Are Your Buyers Backing Away?
60,000 home sales fell through in the US last month; that is nearly 15% of all sales written. This is the second highest level of fall through, only second to the beginning of the pandemic. As rates increase, buyers are getting nervous, and many are backing away.
With the risk of sounding like a broken record, rates are rising, and house prices are falling (or so they should in theory). Inflation is taking a bite out of everything these days. Consumers’ dollars are buying less because everything costs more…utilities, transportation, food, services – this all equals less dollar power and when your dollars buy less, less gets sold.
In real estate, that means fewer qualified buyers and fewer sold signs. If a seller wants to sell, they need to compromise with interested buyers to change their for sale sign to a sold sign.
This week I heard an interesting analogy. For the past two years sellers have been running up the price mountain with a band of anxious buyers nipping at their feet with buckets of cash. Now that rates have gone up, the buyers have stopped running up the mountain and they are standing their ground. Sellers are still running up the mountain, only to look over their shoulder and realize the buyers are no longer chasing them. Sellers are now hesitantly walking back down the mountain to meet the buyers where they are.
During this transition time, when sellers still want too much and buyers don’t want to pay, the market gets a little funky. But remember…the economy is still strong, people have jobs and are making money, it is just that their money isn’t going as far. That includes housing.
Because of the negative news headlines, consumers are being more cautious. Buyers are no longer experiencing FOMO. The urgency close that we’ve been using to convince buyers to act fast is no longer as effective. Soon, buyer will have choices, and time to think it over before signing on the dotted line. They won’t want to overpay any longer, and appraisers will become more cautious.
For the past two years, sellers have come to expect multiple offers, clean unconditional offers, and selling above asking price. Some sellers are having a hard time adjusting to the new reality, as are many agents.
If you are a listing agent, you need to prospect for motivated sellers. You can’t afford to work with curious sellers; they need to be committed. You will need to be more accurate than ever with your CMAs and only use very recent sales as comparables (or be very good at making time adjustments). You will need to keep a close eye on current competing listings to watch for price reductions. Whenever your competition changes, it changes the playing field.
Be prepared that as the market softens, banks may require a second appraisal closer to the closing date to ensure the correct loan-to-value ratio. Lenders get cautious as the market slows down. If the property loses value between the time you get an accepted offer and the time it closes, your buyers will get nervous and many will try to back out. You need to be able to manage buyer remorse to get these deals across the finish line. Mortgage rates are up 60% this year and buyers are now including conditions that give them the ability to opt out.
What do you do if your buyer wants to back out of a deal?
Let me start by saying there is more to purchasing a home than just buying a house. The decision to buy a house is emotional, even for your most logical buyers. Buyers buy what they like and then justify their decision with logic afterwards.
To avoid buyer remorse, it starts with your buyer consultation meeting. I have been teaching this practice for years and still we have agents who don’t follow the proper process. Your first meeting with buyers is important to discover WHY they want to buy and what they want – basically their “wants and needs list”:
- What price range can they afford given the new interest rate environment?
- What locations do they like in relation to their commute to work given the cost of gas these days?
- What features are most important to them? Perhaps they want a 4-bedroom house, but they could live with a 3-bedroom. Perhaps they would like a 2-car garage, but they could settle for a single garage.
- Make a list of what they want versus what they need, but more importantly, WHY those features are important to them.
Be prepared that with the negative headlines, it is normal for people to second-guess big decisions. You need to communicate regularly by voice, not digitally. If you don’t, their uncertainty will only grow. Keep notes on the features that sold them on the property, and constantly remind them of why it is a good buy.
If they start to wobble because they think they’ve paid too much, remind them that everyone needs to live somewhere. Rents are increasing, so it is better to build equity in their own future rather than paying the landlord’s mortgage.
Unless they are planning to buy and flip, what the market does next month or next year doesn’t matter because they are not moving again. Timing the purchase in relation to the dip is all luck, not science. Even PhDs in economics can’t pull off that magic trick. Rates are still reasonable, but if they don’t like the rate they got, they can always renegotiate in a few years if the rates come back down.
Buyer remorse happens when agents don’t set expectations. You need to communicate often to unwind the negative news. Most of all, you need to constantly remind them of WHY they chose the house in the first place. If you don’t, you will have buyers who want to back out. You will never be able to convince them to stay committed if you don’t intimately understand their motivation for buying.
As a last Hail Mary, if I was selling houses today, I would graph the price of real estate over the last 20 years. I would show the peaks and valleys, but most of all, it is a great visual to remind buyers that real estate always goes up over time, and it is always your best bet against inflation.
Leader’s Edge Training