No matter the market, every real estate transaction is ripe with “gotchas” at every turn. In some years, there may be more red tape than others, depending on the economy and interest rates.
In 2008, we had to watch out for sellers selling for less than what they owed and whether that was going to turn into a short sale, or they were pre-foreclosure or already in foreclosure. After the pandemic real estate boom from 2020 to 2022, flash forward to 2023, and everything in real estate has gotten a little bit more difficult.
It seems like there are more obstacles at every turn, a lot of managing expectations and more “vetting” on the front end.
As the pendulum has swung the other way with higher interest rates, there is a lot of conflict in the marketplace between dampened affordability, yet some properties are still seeing multiple offers, low inventory levels and tightened lending guidelines.
Obtaining insurance in areas like Florida, for example, is becoming more challenging and costly, for example, due to a limited number of carriers who write policies.
A real estate transaction in the best of times is ripe with landmines, and as agents, we are finding ourselves expending more time and effort with buyers and sellers in different ways. As such, it is critically important now, more than ever, that we review some of the biggest obstacles that could potentially throw a wrench in a real estate transaction in 2023.
Financing and payment shock
There is so much more to financing than just making sure the buyer is “approved.” A letter from XYZ lender can be meaningless as they may not have been fully vetted.
A buyer should be fully underwritten and approved based on current interest rates, meaning they have submitted all required documentation to that lender upfront and all that the lender will need is an accepted sales contract with a property address. If the buyer’s lender does not offer to fully underwrite a buyer, the buyer needs to be connected to a lender that does.
It is also important to counsel the buyer on all the details involved with respect to the loan program(s) they are considering upfront, as there are often a myriad of details and fine print that tend not to come along until halfway through the deal and could potentially alter affordability or their comfort level with moving forward, such as they need to pay down debt or have to put more down to qualify, etc.
The more proactive an agent and lender can be with the buyer on the front end, hopefully, it will avoid payment shock once they go under contract and cause them to cancel.
Insurance
Let’s hope this is not coming to a market near you if it is not already there. Due to wild weather across the country, every region seems to have something, whether it is floods, fires, hurricanes or a combination thereof.
In some states like Florida, obtaining property insurance is getting quite costly and becoming more difficult, thus throwing a wrench in transactions. Many carriers have gone out of business due to high reinsurance costs and only leaving a limited number of companies willing to write policies in that state.
Since insurance is about managing risk, insurers are taking a hard look at the condition of properties before they will write a policy, so if a home has a roof that is more than ten years old, or an older water heater or HVAC system, that insurance company may not want to insure it or will result in a quote that the buyer is going to think twice about.
And if the property had an insurance claim filed in the past? Things may get even tougher with a much higher quote to the buyer, along with a lot of running interference trying to get details of the claim and prove to the insurance company it was taken care of or closed out, etc.
Lastly, some condominium associations are having a hard time obtaining adequate insurance on their complexes as a result of construction defect litigation or insufficient insurance, which is making it difficult for buyers to obtain financing. This is another red flag to watch for and is often not discovered by a lender until the transaction is well underway. There is often no record of anything that a lender can check beforehand.
Listing agents need to proactively work with their sellers to obtain current insurance information on the condo community they are selling a unit in, and find out from the condo association management and board if there are any issues brewing. Many condo owners have no idea what is being discussed at their board meetings until something reaches a crisis level or an assessment is going to take place.
If there is litigation or other challenges, agents need to find out if the complex can obtain financing and what the requirements would be. Reach out to agents that have had recent sales to see what you can find out. There are some lenders that can do loans in these situations, but down payment requirements may be higher as are interest rates.
As soon as a buyer goes under contract, it is imperative they start investigating insurance policies and costs, select an insurance company and work to bind the policy during their due diligence period. Oftentimes, the buyer shops for insurance, but may not select a company until it gets closer to closing and/or the insurance company doesn’t bind the policy until after the buyer’s due diligence period has expired, at which time a prior claim may be discovered on the property they are purchasing and that changes the initial quote they were given.
