KGCI: Real Estate on Air - Why Deals Are Falling Through At Unprecedented Levels.

Episode Date: May 20, 2024

And welcome to another edition of the nerdy agent podcast. I'm your host, Luke Pedersen, alongside my brothers and fellow nerds, Josh and AJ, how sweet it is that when our listeners hear this podcast, the twins will be well on their way to weigh in the ALCS and heading to the World Series for the first time since 1991. So today we're going to talk about cancellations and what that's been looking like in the market and all things cancellations, what you need to know. but first the would you rather of the week which i just came up with which i'm not sure how it's going to go but i kind of like it would you rather have a bedroom that's always pitch black or a bedroom that's always brightly lit i feel like this is the easiest would you rather ever i want to sleep in so much light yeah it's my bedroom i would always pick pitch black no no tv can't have any phones in there no light sleep i think i would sleep so much better

okay that's what i thought but you won't be able that you can't have any light in there at all. So I have to just zombie to my bed. I'm going to turn my bedroom into a living room now and my living room becomes my bedroom. I would kind of argue for those of us that have a bathroom attached to the bedroom, the bathroom's probably also pitch black and stuff. Not easy. Got to sit down to pee.

Well, that's the one I would have went with too. I like it. That wasn't as heavy of a heavy hitter as we were hoping for. So getting to what actually matters what the people care about. So in August, and we have an article about this that we can maybe post in the description. In August, there were 60,000 home purchase contracts canceled, which is equal to about 15.7% of the homes that went under contract in August. And that's the highest rate of cancellations in nearly a year. And I believe the highest rate since 2020.

COVID started the March and April of COVID, where it was 17.6% and 16.4%. And so we wanted to unpack that a little bit today. The first thing I wanted to talk about were where interest rates were sitting right now. Obviously, this is a little bit of a week delayed, so rates might change by the time this comes out. But where are they at this morning? Aren't they at like a million percent? Yeah. I think if you buy a house, you just pay all your money and then money is.

All your monies just go straight to interest. It's all of it. Yeah. They also just mandated a new rule at least here in the Twin Cities that every house is at least a million dollars. It's a requirement. It's a requirement. It's an interesting market. But the rates today, you know, the rate sheets have not come out.

Today is, what, October 10th? The bond yield is getting smoked today. So it's probably going to be 7.6 after today's over, but 7.81 is where it closed at yesterday. And that's the average. No points. Yep. 30 are fixed. And that's the highest rate since 2000, I believe.

I had possibly seen. That sounds correct. Yep. And so we and I just I want to talk about interest rates because obviously that's a pretty big factor. But why would the rates, you know, and what is causing this cancellation in general, but talk about how the rates are affecting that and why that's becoming an issue. Yeah. I mean, cancellations in general, as we think about it as a topic, are really, really important, specifically to all the real estate agents that are listening to this. Because cancellations tend to happen when something changes for your buyer that they didn't think was going to change.

Right. So right now, the reason why cancellations have been peaking or at least peaked during the last month, the primary reason that's likely to happen is because buyers had a rate expectation of what it was going to be, got pre-approved, and then the rates spiked again pretty quickly on us. And so all of a sudden I got to the loan officer and said, hey, send me my monthly breakdown. And they looked at it and said, oh, shoot, you know, I thought I would be paying X and now I'm paying Y. I no longer feel comfortable with this. I'm backing out. And so that's something that happens when their expectations change. And so we'll talk about as we get further into this, you know, things as an agent you should be thinking about doing to ensure that your buyers have good expectations on the front end. And then as the reality of their world changes, you're communicating that to them before they find out on their own. But if you think about it, the reason why the rates are significantly impacting things right now is because they're changing in a negative way to buyers.

So payments are changing in a way that they go. I'm just no longer comfortable with this. I've also seen that, and I think this was in that article briefly as well, the buyer when the rates go higher, tend to be more slow moving, right? They're a little bit uneasy. They're a little bit more nervous. Everything's a little bit more concerning to them.

And so not even necessarily that they get cold feet during the inspection, but stuff comes up on the inspection, even if they had some expectation that there was getting. to be and then they're just more concerned because in general they have more concerns about the rates and everything going on and the payment being high and prices being high and so they're easier to flip and turn into i don't want to do this anymore i mean if you're if you're in the market right now as a buyer you've seen this as agents right like it happens in the fall i feel like every year the buyers that are buying in this fall winter period tend to be a little more discerning than buyers who are

buying in the spring market just because the spring market tends to be faster but during the interest rate environment, it was chaotically fast for everybody. So people were having high cancellation rates because they were rushing into decisions than getting nervous about they rushed too fast. Right now we're seeing the inverse of that where people are moving very, very slowly. But in their pacing, they're also very, very critical of the decision they're making. So you see a lot more houses with buyers. They're less willing to accept faults in houses because the amount that they're paying on the interest rate impact is so significant that they want more of their boxes checked than buyers were paying or buyers were wanting

during the low interest rate environment. They're not just buying because of the interest rate, which is the difference, right? So like when the interest rates were super low, people were just buying a house because the rates were so good. Yep. Like I'm just going to buy, I wasn't going to, but now I'm just going to buy a house because the rates are so good. Well, it makes sense in my head that, you know, if the rates were three, I'm far more likely to overlook things in a house. Because because the payment's low, I'm going to have a little bit more spending money. I can fix stuff pretty easily. All of a sudden you have a buyer lock at 7.9, which has happened to be recently.

