RISMEDIA, February 3, 2009-Whether you represent the buyer or the seller, you want to use your knowledge and expertise to prevent your transaction from failing to close. Numerous factors contribute to the failure of a contract between buyer and seller of real estate. Financing, possession dates, disclosures, due diligence, inspections, pre-closing contingencies, local market conditions, appraisal reports, ability and competence of the practitioners assisting the clients, change in either party’s personal circumstances, as well as property and neighborhood issues are among the more common contributors to a cancellation.
An all-cash offer, scheduled to close ASAP, that waives all inspections, is pretty likely to close. The maximum leveraged offer, contingent on financing, from self-employed itinerant hod carriers, scheduled to close in 120 days, attached to a sheaf of pre-closing contingencies, in a declining neighborhood with numerous drive-by shootings-not so much.
And, in the case of new home sales, the same property might cancel several times.
For this reason, it is hard to get a baseline on which to set expectations. However, having worked in large real estate organizations, franchises, and on MLS committees, it seems that given a large volume of transactions, over a period long enough to have been subject to all types of market conditions, about 25% of all contracts fail. Smaller firms with more seasoned agents tended to close about 90% of their written contracts.
That would seem to me, particularly in this market, a very worthwhile and challenging goal. Sure, one philosophy says if you throw a certain amount up onto the wall that some of it has got to stick, but I think that idea is so yesterday. No matter how much business you do, even a single cancellation takes a certain emotional toll. Better to use that psychic energy working toward more certain transactions than pushing a rock up a hill.
Many failed transactions never should have been written in the first place. But others, too many others, could have been saved by a little advanced planning.
People in our business are perennial optimists. We have to be now more than ever. But, when it comes to anything that could be torpedoed by one of “Murphy’s Laws”, as professionals, it is our duty to assume that all may not go well and prepare accordingly.
Dealing with Uncertainty
From my observations, it appears that our greatest obstacle in this market is uncertainty. Some people are in danger of losing their jobs and, as we are seeing, there is a sort of trickle down effect. This is on people’s minds whether they think they will be touched by it or not.
There is uncertainty about value. Who wants to pay more for something if they could have saved substantial money by waiting a few months, or even weeks? And, whether we want to admit it or not, there is uncertainty about our very system.
The mainstream media continues to bombard the public with a steady stream of negativity. If it bleeds it leads, they say. We must counteract that by providing factual information. The first step in building a solid foundation for closing is the initial consultation. Again, whether buyer or seller, they need to understand the bigger picture.
Elements of an initial consultation include the following:
Beyond the client’s interest in either buying or selling real estate are circumstances that are vital to the success of your closing. We need to understand their motivation and their mood. Start with a simple and disarming question, “Why are you considering making a move at this time?”
By the way, there are only a finite number of answers to that question but this, and not the real estate transaction, is the real need seeking to be met. Buying or selling real estate may not be the solution to the underlying need. If it isn’t, you’ve got one strike against closing.
Recently, I did a CMA for an urban loft. There were several others listed within the building and a couple at distressed prices. Coming to market under those circumstances isn’t likely to arrive at a fast sale. The why was to cash-in. I advised her to wait. I know many practitioners who would take that listing. Unless the seller is willing to price at market, there are too many other choices. Taking an overpriced listing in a crowded and declining market is hardly a recipe for success.
The Bigger Picture
Every generation faces challenges. The great depression, sandwiched between two world wars, impacted three decades of my father’s life. But, people had families and still needed a roof over their heads. To succeed in our business, we must be able, when appropriate, to assuage people’s apprehensions about their future.
Despite the news of the moment, there is a predictable future. We are a growing and shifting nation. In the directions we are moving, there is inadequate developed real estate to support the job growth underlying the migration. For individuals, buying property in the ten growing regions, called “Megapolitans,” the future is relatively certain.
Investors are active in the market. Not speculators, but investors. Why? Because they know demographics and there is no competition. The best value is obtained when you are the only buyer.
Some of the most important work in analyzing future job growth and corresponding migration patterns was done by Robert E. Lang, director of the Metropolitan Institute and associate professor of Urban Affairs and Planning at Virginia Tech. Lang, working with data from the Census Bureau supported, in part, by the Brookings Institute, has identified what will be the most dramatic socio-economic shift in our nation’s history.
In the last three centuries, we have constructed more than 300 billion square feet of homes, offices, stores and factories. Lang notes that it will take just 25 years to build the next 200 billion square feet. Get ready for the mother of all booms.
According to the Lincoln Institute of Land Policy, “Megapolitan areas extend into 35 states, contain less than one-fifth of all land in the lower 48 states, but captured more than two-thirds of total U.S. population.”
CNN Money calls it “The $25 trillion land grab…” and “…a treasure map of opportunity.” Strong words for a media outlet with little expressed affection toward real estate as an investment.
Local Market Conditions
Buyers look into the marketplace and observe and endless sea of houses. Sellers see only one. Both must fully understand the breadth and depth of what is available, as well as the general nature of the local economy. This provides a great opportunity to discuss the MLS, how it works, the number of properties on the market, and the process of elimination.
This is the best time to present the contract, disclosures, and forms that will comprise the closing process. Most people aren’t able to absorb a lot of details while under the stress of making one of the biggest decisions of their lives.
Demonstrating the paperwork and explaining the role of each item will make it much easier for them to commit when the time comes. If you provide them with draft copies, they can have an opportunity to review them at their leisure and highlight anything they are uncertain about. Covering the paperwork is a great segue into the next item.
Closing Process Step-by-step
Many people become disenchanted by all of the steps and people involved in the closing process. By one estimate, there could be as many as thirty separate individuals involved; everything from the bugman to the notary. Each has a job to do and a contribution to make to the closing process. We do not always control either the demeanor or performance of many of these people and some we do not even meet.
We need to prepare our clients by providing them with a breakdown of all the players, what they do, why they do it, and when it will occur.
Every transaction has key points. Loan approval, inspections, appraisal, title review, and pest clearance are likely milestones. Make sure the client understands the importance of these events.
Keep them in the loop. With the availability of online transaction and escrow tracking, there is a great opportunity to bring the client right into the process.
Pre-arrange communication by discussing it in the initial consultation. Don’t assume it. Ask, “When I do need to communicate with you, what is the best method to reach you?”
By thinking forward and preparing the client for the inevitable ups and downs of a real estate transaction, you can be confident that you are closing every possible transaction.