Real Estate Contracts Being Canceled At New Record Rate
Home sales contracts are falling apart at the highest rate since the depths of the COVID lockdowns in 2020.
Why are all of these pending home sales failing? What does that mean for you as an investor? How can you most profitably navigate this phase of the real estate market?
New Record High Number Of Contract Cancellations
According to new data from Redfin, the number of home sales contracts has hit its highest levels in two years. From back in the pit of the lockdowns when nothing was moving.
Both June and July saw increases in contracts being canceled. Nationally, that stands at 16% of all pending deals falling through. With some markets in Nevada and Florida seeing almost 30% of deals failing.
There may be a variety of reasons for this. Including lenders changing their minds after providing loan commitments, as well as rising interest rates which can kick buyers out in the middle of the process.
Buyers may also be canceling if they fear values may come down. If lenders see declining markets it can lead to a spiral in re-appraisals, lower LTVs, and even fewer contracts making it to closing.
Managing This Factor For Real Estate Investors
The number one thing this means for investors is that they need to build in these ratios to their numbers. If you put 10 deals under contract next month, only expect 7 of them may close. Or if your goal is to sell 20 properties a month, you may need at least 30 under contract to hit that goal. Expect this failure rate to increase as well.
One of the best strategies to beat this is to focus on real estate wholesaling. Meaning you don’t close on the buy side until you have it sold. This way you won’t get stuck with properties. Additionally, this strategy enables you to finance your acquisitions using transactional funding that doesn’t rely on appraisals to close.
In order to keep your ratio of contracted to closed deals strong you want to be extra diligent in vetting buyers and their offers before locking into them. Prioritize cash buyers, big down payments, higher credit scores, and faster closings.
You may also build in steeper financial penalties for those buyers that do cancel. For example, larger, non-refundable deposits, to compensate you for your time and potential losses if they cancel the contract.
You can also prevent issues by pricing your deals lower. Instead of pushing the peak of the market, list under market value to give them a better deal, and remove the risk of financing issues.