And they're going, well, I'm not going to have as much free spending money to fix all this stuff that might come up. And so it's just not going to work the same. Yeah. And every article you read says, hey, it's a bad time to buy a house. And everything you hear from your friends is, hey, this is maybe not the right time to buy a house. And so you're naturally just operating from a place of a little bit of fear all the time, you're buying in this environment. And frankly, that's not necessarily a bad thing.

It's just a reality of the environment that we're in. So we'll talk about it. But it is important as the person who's advising them, that you're able to communicate all of the potential hurdles that they will have to go through so that when they make that decision, they're very, very comfortable and confident decision they're making. So that's what I want to talk about next. So the most important piece here, I would say,

obviously it's good to know that cancellations are up. They're highest they've been in a year since the start of COVID. But what can you do about it as an agent if you're an agent dealing with cancellations or if you're just concerned that this might come up for you? What are things they can do? And I wanted to preface this with we're not saying that when you get new inspection period your job is to convince the buyer to do it, you know, to move forward and not cancel. It's what you do on the front end to set the expectations. So chat about what that will what that looks like what agents can do. I mean, you said the right word.

It's all about expectations. So the key is inspection expectations is a. very important one, right? So when you're showing the home, pointing out things that are going to come up on the inspection, and if you don't know the things that are going to come up on the inspection, you better teach yourself what's going to be on that inspection report. You're looking at 50s houses or 20s houses. You kind of know what to look out for and what important items are going to be big ticket things that may be a thing on the inspection. I tell every buyer, I'm probably going to point out 90% of the items that are come up on the inspection. What I won't know is if that outlet is

reverse polarity, I won't be able to test the furnace. I won't be able to go in the attic or go on the roof. But pretty much everything. I can't look into the sewer line. I can't smell radon. Yeah. Everything outside of that, anything that's within my purview to walk through without any special tools to see, I'm going to point out to them so that they're well aware of it.

So that when it comes up on the inspection, they're not as freaked out. Secondly, I think right now, to your point, rates went from seven to seven point, probably over the past 10 days on the market. That's going to freak people out really, really quickly. So one very important thing to do, and I know we talk about it all the time, is to have good lenders that you work with and make sure that before a buyer is making an offer, they actually know what the interest rate probably would be today if they were to get under contract. So I think a lot of these cancellations are probably happening because people go online and they get one of these online lenders and then they get a pre-approval that they're like, I got this pre-approval way back in the past. You send it in and send the offer. And then they're like, oh, crap, it's 7.8 instead of 7.

my payment's 3,500 instead of 3,200, like this doesn't work anymore. And now they're backing out during their inspection period, but it's really just because the financing doesn't look how they thought it was going to, right? So, like, them knowing that rate and that payment up front as they're making the offer is very important. As an agent, we've talked about this a lot on this podcast. It is your job to advise and help your clients get the best outcome that they want and fit the expectations that they have for their purchase journey or for their real

estate journey in general, right? If they end up not buying anything because you look at them and say, hey, right now this doesn't make sense for you to do, that's a good thing on your part because all you're doing is helping them through their journey, right? I have a client right now. I have an inspection today. We bought the house over the weekend. I have already with that client when I walked to the house said, this tree is dead. That will cost you $2,000. This patio in the back is sloping towards your house, so you'll probably have to spend $1,000 fixing that. There's all these things throughout, these countertops are older. Like there's all these things that I've already pointed out to her and now sent a pre-inspection text saying, hey, here's the things that

we need to do today. Here's what you can expect to see today. So she's not going to go to this inspection and obviously get the report and go, oh, shoot, these are all these issues that I didn't know about. She's already got an overview that basically, and these windows are old, right? Like, all of these things that she's going to find on this inspection are not going to be surprises because I've already told her that they're issues. And I told her that before we made the offer on the front front end. We've also talked through all of the different things going on with the financing space. So she knew that rates had risen to the high sevens. She knew what her options would be for buy downs and different programs before we even put the offer on the house. Because I don't want to get to the point

having a cancellation. I've had zero cancellations this year and I want to have zero cancellations this year because I not because I want to be convincing my clients per Luke's point to be buying houses that they don't want, but because I want my clients to know what they're getting into throughout the entire process and set really good expectations per what AJ said on the front end that they never feel surprised by anything to the point of getting really nervous and concerned through the process. That's my goal. So I think it's really important. We actually, not to keep going here, but we track agent cancellations within our team.

