https://www.youtube.com/watch?v=ysUAxGRwQHY
Summary:
In today's discussion, we're going to explore the reasons behind home buyers canceling contracts. The media has certainly painted a dramatic picture of this issue, and I want to shed some light on the situation beyond the sensational headlines.
Contingencies: A Vital Aspect of Homebuying Before diving into the details, let's start with a crucial aspect of home buying - contingencies. When you enter into a purchase contract, it contains contingencies that protect your interests. These typically include appraisal contingencies, inspection contingencies, and loan contingencies. These contingencies provide you with opportunities to back out of the contract under specific circumstances.
For example, if you're buying a house in California, you might have 10 days for inspections. During this time, you can have professionals inspect the property. If you find significant issues, you can cancel the contract and receive your earnest money back. Similarly, if the appraisal comes in lower than expected, and the seller won't lower the price, you can choose to cancel the contract.
The Shift in the Market 2020 and 2021 were unprecedented years in real estate, marked by a frenzy of activity. Buyers often waived inspections and other contingencies to secure homes. However, the market has shifted since then, primarily due to a significant increase in interest rates. Housing affordability has decreased, and there's a more cautious approach among buyers.
Reasons for Cancellations So, why are we witnessing more contract cancellations? Here are some key factors:
The Role of the Realtor's Preferred Lender It's essential for buyers to consider the lender recommended by their real estate agent. However, it's equally important to scrutinize the lender's credentials. Recently, I encountered a situation where a real estate agent insisted on working with her preferred lender, claiming she was comfortable with them. Upon investigation, I discovered that this lender had only closed ten loans in the entire previous year. Such low loan volume is a red flag, and buyers should be cautious.
The Influence of Corporate Investors Lastly, in certain metropolitan areas, contract cancellations may be linked to corporate investors. In places where institutional investors heavily dominated the market in 2020 and 2021, regular homebuyers may have been intimidated. These investors may have made it challenging for traditional buyers to compete, leading to cancellations. As the market adjusts, negotiations and cancellations may continue until regular buyers regain confidence.
In conclusion, it's important to navigate the home buying process with diligence and a full understanding of the contingencies in your contract. Stay informed about interest rates and communicate regularly with your lender to avoid surprises. Don't hesitate to seek advice from professionals who have experience and a solid track record. And always remember, the media often creates narratives for clicks, so seek guidance from trusted experts in the field.
Thank you for taking the time to read this guide. If you have any questions or need assistance with your mortgage, please feel free to reach out to me or my team. We're here to help you make informed decisions in your homebuying journey.
Today, we're going to be talking about why home buyers are canceling contracts. The media has done a number on this. I've been seeing all the reporter requests where they're like, 'Did you cancel your contract? Tell us why cancellations are up on contracts.' Let's talk about it, right? And it's definitely doing this whole gloom and doom vibe.
So today, we're going to talk about why I'm seeing buyers cancel contracts and something that you guys should keep in mind when you're looking at the whole situation instead of just the headlines. So if you guys find this content helpful, please subscribe or like or dislike—whatever—just let me know how you feel. And if you guys have stuff you want me to cover, I am more than happy to cover it. Drop it in the comments, shoot me an email, you guys know the drill.
Okay, God, the media seriously, like I'm so sick of the drama. Like if I didn't actually do as much business as I do in all the states that I do and I just looked at the headlines, I would be flipping terrified. I would be like, 'Oh my God, all these buyers are backing out. What's going on, guys?' 2020 and 2021 were such crazy years, right? We talked about this at the time; it was craziness. There were people waving appraisals and waving inspections, so let's talk about that first.
So, a little homebuyer 101 here: Whenever you're doing a purchase contract, make sure the realtor explains it to you—so important. If they don't, get a new real estate agent, no joke. But in that contract, there are contingencies, and there's generally an appraisal contingency and an inspection contingency and a loan, okay? And with those contingencies, the way they usually work is, let's say I'm buying a house in California. If I was buying a house in California right now, I would be saying, 'I want 10 days for inspections,' which means I have 10 days to do the inspections on the house. If I don't find something wrong with it, then I wait, then I sign off the contingency, I'm saying, 'Yes, everything's good, day 10,' right? And I continue down the path.
And then, you know, let's say day 15 is my appraisal contingency, okay? The appraisal comes in at value, I sign off; it's basically like little checkmarks on the way to closing, okay? And let's say it went the other way. I could, let's say day five, I'm like, 'Oh my God, this place is a dump.' I could cancel the contract and get my earnest money back, or let's say the inspections are fine, but the appraisal comes in low, and the seller won't lower their price, and I don't want to pay more. I cancel the contract, I get my earnest money back.
