The Unprecedented Value of Certainty when Selling a Home
Political strife, the Fed, the economy, a soft landing, worker strikes, Ukraine & Russia, gas prices, and a Barbie movie that breaks a billion dollars. There’s no shortage of uncertainty in American life these days. But certainty is something that most Americans crave, and will even pay a premium for. Except in real estate, where the traditional view has always been to get the highest price offer and simply hope for the best.
But is it time to re-frame the way we think about selling and the value we place on certainty? We certainly think so.
Not every contract closes
Putting your home under contract is an incredible feeling. You can see the finish line and the financial freedom it brings. But will it really make it to closing?
The truth is that not every contract makes it to closing. A study published in September of 2022 by CNBC showed that Jacksonville, Florida had the highest rate of contract cancellations, with 26.1% of contract holders backing out of the deal before the closing date. And it’s worth noting that a majority of that data comes from a period in 2021, when interest rates were near historic lows, and home inventory was nearly non-existent. Now, with affordability reaching a low unseen for more than three decades, the problem is only growing.
Coupled with the fact that the median time to contract was 34 days* in the Jacksonville MSA, each time a contract falls out, you face the possibility of significant delays in your sale. While the average time to close is currently about 45 days in Jacksonville, it’s an average, and it’s not uncommon for some homes to be on the market for 120 days or more!
The costs of selling delays
Having a buyer back out is frustrating and demoralizing, but it’s also expensive. Unless you own your home outright, free and clear of any mortgages, it’s a sizable expense to hold and maintain your home each month.
According to research from Black Knight Inc, a fintech and data sciences company based out of Jacksonville, the average monthly P&I or principal and interest, for a new mortgage in July was more than $2300. And that doesn’t factor in taxes or insurance, both of which have spiked in recent years. While many homeowners have significantly lower monthly payments, monthly holding costs when trying to sell often add up well into the thousands.
Additionally, many sellers are also dually acting as buyers, working to secure a new home which usually requires the proceeds, or at least a guarantee of proceeds at the time of closing. Time is of the essence in a real estate transaction, and delays in a sale can quickly lead to a purchase contract falling out.
Most buyers place deposits, and expense inspections and appraisals prior to final approval. Failing to close because your home didn’t sell can end up costing you more than just the loss of your potential future home.
Why contracts fall out
There are many reasons why a sale fails to make it to the closing table, and unfortunately most are completely outside of the seller’s control. Here are some of the most common scenarios:
- Buyer failed to obtain financing – This is perhaps the most common reason that contracts fall out. The loan approval process can be grueling, and just because someone is able to obtain a pre-approval letter, doesn’t mean that their lender has all of the facts. The bulk of lender underwriting doesn’t occur until after a buyer has put a home under contract. In the meantime interest rates can change, jobs can be lost, and new debt can occur. Most contracts have a contingency period for financing. If your buyer isn’t able to make it work, they can usually walk away without forfeiting their deposit.
- Home failed to appraise – This is another step in the financing process, but deserves its own special mention. Lenders are strict about how much of a home’s value they are willing to lend on. Most have a maximum LTV or loan to value ratio. Traditionally this was 80% of the appraised value of a home, meaning that a buyer was expected to bring 20% of the cost to the closing table as a cash down payment. More recently loan programs have been expanded to offer 90-97% LTV options, allowing for lower down payments. The catch is that in each of these situations, the home has to appraise. No matter how much a buyer is willing to pay for your home, if the home doesn’t appraise, they’ll either have to make up the difference in cash, or back out of the contract.
- Home Sale Contingencies – We’ve already touched on this, but many conventional offers come with a home sale contingency. This means that the buyer is also in the process of selling their prior home, and that their purchase of your home is contingent upon their sale closing. If the buyer’s home sale falls out, you’ll be given the option to wait for it to sell, or allow them to back out of the deal.
- Failed inspections – a major issue like a damaged slab, foundation, roof, or plumbing system can make a home uninsurable until fixed, and a lender may not be willing to offer a loan until a repair is complete. If the seller can’t come up with the cost to cover the repair prior to closing, the buyer may back out or be forced to back out. And even in the event that the seller makes those repairs, their net proceeds will be reduced as a result.