As a listing agent, it is critically important to remind sellers of the importance of truthfully answering questions pertaining to prior claims on seller’s disclosure documents and to think carefully as to whether they’ve had any. Memories tend to be short, and it can be easy for a seller to forget about the $2K water damage claim from a water heater leak that happened while they were out of town three years ago. Sellers should be advised of what may happen if it is revealed that a claim has been filed in the past on their property.
Work with a trusted insurance agent to have them quote a policy on the property for a new buyer and run a CLUE report which stands for “Comprehensive Loss Underwriting Exchange” report that will reveal if there were any prior claims and if anything is needed to be done to mitigate this information, whether an independent inspection is required or supporting documentation is needed from the seller to show the claim was properly addressed and closed out.
A common issue that often arises is the seller’s insurance company has often changed several times and a prior carrier that handled the claim may be out of business, so tracking down records may be difficult.
Trying to get insurance surprises resolved in the middle of a transaction can often be quite stressful and may delay or cause the sale not to close.
Inspections and repairs
In 2023, everything became a lot more expensive, and that includes the cost of repairs. If inspection findings reveal a lot of fixes, particularly big-ticket items, a buyer may not hesitate to walk away. They simply don’t have the extra money to spend on addressing things that a seller should have been keeping up with during their ownership of the home.
Big ticket items like a roof, HVAC, water heater and termite damage are not things a buyer is keen to deal with. Ditto for old piping or electrical wiring that could be deemed a fire hazard. The problem is the seller is not in a position to typically afford a lot of these fixes, so their best-case scenario is to negotiate a price reduction and/or large credit towards a buyer’s closing costs and/or interest rate buydown to make the property more affordable.
If the property is older, has been a rental, is vacant or the seller simply doesn’t have a grasp of maintenance and upkeep, they need to obtain an inspection before going on the market. Consider this as taking an insurance policy against the “unknown” as the seller can find out their home’s condition on their time, not a buyer’s and all the stresses and pressure of going under contract.
Based on the findings, they need to strategize with their agent on what items should be addressed before coming on the market. A couple of thousand dollars of repairs or less, can go a long way to preventing a deal from falling apart.
If there are major items that need to be tackled, it will be difficult for the seller to escape having to deal with them in some way. Estimates should be obtained, and the seller should tackle at least one or two of them.
It is getting increasingly difficult to sell a home “as is.” Even with a price reduction in lieu of repairs or replacements, many buyers today cannot afford to take that on or simply don’t want to, as those are usually not the only things that need work.
Builder competition
Right now, builders are hungry for business. I mean, really hungry. Especially the builders that are in price ranges appealing to first-time, new move-up buyers as well as those downsizing.
They are suddenly very agent-friendly after the last three years of giving the cold shoulder, back to offering selling bonuses, relocation reimbursement fees and rolling out the red carpet for buyers through huge interest rate buydowns that they can offer through their own or affiliated lender(s), concessions toward closing costs as well as incentives to use towards a price reduction and/or options and upgrades.
If you are selling a property that competes with a lot of new construction in your price range, it’s going to be tough. The independent seller does not have the bandwidth to typically offer what builders can right now, plus it is a new home vs. something that is “used.”
When buyers are comparison shopping, they are buying with their eyes a lot of times and the idea of being able to buy a brand new home, get all of their closing costs paid, with a below-market interest rate and an incentive to reduce the price and/or use for upgrades like adding a fence, enclosing a lanai, window treatments and appliances, etc., the choice becomes obvious.
The best a resale seller can do is try to underprice and offer concessions towards an interest rate buydown or closing costs, but in our current market, it can be difficult for a seller to give up equity unless they are in a must-sell situation or are receiving corporate relocation benefits to offset their aggressive pricing.
Home sale contingencies
After the last few years of never daring to write this term in an offer, the home sale contingency is back. The problem is, it can be difficult to provide a timeframe as to when a buyer’s home will sell in the current environment, depending on what it is and where it is located. There are many factors at play that could make it tough, the first one being higher interest rates and diminished affordability.
