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With prices continuing to climb like a rocket bursting through the stratosphere, increasing numbers of homeowner wannabes are closing in on the outer limits of their ability to purchase a home.
Having watched any number of rockets explode over the past years, it has become apparent that everything must work perfectly for the space vehicle to rise from the launch pad and make it into orbit. Similarly, as buyers have to stretch to the max to buy a home, there is no margin for error.
Although thoughts of exploding missiles might keep rocket scientists up at night, the possibility of a failed transaction has robbed many buyers of a restful slumber. Consequently, with margins growing ever tighter, in just the past few weeks, we have seen a dramatic increase in the numbers of buyers waking up the morning after inking a deal with a severe case of buyer’s remorse.
Those who have ever been to an auction or bitten by bidding fever understand how emotions can get the best of you when trying to negotiate on the fly. Consequently, it’s common for buyers to pay more than they intended and concede more terms than planned. Although some steady their nerves and press forward, others, with regret oozing from every pore and feet shrouded in ice, call their agents and try to nullify the contract.
Understanding that contract laws vary from state to state, canceling can be tricky in California, especially if the accepted purchase agreement was non-contingent. In fact, if the deposit is already in escrow, the buyers could stand to lose the entire amount if they continue to back away.
Not only do we see increased attempts at cancellations, but we are also encountering calls from agents who, on behalf of buyers alarmed at the price they paid or terms they negotiated, call up and try to renegotiate signed and sealed contracts. This move is also ill-advised and goes a long way toward alienating the listing agent and sellers right from the beginning of the transaction.
With cancellations increasing, here are three key things to focus on to help avoid buyer’s remorse:
1. Fully examine the property
Ensure that your buyers take adequate time to perform due diligence on any home in which they intend to write an offer.
Understanding that in many parts of the country, current COVID restrictions limit visits to 15- to 30-minute viewing windows, it’s critical that buyers and their agents sift through disclosure packages, reports, and other available information to understand the pros and cons of the home fully.
If possible, revisit the property for a second look: We’ve discovered that a lot of “magic” can dissipate once a buyer goes back into a prospective home for the second time.
2. Perform an in-depth financial analysis
Make sure your buyer has adequate reserves in the event the home appraises low. A simple rule is to subtract the list price from the price your buyer is offering: If your client has enough extra cash to make up that difference, they should be OK.
For example, if a home is listed at $500,000 and your buyer offers $550,000, make sure they have an additional $50,000 in reserves in the event the property only appraises at list price.
With appraisers struggling to keep pace with the market increases, we frequently see appraisals coming in low, requiring buyers to pony up extra cash to get the transaction closed.
If your buyer does not have extra money on hand, the deal is most likely doomed from the beginning. Additionally, run the projected monthly payments to ensure the buyer can service the new debt. Add together principle, interest, taxes, insurance and any applicable HOA fees to come up with a projected amount.
3. Set concrete limits
Once your buyers have set a limit, don’t exceed it. If your buyers mentally prepare before getting into a bidding war and understand their limits, they will be able to back away if the numbers cross over their line.
As their agent, you also need to understand their limits and put the brakes on with them: I have seen many agents encourage their buyers to “go for it” when they are ill-equipped to do so. It’s better to avoid getting them into a contract that puts them in deep water than trying to throw them a life preserver once they start to drown.
Although most people have heard the adage, “In real estate everything is negotiable,” it’s vital to understand that it applies to what happens before buyers put ink to paper and a deal is ratified. Another maxim to understand is “buyer beware.”
Although we occasionally encounter an agent who encourages buyers to outbid everyone and try to renegotiate later, most agents operate with integrity and their client’s best interests at heart. Proper training and due diligence will keep your buyers from waking up the next morning with cold feet and eliminate that dreaded phone call that leaves a sour taste in your mouth.
Carl Medford is the CEO of The Medford Team.