By Kathleen Lynn
RISMEDIA, April 14, 2008-Deal or no deal? Does a signed contract mean the property will actually sell? In a volatile housing market, the answer these days is “not necessarily.”
“You start earning your commission the day you get the contract,” said Kate Conover of Re/Max Properties in Franklin Lakes, N.J. “Getting a contract isn’t as hard as keeping it together.”
Home builders are especially plagued by canceled deals. Large builders say their cancellation rates have soared in the past year or two-to 35% or higher-often because their would-be buyers can’t unload their own homes. In an effort to head off cancellations, Hovnanian Enterprises of Red Bank, N.J., that state’s largest homebuilder, now offers free home inspections, staging advice and other services to help its buyers sell their homes.
Cancellations are not as big a problem with existing home sales, according to some real estate agents interviewed for this story. But they say keeping deals on track-from the offer through the contract to the closing-has become much more complicated.
Sometimes buyers have second thoughts; sometimes lenders balk at the size of the mortgage or the credit record of the buyer. Sometimes the home inspection turns up trouble.
“A lot of buyers are getting cold feet and backing out in attorney review,” said Ann Murad of Re/Max Real Estate Associates in Woodcliff Lake, N.J. “It’s usually three days of attorney review. Sometimes they’re dragging it out a week, and then they’re backing out.”
Often, deals go on the rocks because lenders have gotten tightfisted-after several years of being free (in some cases, reckless) with mortgage money. And at banks’ request, appraisers are being more conservative when valuing properties.
Keri Mottola, an agent with Margrit Vogler Properties in Oradell, N.J., recently had a deal that came close to imploding because of a lender’s caution. She was working with affluent, qualified buyers of a two-family home. Both Mottola and the buyers felt the property’s price was reasonable.
But the lender said no because the sale price was higher than other recent two-family sales nearby. Mottola questioned the appraisal, explaining to the lender that it’s hard to find comparable sales because there are few two-families in Oradell.
“The lender would not change the appraisal,” Mottola said. “We had to go to another lender. That delayed the closing, and it could have cost us the deal.”
Attilio Adamo of Adamo Prudential Realty in Paramus, N.J., also recently found himself scrambling to keep a deal intact.
“The banking industry is being extremely conservative,” he said. “A lot of buyers don’t understand what’s going on, and it’s overwhelming.” That means he spends more time following up with lenders to make sure they have all of a buyer’s paperwork.
In one recent sale, he said, the first-time buyer didn’t understand he’d have to come up with closing costs of about $7,000. The real estate agent, buyer’s lawyer and mortgage broker all agreed to cut their fees to help make up the difference.
“We try to keep every deal together,” Adamo said. “Every deal is important to us nowadays.”
Several real estate agents said they are screening buyers more carefully upfront to increase the odds that deals can hold.
Nelson Chen of the Chen Agency in Fort Lee, N.J., said he’s “more vigilant about mortgages.” He tells buyers: “That’s great, you’re going to buy. Now let’s see if you can get the mortgage you think you can get.”
Chen also tries to head off cases of cold feet by encouraging buyers to be sure about their offers.
“I tell buyers, `You have the luxury of time. Think about what you’re doing. Before you make an offer, think about it,’” he said.
Home inspections are sometimes the weak link in the chain holding a buyer and seller together. Buyers will often demand large price concessions when the inspection turns up problems, and then call off the deal if they don’t get them.
“Some people use the home inspection to back out of a deal,” said Randy Douglass of Douglass ERA Realtors in Montvale, N.J. “It seems a little more adversarial with home inspections.”
“It’s much more difficult to get through the home inspection,” Mottola agreed. “Sometimes you feel the buyers are trying to negotiate price through the inspection, which is not the purpose of inspections.”
When deals fall through, sellers have limited recourse.
Bart Gelormino, a real estate lawyer practicing in New Jersey, said buyers typically give real estate agents an initial payment of $1,000 to hold a property. Then, after the inspection and attorney review, they give the seller’s attorney a larger deposit-usually at least 5% of the asking price-usually within two weeks.
During the three-day attorney review period, either party can walk away without penalty. After that, if an inspection finds a serious problem, a buyer can cancel the deal and get the deposit back.
“Most deals that are going to die, die quickly, during attorney review,” said Hackensack lawyer Michael Fitzpatrick.
And if buyers back out later? The seller doesn’t just get to keep the deposit, the lawyers say. That’s because the deposit is held by the attorney and can’t be released unless both the buyer and seller agree, Gelormino said. Most sellers just return the deposit and sell to someone else, Gelormino said.
At Hovnanian, division President Jim Driscoll said, buyers who back out have one year to apply their deposits to another Hovnanian property. Deposits typically start at $10,000 or less at Hovnanian; the buyer then has 30 days to bring it up to 10% of the home price.
In the most extreme cases, canceled deals can lead to lawsuits. Park Ridge, N.J., lawyer Robert McGuirl said he is working on a case where a buyer agreed in 2006 to buy a home for $765,000. The buyer then backed out, saying the inspection turned up serious problems-a claim disputed by the seller.
By the time the house was listed again, the market had slowed and the seller had to accept a lower price. In addition, the seller had moved and had to maintain the house until it sold. The seller also had to pay a Realtor’s commission, when the first deal was arranged without an agent. All in all, the costs added up to tens of thousands of dollars.
“Those are costs they’re trying to recover,” McGuirl said.
When real estate prices were rising, deals that fell apart were no big deal, McGuirl said. “You’d sell for as much or more, and it was never a matter of litigation,” he said. But now a seller could face real losses, he said.
For all the frustration of a failed deal, Chen pointed out that collapsing transactions are nothing new to experienced real estate agents. They may represent a return to more normal market conditions than in the overheated market of a couple of years ago, he said.
“In this business,” he said, “a deal is not done till it’s done.”
Record correspondent Mary Amoroso contributed to this report.
© 2008, North Jersey Media Group Inc.
Distributed by McClatchy-Tribune Information Services.
Copyright© 2014 RISMedia, The Leader in Real Estate Information Systems and Real Estate News. All Rights Reserved. This material may not be republished without permission from RISMedia.
Content on this website is copyrighted and may not be redistributed without express written permission from RISMedia. Access to RISMedia archives and thousands of articles like this, as well as consumer real estate videos, are available through RISMedia's REsource Licensed Content Solutions. Offering the industry’s most comprehensive and affordable content packages. Click here to learn more! http://resource.rismedia.com