One in Four Pending Sales Still Not Closing

One in Four Pending Sales Still Not Closing

It’s been quite a while since we last had a look at the percentage of pending sales that turn into closed sales, so let’s refresh that chart and take a look a the latest data.

This particular series is fairly noisy when you look at it with monthly granularity, so for this post I’ve rolled the pending sales and closed sales data up by quarter, with pending sales offset by one month. In other words, the second quarter numbers below represent closed sales from April, May, and June and pending sales from March, April, and May.

Pending & Closed Sales of King Co. SFH

I had actually expected that with as hot as the market has been this year that we would have seen the gap between pending and closed sales begin to close. So far there has not been as much movement as I expected. The gap was bouncing around between 28% and 33% through 2011 and early 2012, but has only dipped down to 23.8% in the latest quarter—a far cry from the 4.5% average difference between the two numbers from 2000 through 2007.

In 2009 through 2011 I would have attributed much of this gap to the large volume of short sales, which took months to close if they even closed at all, but short sales have fallen to a small fraction of the market now, so that is clearly not what is behind almost one in four pending sales failing to show up as closed sales.

My theory is that despite the hot market, buyers today are still more cautious than they were when everyone believed that “home prices can only go up.” They’re more likely to be on the lookout for deal-breakers and back out of a home sale when something comes up.

  

About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

20 comments:

  1. 1
    ARDELL says:

    Is there any way to see those numbers after taking out short sales?

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  2. 2
    Tim McB says:

    Could some of these deals falling through recently be attributed to the rapid rate rise earlier this year (killing pending deals that don’t have locks prior to closing) and also possibly financing falling through last minute due to more lender scrutiny? Just a guess.

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  3. 3
    mike says:

    RE: Tim McB @ 2 – That would be disturbing if the reason was people no longer qualified for the loan at a higher rate. I kind of doubt that is the reason for the majority of failed sales but it’s certainly worth looking in to.

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  4. 4
    Erik says:

    RE: Tim McB @ 2
    It seems like this graph has more to do with the number of short sales as opposed to the number of deals that fall through.

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  5. 5
    wreckingbull says:

    RE: Tim McB @ 2 – I think that is plausible. I also think that crap inventory has something to do with it as well. If a poor bastard is swallowing the bitter pill, they may say “enough is enough” after walking the place with an inspector.

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  6. 6
    Eastsider says:

    If you remove all pending sales older than 2 months, the rate of actual closings will probably be close to historical norm.

    Any pending sales taking longer than 2 months are questionable to begin with (e.g. short sales, <20%-down buyers, etc.)

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  7. 7
    ARDELL says:

    RE: wreckingbull @ 5

    I often, though not always, include an amount for home inspection fixes in my commission quotes. If it is not needed then it goes to the client. But it prevents sales from falling apart over $1,500 or less of fixes, as the discretion to pay for the fix is in my control. I have gone as high as $5,000 depending on the house when it’s a seller and I can tell what it needs in advance. A little harder to pinpoint with buyer clients. The total commission is still less than the perceived amount agents charge, and I get to know them at least a little before determining the amount.

    In a very hot market it is not needed. But in most markets for the 23+ years I have been doing this, it is needed. Though in a hot market a lot of “cancelled on inspection” is bogus. The buyer tied up the house and then decided if he wanted it or not. In a really hot market sellers have to be aware that this happens, and often. Not so much now through year end, but it may start up again when we hit high season after the 1st of the year into July.

    Still, I am surprised at this 1 out of 4 number, but that could simply be because my anecdotal information is not reflective of market realities. I would expect without short sales for this number to fall to 1 in 10 vs 1 in 4.

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  8. 8
    Kristian says:

    I made 5 offers in bellevue and Redmond over the last year (have a second child coming, needed to finally buy something to get away from having a rental contract deadline). In 3 of those situations we saw the houses go pending (with someone else’s offer) and then return to the market after a few weeks. In two of those situations the selling realtor didn’t have a believable story for what happened.
    I both those cases the “winning” offers were considerably higher than my comparables pricing for the house. And in both cases the houses sold several weeks/months later at a price in the vicinity of our comparables estimates.
    My best guess about what happened, in both cases, was that the buyers offered too much, that their offers failed to match their financing appraisals, and they ended up not being able to finance the purchases.
    With the very low inventory we have been having, I think there are enough over-bidding people with poor comparables skills out there to lure sellers into negotiations which fail.

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  9. 9
    Eastsider says:

    Some buyers have multiple pending offers on short sales because of uncertainty in closing. As soon as they close on one property, they will cancel the other pending offers.

    There are also many related party deals in short sales that may or may not close.

    There are some buyers that offer high bids to be in the first position in a hot market. The closing rate of these buyers are not going to be high.

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  10. 10
    mike says:

    By wreckingbull @ 5:

    RE: Tim McB @ 2 – I think that is plausible. I also think that crap inventory has something to do with it as well. If a poor bastard is swallowing the bitter pill, they may say “enough is enough” after walking the place with an inspector.

    That would be my guess. People settle on some home with a major dislike and something better comes on the market in the meantime.

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  11. 11
    Jonness says:

    Perhaps tightened lending standards come into play here? It’s a lot easier to get pre-approved than actually get the loan. And it’s certainly a lot harder to get a loan these days than it was in 2000 through 2007.

    Interesting point by Ardell @7. I never really thought of the strategy of simply making the offer to tie up the house, and then bailing a week later due to a phony failed inspection.

    During the bubble run-up period, most people thought buying a house would make them rich, so I expect they were very unlikely to willingly back out of the deal, even if the inspection didn’t go perfectly. Fast forward, and when buying a house, you have to worry about whether you will end up underwater. So tie the house up, think it over, and then bail.

