No one can predict the future of real estate, but you can prepare. Find out what to prepare for and pick up the tools you’ll need at Virtual Inman Connect on Nov. 1-2, 2023. And don’t miss Inman Connect New York on Jan. 23-25, 2024, where AI, capital and more will be center stage. Bet big on the future and join us at Connect.
Adam Kaufman, an agent with Howard Hanna in Cleveland, listed a handsomely renovated home in September for $895,000. It was located in the suburb of Chagrin Falls, and within days they had an offer from a well-qualified buyer who offered a 50 percent down payment.
The would-be buyer had the house inspected and Kaufman heard from the buyer’s agent on Wednesday night that the inspection went great, with only three minimal issues with the house uncovered. The deal seemed to be moving along — until Kaufman heard the next day that the buyer had changed their mind and decided to pull out. The reasoning? They were unhappy that the refrigerator wasn’t properly bolted into the wall.
While that was the stated reason, Kaufman believes the buyer’s real reason for pulling out was a classic case of cold feet.
“Buyers are second-guessing themselves now,” Kaufman, a 20-year agent who logged over $170 million in sales in 2022, told Inman. “When the market was insane they didn’t have the opportunity to second guess themselves as much. But what they’re doing is destroying sellers in the process.”
Kaufman’s buyer isn’t alone. According to data compiled by Redfin, nearly 60,000 home purchase contracts were canceled in August — equal to 15.7 percent of homes that went under contract that month, the highest rate of scrapped deals seen in nearly a year. It comes as mortgage rates topped 7 percent and housing prices continue to climb, saddling buyers with more costs than they may have set out to incur and causing many to get cold feet.
“The fallout has gotten crazy,” said Kaufman, who added that when deals fall through, it’s sellers who hurt the most. “Once a house comes off the market and goes back on the market, it’s a blight on the house,” he added.
With the mortgage rate environment unlikely to change in the near future, Inman spoke to agents across the country about how they’re dealing with contracts falling through, and how to get ahead to prevent deals from falling through in the first place.
The power of pre-inspection
While the increased cost of borrowing money over the past two years has undoubtedly contributed to the recent uptick in scrapped deals, the leading cause of broken contracts has long been structural issues, agents told Inman.
“Ninety-eight percent of the time it’s condition, and then it’s a seller that doesn’t want to compensate for that for whatever reason,” Paul Reddam, owner of Homesville Realty Group in Austin, Texas, told Inman.
Some buyers go into a deal prepared to take on a renovation, then back out once they realize what that will entail.
Albany, New York, RE/MAX agent Jeffrey Decatur told Inman of a pregnant buyer client he worked with who backed out of a deal to buy “the ugliest dog on the best block” due to problems with the house that were uncovered by an inspection. She feared the home’s condition could be harmful to her unborn child.
“We had termites, we had mold,” Decatur said. “It needed to be rehabbed… after finding out she was pregnant, she didn’t want to be around the chemicals.”
To get ahead of deals falling through due to structural issues, agents say they push their seller clients to have their homes pre-inspected when listing in order to prevent any nasty surprises when buyers get their own inspections.
“This is the only business I know where people don’t really know a lot about the house before they buy it,” Reddam, a 25-year agent said. “You know what’s coming with the car you’re buying. It’s just dumb. Pre-inspection would change everything.”
Reddam says he has been able to keep his fallout rate low throughout his decades-long career by making sure prospective buyers read the inspection reports before going under contract.
“We make sure the buyers have read it before we go under contract — and that really keeps our fallout rate low,” he said. “Sellers love it when I pitch it to them at our listing appointment. I hear from people that usually they have pushback from sellers, but if you just say it right, it’s okay — it’s for them.”
The importance of communication
The years following the COVID-19 pandemic have seen an onslaught of new real estate agents join the profession, as houses flew off the shelves during late 2020 and 2021.
At the same time, deals are falling through, and Decatur sees a connection.
“Nowadays, with so many newer agents getting in the business, they don’t have that experience behind them of having fall-throughs, so they know to prevent that in the future,” he said.
The most effective way to do that when working with sellers, the 28-year agent said, is to be upfront with them about pricing and help them manage their expectations.
“Usually, when you’re in a seller’s market, there are more fall-throughs because sellers get cold feet; they think they’re paying too much. When we’re in a buyer’s market, the buyer feels as though they have more leverage with negotiating because the sellers are going to give them credits,” he said. “In today’s market, they don’t really feel that as much.”
“It all comes back to the agent not managing that expectation,” Decatur continued. “Everything in real estate comes down to managing your client’s expectations and educating them.”
Matt LaMarsh, a 14-year agent who works with Engel & Völkers in Atlanta, agrees.
“What’s pretty common is the unrealistic expectations of sellers still in the market, because they see their neighbor’s homes sell very quickly and at a higher price and they think ‘Our house is about the same size. They have about the same number of bedrooms and bathrooms and we have about the same lot so my house should be worth as much as theirs,’” he said.
LaMarsh has found that often sellers fail to take into consideration the overall condition of their home when determining a price, which often leads to them overpricing it.
“The homes that are priced appropriately for the condition they are in are still selling very rapidly,” he said.
LaMarsh should know. According to Redfin, Atlanta had the highest fallout rate of any major American city in August, with 23.7 percent of homes that went under contract that month falling out. The week he spoke to Inman, Lamarsh had already seen two of his own deals fall through.
Honest communication is equally important with buyers if you’re looking to prevent fall-throughs, especially with mortgage rates at 20-year highs. Buyers deserve to be educated about the realities around pricing, Decatur said. For instance, if a buyer is considering backing out of a deal because they’re worried they are paying too much, make sure they have the full picture on price appreciation.
“The fact of the matter is that you just backed out of something and a month from now it’s going to cost more,” he said. “The reason people are backing out of contracts is they haven’t had their expectations managed, and they haven’t been educated on the way the process works.”
Agents should also work to educate their clients about mortgage rates, and be sure they know they have the option to buy down when the opportunity arises.
“Just help these people understand that these rates are only temporary, and they will come down once the Fed gets their inflation number down,” said Mike Opyd, a RE/MAX agent in Chicago. “I always try to tell these buyers: ‘If you’re comfortable with it now, stick with it. Once it drops, refinance and save yourself 200 or 300 bucks a month.'”
Buyer and seller agents alike should both be striving to make sure their clients are well-informed and prepared to make a serious financial commitment.
“Everything in real estate comes down to informing your client’s decisions and educating them,” Decatur said.
Develop a Plan B
Even if you take scores of preventative measures, the real estate game can be unpredictable and sometimes there’s no way to stop a deal from falling through.
That’s why Chicagoland RE/MAX agent David J. Cobb always makes sure to keep a backup buyer in mind when a house he is selling goes under contract, even if the deal seems foolproof.
Cobb has the benefit of working in a major market, where properties often get multiple offers even in a down market.
“In this market, sometimes we get multiple offers, so you have an A and you have a B, and you’re keying up the A, but have a conversation with that B buyer,” he said. “Say ‘Hey, are you in a position to be a backup buyer for us?’ And that way you have a fallback.”