By Chuck Fister
Special to The Citizen

In the Biblical text of Romans 4:18 (KJV), Saint Paul writes about Abraham, “Who against hope believed in hope, that he might become the father of many nations, according to that which was spoken, So shall thy seed be.” At the time, Abraham was 100 years old and Sara, his barren wife, was 90. Hoping against hope is to hope very strongly that something will happen, although you know it is not very likely. It is often simply described as wishful thinking.

If you read my articles in The Citizen these past months about Fayette County single family listings, you know that I track and report on performance metrics. One of the metrics I track is the monthly ratio of sold listings to under-contract listings. Why is this metric important? It is an indicator of under-contract listings that fail to close and not result in sales. How pervasive a problem is this? For this report I have averaged the sold and under-contract listings for the four month period May to August 2007 to smooth out the irregularities found in month-to-month comparisons.

My data shows that, on average, listings priced less than $200,000 successfully go to closing at a sales-to-under-contract ratio of 99%. Listings priced between $200,000 and $300,000 close at a ratio of 84%. Listings priced between $300,000 and $400,000 close at a ratio of 76%. Listings priced between $400,000 and $500,000 close at a ratio of 69%. Listings priced above $500,000 close at a ratio of 45%.

Since the closing ratio measures success, the inverse of the closing ratio measures failure. In other words, on average 55% of under-contract listings priced above $500,000 failed to close and result in a sale. Similarly, 31% of under-contract listings priced between $400,000 and $500,000 failed to close. 24% of under-contract listing priced between $300,000 and $400,000 failed to close. 16% of under-contract listings priced between $200,000 and $300,000 failed to close. Nearly all under-contract listings priced less than $200,000 closed.

Closings don’t always happen in a 30 day period, and are less likely to do so in the upper price ranges. All-cash sales for example may close and sell in less than 30 days. However, the varying lengths of closing periods tends to become a moot point as the time-sequence of data is extended and the average takes into account a larger pool of data.

This article then is not about preparing your house for sale with the ultimate goal of attracting an offer and sales agreement. That is the focus of most real estate articles and the sole strategy of many sellers. You know the drill. You call on agents to learn about market values and marketing strategies and plans. You fill out a seller’s property disclosure statement and review the condition of your property. You perform needed maintenance, repairs and make more serious improvements. You seek decorating guidance to “stage” the house and invoke other marketing actions to make the interior more attractive and improve curb appeal for when a buyer appears. Then you wait and hope for an acceptable offer and sales contract.

Let’s say that all of your marketing strategies work and you have found a buyer. Now what do you do? You negotiate a sales agreement and hope against hope for success. From the data I track, hoping for success doesn’t seem to be working all that well in higher priced homes. To hope against hope for a successful sales agreement without preparing for success is a sort of madness. Sales agreement failures happen for a number of reasons, all of which cannot be foreseen, prevented or provided for. The intent of this article is to explore the major reasons for failure, and offer strategies to avoid that failure. In general, these strategies for success fall into two categories: (1) actions to take regarding property condition, valuation and title; and, (2) structuring the sales agreement to avoid failure.

Pre-Listing Home Inspection: A professionally performed pre-listing home inspection is very important according to Michael Luciani, Certified Building Inspector, with M.A.L. Inspection Services. Prior to listing, sellers have the time and convenience to perform necessary repairs and replacements. Michael notes that typically a home inspection will find a minimum of $1,000 to $3,000 in defects which should be repaired or replaced. Usually these are relatively minor and sellers can repair or replace the identified defects within the agreed upon defect resolution period stated in the sales agreement. However, more serious defects generally require licensed repairs and take a long time to bid and contract for, and the defect resolution period is too short to have major repairs and replacements made. In either case, defect resolution requires a sales agreement amendment. Failing to agree on defect resolution gives buyers the option to accept the property as-is or terminate the sales agreement.

Michael recommends that sellers use a two pronged approach to inspections.

First, sellers need to assume the perspective of buyers and inspect each room and the exterior of the house looking for unidentified and deferred maintenance and repair items that home owners often overlook. A good idea is to seek the opinions of independent third parties in this review.

Second is to have a pre-listing home inspection professionally performed. An inspection should identify crumbling chimneys, leaking basements, wet crawl spaces, settling foundations, septic failures, old and failing roofs, HVAC systems past their useful age, mold remediation, etc. The point is to fix these deal-killing defects before they become a closing issue. Keep the receipts and be able to prove the repairs were made. Have the inspector come back to certify that the repairs have been made (this may require another fee paid to the inspector). Make the inspection report part of the listing marketing material along with the Seller’s Property Disclosure Statement.

Pre-Listing Termite Inspection: A professionally performed pre-listing termite inspection should also be part of your listing failure-avoidance strategy. Obvious termite damage should be identified in the home inspection, but the presence of termites and latent termite damage probably will not. Standard procedure in past years was for sellers to have an inspection and termite letter available for the buyers’ inspection. Not so today. The sales agreement makes the buyer responsible for this inspection. Active infestations and damage caused by termites, insects or other wood destroying organisms is a defect subject to resolution or sales agreement termination. Here again, failing to agree on defect resolution gives buyers the option to accept the property as-is or terminate the sales agreement.