- Interest rate changes – Another common cause that ties in with financing. Notice a trend here? When a buyer goes under contract with a seller, they typically provide a pre-approval letter. This letter is a good faith estimate from a lender of a buyer’s buying power based on current market conditions. Key word being current. Interest rates fluctuate daily, and major events such as federal reserve rate increases can have immediate and drastic results on rates. An increase of even a quarter percent can disqualify a buyer if their income can’t support the adjusted monthly payment.
- Cold feet – At the end of the day some buyers will simply decide that they don’t want to move forward with the purchase. In Florida, if this is during their inspection period, they can elect to do so without penalty. However, even in states where this is not the case or in the event of a cancellation outside of the inspection period, the only remedy for the seller is to keep binder deposits, which are typically $1,000 – $5,000 while delaying your sale for weeks.
How to help ensure your sale closes
While closing is never 100% certain, you as a seller can help negotiate terms that make closing more likely. For some sellers who may value certainty in selling over squeezing every dollar out of their home, these terms of the purchase contract can be as important as the offer price.
- Inspection period – Negotiating down or eliminating an inspection period is a great way to vette buyers. And a buyer who is willing to put up funds without any inspection period at all is very likely to close without requesting additional repairs or updates.
- EMD – The EMD or “earnest money deposit” is a good faith binder deposit placed with a reputable third party in the transaction. These funds are forfeit if the buyer fails to perform on the contract outside of the contingency periods. The higher the binder, the less likely a buyer will walk away from a contract outside of their contingency periods. Negotiating for a higher binder can be a great way to sure up an offer.
- Financing – Financing contributes to most of the reasons that sales fail to close. Cash buyers don’t have financing restrictions, which makes a cash offer more likely to close than a financed offer. By screening buyers based on their financing, you can make closing more likely.
- Flexibility – A good buyer can be flexible with your selling needs. Need a few extra days to move out after you sell? It can go in the contract. Owe back taxes that have to be paid prior to closing? A good buyer can negotiate to pay those for you in return for a lower purchase price. If you know you have specific needs to ensure a smooth closing, negotiate for them in the initial contract.
Cash buyers & investors
A cash offer with little to no inspection period, flexibility, a quick closing, and a sizable EMD are all ways to insure some level of certainty around closing. But finding a buyer willing to offer these terms can be difficult. That’s where investors and cash buyers come in.
A reputable local investor will typically offer terms similar to those above, with the caveat being a reduced sales price, typically 80-85% of the home’s after repair value minus the cost of repairs, with the buyer paying the closing costs. An example would be a house worth $200,000 in perfect condition which needs $40,000 in repairs. An investor offer would likely be in the $120,000-$130,000 range.
“But that’s sixty to eighty thousand less” you might say. While true, the accounting for an on market sale is actually closer than you think. If you sold the same home on the open market, getting a full priced offer of $200,000 you would still spend roughly 8-10% on closing costs. Plus, you would have had to spend $40,000 up front to make the needed repairs. Leaving you with about $140,000.
Of course there are many other factors that go into determining net proceeds, but ultimately many bonafide cash offers from trusted local investors are competitive, especially if you put the added emphasis on certainty.
Selling a home is an uncertain business. Contracts fail to close at an alarming rate, and time is money when it comes to your home. Understanding your needs as a seller is paramount to ensuring you sell your home well, regardless of the situation. For some that may be selling a home for top dollar on the open market, no matter how long it takes. For others who need to close quickly, or can’t afford to have the contract fall out, working with an investor to find more certain terms in exchange for some equity might be the best way to sell. The important part is weighing these terms carefully, so you can make an educated decision, empowering you for future financial freedom.
Duval Home Buyers
Duval Home Buyers is a local real estate investment company, operating in the greater Jacksonville area since 2008. Offering quick quick closings, flexible terms, and the support of a licensed agent, there’s nobody that knows the First Coast better. If you have a home you are considering selling, give us a call. We’re here to help you get what you need out of selling your home. It’s the way selling should be.