Now, there is one state where this is different, which is North Carolina. So before I get all the North Carolina people saying, 'No, that's not how it works,' guys, most of the country, this is exactly how it works, to a large extent, okay? New York as well is an exception. But there's parts of the contract where you have a way out, okay? And those are contingencies.
Now, 2021 and 2020, a lot of real estate agents were telling buyers, 'If you want the house, you don't get any contingencies,' which means if you do an inspection and the house is falling down, tough luck. If the appraisal comes in low, you're paying the difference, you know, all these different things, which really hard press buyers into houses where if they had actually had the time to investigate the house, they probably wouldn't have bought it, and I strongly believe that.
And look, I have been the lender for the last few years who always is like, 'Don't do it, don't do it, don't do it, don't do it, don't do it.' You know, if you're super-duper rich and you can afford a huge amount of repairs and you just don't care about your money, cool, waive inspections. But if you're a first-time homebuyer or you are not sitting on a pile of cash, do not waive those inspections. You need to do your inspections, okay?
So a lot of people were doing that in 2020, 2021; they weren't even getting inspections; they were just trying to get into the house; they were paying over appraised value—whatever they could do. The market shifted, okay? The market shifted because rates jumped so dramatically, right? I mean, my God, they've doubled in eight months—craziness, craziness, right? So they've doubled in eight months. So there's less people out shopping because a lot of them have been priced out. Housing prices jumped dramatically in the last two years, so you've got home affordability at an all-time low, okay? So buyers now, when they're writing their contract, they can have inspections; they can have that appraisal contingency. So what I'm seeing on my end, the cancellations that I'm seeing, okay, it's not because the buyer's getting cold feet or they're worried about the housing market; they're backing out because something is wrong with the house, yeah.
You know, 2021, 2020, you could have a house that is falling down, and there was probably a buyer for it. 2022, people are more cautious, which I am thrilled about. I think it's great. I think you should always have inspections. I think, you know, if you do an inspection on a house and you see that there's going to be all this stuff that needs to be done, and the seller doesn't want to pay for it, and you don't have the money for it, why would you want to buy that house? The house should be a benefit and not a burden, you know? And if there are other houses for sale that you could choose from, you should try to get a house with the least amount of cost that you're going to have to put into it, okay? Unless you're looking for a fixer-upper, doing a renovation loan, etc., etc.
But that is one of the large reasons I see cancellations right now. We're in a market where buyers are getting to do their due diligence, which is great. And so they're able to go, you know, the appraisal comes in low, and they're like, 'I don't want to pay over.' There's some sellers who are still living in 2021 who are like, 'Well, then I forget it.' Okay, cool, bye-bye.
Now, I do have to say, on the appraisal piece, I'm actually starting to see more appraisers appraisals come in above purchase price, which is kind of cool because I hadn't seen a lot of that in the last two years. So we're definitely shifting into that buyer's market, and I think that is a large reason you're seeing more cancellations. So I don't think it's a reaction. I don't think it's a bad thing. I think it's a more normal thing. You know, if I think back to like prior to 2020 and 2021 with purchases, you know, we would see cancellations because of issues on inspections. There can be a lot of stuff wrong with houses that isn't visible to the naked eye, or you could think something's gonna cost 500 or a thousand dollars, and then you get a professional out there, and they're like, 'Dude, it's 10,' and you're like, 'Whoa, I'm out, I'm out.' So that's one of the big reasons I see people canceling now.
Another reason people are canceling—and this doesn't happen with my clients because look, we're engaged; you guys watch me on YouTube, or I'm stalking you on email; we're engaged, right? So you guys know what's going on with rates; you're in the know. That is not normal for America right now. So a lot of people, when they're looking at a house, they do zero research. They go to whatever lender the realtor says or whatever company, and they just assume that magically everything's gonna be taken care of, and if they have a pre-approval, that's the rate they get, even if it's not locked. They don't even know to ask that. They don't know; they don't know rates are going up; they don't read newspapers, you know. And that's okay; that's their life choices. However, this is not a good year for that life choice, no.
And so there's a lot of cancellations happening because people don't check in with their lenders. So they're not checking in with their lender; the rate's gone up, and they can't afford the payment, or they don't like the payment. I was on the phone with a lady yesterday; she was so wonderful and lovely—great. Well, she had been pre-approved in January by a lender, and I don't think her and the lender had communicated until she found a house that she liked this month, right? We're in August. And guess what? That program doesn't exist anymore. Right? That's a reason for a cancellation. Someone was pre-approved for a loan product that doesn't exist anymore. Another cancellation, someone thought the rate was two and a half, rates are not two and a half, payments too high, they don't qualify. Cancellation. Someone sees what the payment is. Cancellation.