Appraisals and Sales Price: Sales agreements often fail because the purchase price exceeds the fair market value as established by professional appraisal hired by the buyer’s lender. Dan Decell, Certified Residential Appraiser, Dan Decell & Associates, LLC recommends that sellers have the property appraised prior to listing. Dan notes that this benefits a seller in three ways: (1) it lessens the opportunity for valuation failure in the financing process; (2) it either validates or challenges a seller’s opinion of valuation, thereby bolstering or tempering expectations; and, (3) it assists sellers with establishing an attractive listing price in today’s market where buyers are seeking bargains. Make the appraisal part of your marketing material. Price the listing below appraisal and the buyer perceives instant equity.

To find an acceptable appraiser, contact one or more lenders to determine who is on their approved list of appraisers. In that way your appraisal may be useable by a buyer as-is or with a review. Before you contract for an appraisal, make sure your property is up to code and that repairs and replacements discovered under your pre-listing home inspections are made. Keep in mind that appraisals are good for limited periods of time and, because of mortgage fraud concerns, Georgia law is now more stringent regarding comparables that appraisers can use.

Pre-Listing Title Search: Paul Cargal, Mortgage Broker, with MetroBrokers Financial recommends that sellers have a title search performed in advance to discover any liens, encumbrances or other clouds on the title that would need to be resolved prior to closing.

Financing Contingencies: Contracts fail most often because buyers fail to obtain necessary financing. Paul Cargal notes that the number one reason for financing failure is misrepresentation or miscommunication by buyers regarding their debts, assets or income. Paul recommends requiring a pre-approval letter with the sales agreement, and setting realistic financing contingency periods. Financing contingency periods of two weeks or more are ideal.

Sellers need to insist that their agents keep up to date with the buyer agents as to where buyers are in the financing process.

Dave Loeffler, Branch Manager, First Horizon Home Loans advises that seller agents must be more selective in what they accept as proof that buyers are qualified and approved for loans. Seller agents should ensure that buyer agents have determined what terms and conditions lenders will agree to lend at. “Timeliness of the approval is important.” In today’s changing market, buyers may be pre-approved under programs that no longer exist. The optimal situation would be that buyers are fully credit approved or at least have conditional loan approval, and not prequalifications.
Sellers should not accept offers from buyers who are only pre-qualified. Prequalifications are red flags of possible failure because the level of documentation is minimal. Buyers with good credit and strong financial fundamentals should be able to obtain conditional approval.

Inadequate Earnest Money: In the event sales agreements are terminated due to buyers’ defaults, earnest monies are disbursed to sellers and constitute liquidated damages in full settlement of all claims by sellers. It stands to reason that the greater the earnest money amount, the more likely that buyers will not default. Connie Granata, Staff Attorney, Sams & Cole, LLC recommends earnest money deposits of 3% to 5% of the purchase price.
Due Diligence Issues: Connie opines that sellers should be wary of sales agreements wherein a buyer has elected to purchase subject to a due diligence period. Even though the contract is titled a “Purchase and Sales Agreement”, such agreements only grant option periods to buyers. During these option periods, buyers have the exclusive option to terminate the contract for any reason and without recourse. When selected, this contract provision may give potential buyers the ability to continue listing shopping, and to lock up potential sales on multiple listings while they decide whether to ratify any or none of the purchase and sale agreements they have entered into.

Sale or Lease of Buyer’s Property Contingency: With the current home sales market in distress, many potential buyers have their own homes on the market while they continue shopping for a replacement home. These potential buyers will often offer on listings where the offer is contingent upon the sale or lease of their home. This contingency can be with or without a “Kickout Provision”. Connie Granata advises against accepting sales agreements with either of these contingencies. From both a buyer’s and buyer agent’s perspectives, these listings appear to be under contract and that chills consideration by buyers. Buyers are reluctant to offer on listings under contract with these contingencies because of the perception that to do so puts them in a bidding situation and not in negotiations.

Unrealistic Closing Dates: Step back and slow the closing process down. Allow adequate time for closing. Take into account that financing, inspections, repairs, and potential issues with title can take several weeks to resolve and clear. Closings using Power of Attorneys and “Mail Away” closings can take longer due to the mechanics of the process. Connie Granata recommends a minimum of 30 days, even with financing pre-approvals. A more realistic closing period is between 30 and 45 days.

Insurance Inspection: Insurance agents rely on appraisals to determine the condition of the property prior to closing. Glenn Curry, Vice President, Metrobrokers Insurance advises, “If a buyer can’t obtain an insurance policy prior to closing, then the contract will fail.” Insurers will not insure houses with obvious damage - so sellers must ensure that the listing is in insurable condition. To avoid sales agreement failures, seller agents should have a check list to task buyer agents with. One of those tasks is to ensure that their buyers have contracted for insurance and that loan processors have the policy declaration page well in advance to bring to the closing table.

If you have any questions or comments about this article or would like a copy of my data analysis and listing performance evaluations for Fayette County, Coweta County, Clayton County or Henry County, please call or email me. If you have a need for specific market information, please call and I will attempt to accommodate you.

Chuck Fister, REALTOR®
Direct: (678) 587-3425
Email to: chuck.fister@metrobrokers.com
Chuck Fister is a REALTOR®, real estate consultant and sales agent with Metro Brokers/GMAC Real Estate and works out of their Peachtree City Office.

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