Cancel culture invades real estate...The number of cancelled home contracts hit a two year high in June 2022. Nationally, 14.9% of transactions were terminated. The number in Atlanta was higher at 22%. The recent national highs were at the start of the pandemic, 17.6% in Mar '20 and 16.4% in Apr '20. At that time, everything was up in the air as the pandemic took the over the globe.
Atlanta is over the national average but well off the leaders at 17th of the sampled markets. Still, 22% of contracts terminating isn't a anything to ignore. Oddly, Newark NJ had a minuscule 2.6% termination rate. The number is up in Atlanta but let's have a look at why.
Why Contracts Terminate
There are many moving parts to a successful real estate transaction, it takes a significant amount of time and effort to make them look boring. As inflation runs roughshod over the country, there are multiple factors playing a role in contracts terminating.
- Rising interest rates - if a rate sensitive buyer failed to lock a rate, the slightest increase can result in loan declination. At that point, the buyer simply fails to qualify and cannot purchase the home.
- Contingencies - we're rapidly seeing the return of due diligence, inspections, appraisals and the like. When issues arise that cannot be resolved, termination may be the result.
- Increasing inventory - as the market balanced, buyers are under less stress. In some cases, something better may come along and a buyer is willing to break a contract to get it.
- Investors - Wall Street is always ahead of the curve. Institutional investors are slowing on purchases and in some cases, either looking to renegotiate or terminate those they deem unwise.
- iBuyers - think Opendoor, Offerpad and the like. Not only are they also halting purchases, they are terminating on those reconsidered as the market adjusts.
The other common thread are agents; many in the insanely bloated pool of agents have no experience in working through challenges. Most of these are opportunity agents and will soon be out of the business, but their inability to professionally handle a transaction will cause pain for their sellers on the way out.
Can Sellers Sue?
When a buyer terminates, what can a seller do? Can a seller sue the buyer? Sure, just understand that everything depends on how the contract was written and managed. Sloppy, poorly written contracts and/or poorly managed time frames and proper adherence to the terms complicate things. The contract typically allows a seller to pursue the earnest money as full liquidated damages, that's the most common outcome. Nothing prohibits chasing a buyer for more, but in the real world this makes little sense. Everything of course, is predicated on how the contract reads and the circumstances surrounding the termination. Each situation is different so there is no universal answer.
So get ready for a return to normal; the Tony Soprano run sellers had is over. So too, hopefully, we see the hack hobby agent population culled from the herd. A real estate transaction is a complicated and significant financial transaction; treat it that way.
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