You know, the other reasons we'll see people cancel contracts is because the lender they're working with never goes through what to expect with closing costs. And you guys know that is my number one mortgage lender red flag. Your lender needs to talk to you about what to expect with closing costs. People cancel because of that. Okay, another reason we're seeing cancellations is because we have a bunch of rogue lenders that were doing refi in 2020 and 2021, maybe they just got their licenses then, and now they're trying to do purchases, and they don't know how to structure deals. So you've got cancellations coming from loans being declined because they were structured incorrectly. So there's all these different factors going on that are leading to these cancellations.
Do I think it will stabilize? I do. I think if we continue down this path, I think by next year, sellers are going to be more awake to like, 'Hey, if I want to sell a house, like it can't be falling down, or I need to know that I'm going to need a renovation loan.' You know, 2020, 2021 totally spoiled sellers, and it was more of a market where, you know, just get it on the market; it doesn't matter what the condition is; just get it; someone's going to pay over for it. And that's shifting. So I think we'll see sellers having to, you know, do some of the fixes to make the houses more marketable. I think people are definitely getting used to the higher rates. No one's quite as shocked anymore, so that's good. The lender piece is going to be muddy for another year. You know, it's going to take a year to two years to shake out the lenders that don't know how to do purchases.
Okay, and as a buyer, the key thing you guys need to make sure with your lender is, hey, like how many purchases do you do just because your real estate person referred them? I had this happen the other day, I was dying. So, this real estate agent was like, 'Well, I want them to work with my lender,' is what she said to me, and she'd said it to them, which is why I was like, hey, look, we're legit, they're fully underwritten, they're locked, like here's all my numbers, here's my reviews. She's like, 'I want them to work with my lender because I'm comfortable with them.' I looked up her lender's numbers and I'm like, oh my god, is this a flipping joke? They've done 10 loans last year, 10. How are you more comfortable with that? 10? That is not, guys, 10 loans a year is less than one a month. That is not a full-time job.
Okay, no one should be more comfortable with a lender that does 10 a year. You might have a real stage and go, 'Well, they're going to give you the best service.' No, they're not, they're really not because, you know, you would go, 'Oh, well, they have no one else to talk to, so of course, they're going to give me great service.' Guys, if they were giving great service, they'd be doing more than 10 loans a year, it's that simple. Right?
So, I think the lender piece, you're going to have some mud for another year, year and a half, two years, as we shake out, you know, the lenders in the industry that don't belong. And I don't want to be mean because I love, I love other lenders, like look, a lot of lenders follow me, baby lenders, and if you guys are learning your guidelines, if you're doing what's right for your client, if you're, you know, helping your client out every way possible, I love you, stay in the industry, please, we need you. Be honest, be ethical. But if you're some lender just trying to make a buck, you're not reading your guidelines, you just take what's given to you and you spend the rest of your time enjoying your life and not trying to, like, actually take care of your client, get out, go away, go do something else, we don't need you. Okay, so two years for that.
Last note, because I know this will come up, one of the things people are talking about is certain metropolitans where we're seeing more cancellations and how they're tied to corporate investors. I do think that's plausible because here's why. So, there's certain parts of the country where it was so investor-dominated, like I think of Phoenix, Phoenix definitely pops out to me as one where it was like, Jesus, how many, you know, hedge funds and huge money sources are buying properties in this area? And there are more cancellations in those areas right now. I feel like a lot of buyers, got real buyers, people buyers, got scared out of those areas because of how crazy it was with the corporates in 2020 and 2021. You know, I did business in those areas during that time, and I have to say it was brutal, it was brutal. So, the corporates have basically scared out, you know, your regular buyer. So, they know now that they kind of have the seller on the ropes. So, I think you'll see a lot of negotiating in those areas until we get the real buyers back. I think you'll see cancellations and gains because they know that they don't have as much competition in that market because they scared everyone away.
So, if you're a buyer, you know, Phoenix, Atlanta, um, definitely, I would start, you know, you probably are pretty beaten down from the last two years, to be blunt. I would start watching again because I think there is going to be an opportunity for you guys because I think the corporates are playing games right now. So, look, this is just my personal opinion, but I wanted to talk to you guys about this because the media, here's what you guys need to know, they're creating a narrative, they're always creating a narrative so they can get more clicks because that's how a lot of them make money now is pay-per-clicks. So, just always talk, watch the experts, you know, there's a lot of people on YouTube who don't actually do any loans, they don't do any real estate, they're experts, but they just read the media. And as someone who talks to people every single day across the country, this is what I'm saying. So, as always, licensed in 48 states, questions, comments, leave them. If you guys need a mortgage, I am here to help, as is my team. Get on the calendar, give me a call. Thank you for watching