Depending on the price range, how many options do buyers have? As I mentioned above, if there is new construction to compete with, that will make it all that more challenging. The only way to try to manage a home sale contingency is to put a deadline on when the buyer of the seller’s home must have an accepted offer on their home and a date by which it must close.
The timeframes should not be too long but need to be realistic. It is also recommended that a seller push for a continued marketing addendum/right of first refusal so that the seller doesn’t lose out on lost marketing time and can consider subsequent offers without a contingency by providing the buyer in first position a timeframe in which to lift their contingency or step aside so the seller can work with another offer.
Interest rate increases, bank failures, stock market volatility and layoffs
The current state of the economy has many buyers and agents for that matter, jittery. The bank failures from 2023 are starting to fade from many buyers’ memories a bit now, but the fear of the unknown looms. Will interest rates come down? If so, when? Just when it seems like things are settling down, there is chatter about another rate increase.
Layoffs that have taken place in the tech, media, banking and real estate sectors have many buyers nervous, especially those that work in those fields. They would love to buy, but… what if they lose their job once they go under contract or worse yet have just closed? Nothing is certain other than the uncertain. With continual conflicting information about inflation, job growth (and losses), GDP as well as the housing market, no wonder buyers are hesitant and may decide to withdraw once they go under contract.
This one can be difficult to combat. Every buyer’s situation and personal views on money and finances are different. If the concern is interest rates, it is important to remind a buyer that they don’t live in an interest rate, they live in a home, and that they can refinance when rates become favorable again.
They can also consider loan options that afford them the ability to make a lower payment now, such as an interest-only or ARM option, and of course, discuss asking the seller for a concession towards buying down the interest rate or closing costs.
If a buyer is worried about a job loss, that could potentially be written into an offer as a contingency, depending, although usually that would invoke a finance contingency, but check with the buyer’s lender to be sure.
If a buyer has been relying on money that was invested to utilize for a home purchase, and those funds have fluctuated based on the stock market, they need to discuss with their financial advisor and devise a plan well ahead of them ever making an offer on a property. Many buyers aren’t versed in the details of withdrawing money from investment accounts or if they plan to take it out of a retirement fund.
The news
Camping onto the above, with a continual stream of “if it bleeds it leads headlines”, it can be easy for buyers to read something, and it gets taken out of context or misinterpreted. A prime example of this is the proposed loan level price adjustments regarding interest rates that has triggered a lot of fear and confusion.
Buyers will make decisions based on a headline or something they heard or read. Today’s version of “telephone” as played out on social media is a prime example of this, which can paralyze buyers from being able to make a decision.
Educate buyers on facts vs. media headlines. Explain that the media loves clickbait and just to get something read or watched, and when you read the entire article, the point is never nearly as bad as the headline. Have them seek advice and counsel from reputable sources to make them feel comfortable, whether that is a trusted lender resource, title or escrow person as well as an attorney.
Too much information
For anyone old enough to remember the band The Police, they were way ahead of their time with their 1981 hit “Too Much Information.” No internet, no social media, the landline and people only got news from newspapers and the evening news.
Today, we all have way too much information at our fingertips and constantly distracting us. MLS listings are syndicated to 500-plus websites and many of these websites provide valuations of listings along with other data that may or may not be accurate. No wonder the consumer is confused. They rely on one platform or another of their choosing, and as agents we are running constant interference with their interpretation of what they are seeing.
The ability to instantly research properties and the people or entities that own them online can be a blessing as well as a curse. Buyers love to make assumptions about sellers based on what they uncover and vice versa. When social media profiles are found, it can be even worse.
In this age of security cameras, video doorbells and apps to access on a mobile device, sellers have an unfettered view into their potential buyer’s behavior. How long were they at the property? What snippets did they overhear (even though audio surveillance is supposed to be disabled for showings this is often conveniently forgotten and not really monitored), etc.
Hence, too much information, misinterpretation of it and a constant stream of it can lead to confusion and indecision.