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  12. 13

    We’ve been seeing more pre-inspections, where the buyer has the property inspected before putting in the offer. If this is the case, and it’s certainly more common than it used to be, then there ought to be a smaller gap between pending sales and closed sales, right?
    Are more buyers walking away losing their earnest money? Are appraisals coming up short?

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  13. 14
    mike says:

    RE: ARDELL @ 12 – So basically what you’re saying is both buyers and sellers need to “shake down” their own agent for a few bucks at closing or they’re not getting the best possible deal? ;)

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  14. 15
    ARDELL says:

    The opposite, Mike. If you shake the tree too hard before the game starts, you may be setting yourself up for a failed sale. There needs to be a little wiggle room so that if the buyer and seller are all out of wiggle, there’s a little wiggle left from the agents. Many transactions involve a concession by the agents, and I have a standing policy that a client will never fail if the amount needed to cure does not exceed my commission. Luckily I am rarely called on to have their back to that degree.

    In the seller case I mentioned the seller wouldn’t let me “cure” the defect as he wanted the sale to fail, so the agent for the buyer had to kick it in, and luckily did. Usually that has more to do with a seller not really ready to let go of “their home”, than pure greed. It’s pretty common actually.

    Also, the worst thing you can do is try to “shake down” the agent, as then you hit a brick wall of stubborn wtf? Better to whimper about how you hate to lose the house…but…and NEVER “at closing” as your Earnest Money is at risk at that point. Has to be before your legal outs expire.

    Ira, I have never, ever had an appraisal not come in at or above value. Appraisers don’t have any secret information that agents cannot readily find before the deal is sealed. If a sale fails on appraisal…someone screwed up. The trick is to push it above the comps…but right to the edge of the range of appraiser discretion. That’s why it is important to keep an eye on the market changes in lender instructions to appraisers. The amount they are allowed to stretch is usually a known factor. Not 100% accurate, but an agent always needs to know which way the wind is blowing in that regard…and to what degree.

    There are some we know can not appraise and those require removal of the “must appraise clause” or cash only. Short term flips are a good example, especially if sold before the full 90 days from purchase expires, as that kicks in the need for improvement receipts after appraisal and during the final underwriting and funding phase. When agents fully delegate to lenders without knowing all of the twists and turns of the lending phase…well, yes, that is another reason for a lot of Pendings failing. The agent can’t delegate without knowing the full process and potential road blocks.

    Sorry for the long comments, but with a max of 5 on a topic near and dear to my heart…I’ve got to jam it all in there. :)

    VIP!!! We used to have “STI” status (subject to Inspection) vs “PI” (Pending Inspections) so failed pendings were truly failed transactions during escrow. One of the reasons Pending transactions failing is significantly higher than before “the bubble years” is because failing on inspection was not a Pending sale in the early bubble years.

    I have had 2 transactions where we had no inspection contingency so I had to pull out on the Seller Disclosure legal out, renegotiate while out of contract, and pull the transaction back in as a “reinstate”. So not every failed pending is a failed sale. It could be an “intermission”. :)

    Important to know that pulling the Inspection Contingency does NOT mean you don’t have an inspection ASAP. Cheaper to do it that way than do pre-inspections on every house your like, but tricky.

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  15. 16
    Peter Witting says:

    RE: ARDELL @ 15 – I always appreciate your insight and comments, Ardell! Thank you…

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  16. 17
    ChrisM says:

    RE: ARDELL @ 15 – Awesome comments Ardell, thanks!

    If I may ask, on the comps, do you see different appraisal behavior based on the lender?

    Also (bundling my comments, too!) the bogus cash offer is interesting – would love to hear a lawyer’s take on what the options to such an offer would be. Seems pretty risky…

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  17. 18
    ARDELL says:

    RE: ChrisM @ 17

    As to your 2nd question, the first time this happened to one of my sellers I could find no legal basis to reject the offer, though warned my seller client that I was 99% sure it was bogus. We did accept it, they did cancel, we used the time in escrow to catch up on a few things that needed doing and the house sold to someone else. The 2nd time it happened the agent came clean that it was indeed bogus and we ignored the offer and accepted a different offer. Both houses sold.

    As to your first question, there is a general instruction as to market conditions that is fairly uniform. We went from appraisal instructions being to reduce the final appraised value by X% to be sure to pull in at least one distressed sale but don’t reduce final value to straight up appraisals with no attempt to drag the final down, but also no instruction to pull it up for increasing market either.

    On an individual lender basis we have some lenders not being risk averse at all to some being exceptionally risk averse. The instruction per lender was different and often different based on the credentials of the borrower. On the 40% down borrower the appraiser came late in the escrow and finished his full report in an hour. Obvious the lender felt no pinch of risk on that one. On the flip purchase the lender was very concerned about the jump in price from the time the seller bought it to the time he sold it which was ONE DAY short of the 90 day hold period. That is why I mentioned it earlier. I had the buyer vs seller, but the extra scrutiny created by that one day had this teetering on the edge all the way to the last minute. It closed, but was more touch and go than it would have been if the agent for the seller were aware of the 90 day hold period vs missing it by one day.

    No appraisal is really merely about the comps in the end, as the appraiser has discretion on the adjustments per comp and the weighting of each comp. In other words the individual appraiser has the option to weight one comp at 75% of total value and the other two at 25% on a combined basis. The end result is not an average of the three. This was more of a concern when the market started moving rapidly back in March than it is today.

    This is my 5th and last allowed comment on this thread, so hopefully that answers your questions. :)

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  18. 19

    […] last quarter’s numbers I commented that I was surprised that the gap between pending and closed sales had not yet begun to […]

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  19. 20

    […] the gap between pending sales and closed sales had been shrinking in the second and third quarter, it opened up a bit in the fourth quarter, inching back up to just under 20 […]

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