Women in Radio & Television. Kathy loves the freedom that real estate investing can bring. She lives in Malibu, California, with her husband and two daughters and enjoys traveling, hiking, rock climbing, skiing, figure skating and surfing.