Be ready to help dispel confusion and myth vs. fact. Encourage buyers to utilize your MLS portal as the source for accurate listing data vs. relying on third-party websites that may or may not be up to date.
Educate them on how market value is determined and provide active, under contract and sold comps that are on point to the properties they are considering vs. some radius search that pulls in things that may be less relevant. Explain how certain features or lack thereof, backing up to a busy road, train tracks or being located in a flight path can affect value.
Viewing properties online provides zero context about these things and so a buyer may be confused as to why a really nice home is priced $50K less than one that seems inferior based on condition, when in reality due to its location and/or lot, it really isn’t.
Low inventory, multiple offers and picky buyers
Housing supply still remains a challenge, but as prices have escalated, buyers have also gotten extremely particular, whether they are first-time or very seasoned buyers. No one wants to compromise, and buyers end up competing for the same property when something turnkey in a desirable location comes on the market. Hence multiple offers.
This can be a one-two-punch to a buyer that will be paying significantly more than they were a year ago based on interest rates alone, forget having to make an offer over asking price. Many buyers continue to underestimate the market, even now, and don’t understand what it will take to have the winning offer.
When it comes down to it, they aren’t as committed as their agent is to strategizing on how to present an air-tight offer, hence, they lose out and keep running with the herd after the same homes and doing the same thing, expecting a different result.
Many people are electing not to move due to the low interest rates they locked into within the last few years, plus given the high cost of housing, where would they go? Hence, the double edge sword for buyers and would-be sellers.
Having honest, candid conversations with buyers about the market and what they should expect in their price range with regard to inventory, time on market and the kind of offers being made (including if multiple offers are happening) is a must. Share with the buyer recently sold comps of properties in the areas they are looking in so they have a reality check of what they are selling for.
They may be surprised to learn they have sold for much more than they would have thought. Buyers may think the market is bad based on the information they consume and can’t fathom there could be multiple offers. They need to be adequately prepared.
Depending on the available options, they need to be coached to consider properties that may need some updating or in some other areas vs. the one they really want. Flexibility is key to a successful property search in 2023.
Indecisiveness, unrealistic expectations and ghosting
There are still lots of buyers who want to move. Some are left over from the pandemic where they got consistently outbid and dropped out. Now, everything is that much more expensive from the purchase price of homes to mortgages, home improvement, furniture and the cost of moving itself.
If buyers are making an elective move, they may be sticker shocked, despite watching listings and being aware of prices. Once the reality of what they get or don’t get for the money sinks in, they may start to feel overwhelmed and not know how to proceed. They may decide to put off their move or change their criteria or even where they originally intended to relocate altogether. This may cause them to go dark at times or never to be heard from again.
It can be hard to manage buyers as they can be fickle and change their minds often. The key is to consistently stay in touch and check in just to say hello, let them know you care and share relevant information from time to time. See if you can get them to share any updates by asking questions. It can be incredibly frustrating as you can feel like you are talking to a wall when you continually reach out and hear nothing back and questions don’t get answered, but eventually, they may respond once they know what they are doing.
If your gut tells you perhaps they need to take down their price range, perhaps send some other options in their market that they may not be aware of. This may spark their interest and restart a conversation. It gets them off the hook of having to ask you about lower-priced options.
Oftentimes, a buyer may not be comfortable telling an agent that they can’t really afford to move at this time, after engaging for weeks or months with them and actively looking at homes. Don’t give up and never stop reaching out unless they’ve asked you not to or have done something else. It always comes down to motivation and means, and until a buyer has both, nothing will likely happen.
In the end, there will always be potential deal killers in real estate — far more than listed here, but the silver lining is changing markets build resiliency, problem-solving, patience and perseverance — which is a must for us to have staying power in this business long term. This market will be another badge of honor we can add to our resume, and will position us to be the best advisors to our clients and prospects that we can be.
Cara Ameer is a broker associate and global luxury agent with Coldwell Banker Vanguard Realty in Ponte Vedra Beach, Florida. You can follow her on Facebook or Twitter.