How many are happening? Who's having them? And then we'll coach if we're having somebody that's getting a lot of cancellations because usually it's not a function of they're not. helping or they're not being good at their jobs, but usually it's more of an expectation setting thing and ensuring that the buyer understands exactly what they're walking into at each step of the process. So I don't have anything else on the buyer side of setting expectations for cancellations. Is there anything else we miss there?

One thing I will say that's pretty nice is we have 34 canceled deals on 324 sales. So we are below that 25, 30% below the national average, which is pretty darn good. It's fantastic. I mean, we can talk about Luke. You started this, actually. I stole a lot of this from you, but like before an inspection, what are you doing to ensure a client is prepared for that, right? Scare them.

I mean, it's, or just give them an understanding of what's going to happen, right? You're not intentionally scaring them, but you're saying, like, this is what you can expect today. I kind of am, yeah. I mean, that's the expectation I'm doing. I'm saying this is going to be the worst day of the entire transaction. Yeah. That's true, though. It is.

I think I got that from AJ. Yep. And then send them, and then send them a pre-inspect, send them an inspection report that you I did with another buyer, so they know what the report's going to look like. So like, oh, this was a fine report. Mine looks the same. It's not as big of a deal as if I just read this report. I go, oh, shoot, there's all sorts of scary things on here.

There's a lot of different things that you can do to ensure that your buyers are getting that information. The other big one, which we preach really religiously, is you don't go into a showing trying to sell anybody a house. You go in the showing trying to point out all of the things about the house that are almost why you wouldn't buy the house. Because then if they decide they want it, they're essentially saying those things are all the negatives, but I'm still feeling good about this decision. So you are going into it eyes wide open versus I'm so excited because the kitchen was cute. But now the grating is bad and the furnace is old and the AC is old. And, you know, like there's a leak in this faucet and all of these issues. It totally changes their view of the property versus if you're talking about it and you're pointing out the things that are bad in the front end, they're going to feel good about it. The decision that they're making. when they're making it. Saving everybody time and energy. On the sell side, there are some things you can do as well. I thought this article pointed that out pretty nicely.

And so I did want to chat about, they talked about pre-inspections. So essentially, sellers having an inspection company come through the house before they put it on the market, putting that in the supplements on the listing and making sure buyers see that before offering. And they didn't say necessarily to make it so buyers offered no inspection, to make it so they knew what they were getting into on the front end. And that agent, the agent that brought that up in the article said their cancellation on their listings is significantly lower when they started doing that.

So I was just curious to get some thoughts from you guys on those. Yeah, I mean, it is a good expectation setter. And I think a lot of agents don't do what we're talking about on the by side, right? So you're basically doing what you would do on the by side, but you're just kind of broadcasting it to this potential buyer, right? So it can help. I will say, you know, the one thing that you're going to have to deal with is the fact that it's going to cost your seller for $500 to do the pre-inspection.

During the pandemic era, I saw these and it actually did work really well around them because people were so scared to do no inspection offers. But once they saw pre-inspection, some of the time they did decide that that was maybe a decent option for them, even if it wasn't a inspector that they even. knew, but just knowing that some qualified professional walked through the house and gave their two cents. And even the seller marking off, here's all the stuff I actually fixed because, like, you could see the, um, you know, we talk a lot about, uh, the three categories of things that come up on an inspection. And, you know, the first one's minor maintenance items.

The middle one is gray area items. And the third one would be like high value ticket items, uh, health safety problems. Um, when those ones come up, you know, like, let's say they did do a pre-inspection there was radon and they just put a radon mitigation system in proactively. it's something that the buyer would go, oh, I feel pretty good about these sellers, like they're doing a really nice job, and you might be able to either set the expectation

during their inspection that we already found all the stuff that's wrong with the house, or they might be willing to just say, oh, we don't need an inspection. These guys already did it, and they fixed half the stuff on there anyhow. It's a lot easier as a seller to also tell a buyer who then looks at a pre-inspection report,

buys the house, then does their own inspection, then asks for something on the pre-inspection report that you're less likely to make adjustments to fixing things. I mean, leverage will play the biggest impact in this, but if you spend $500 on that report and it points out $3,000 worth of issues that then the buyer sees in advance and then does their inspection and then asks you for you, you're like, you guys already knew this when you were looking at the property. So you have more opportunities to, I think, to have leverage. I mean, I've seen it work really effectively when the market is a little more chaotic, right? So when

the market is multiple offers spring crazy, it works really well because you can use it as a seller to essentially get no inspection offers, which allow you to have less opportunity for cold feet to happen, even if the inspection is clean. And I've also seen more buyers suddenly accept issues with houses when they know it in advance of making that. Same way we talk about how we communicate, but like if they see an inspection report, they see, oh, these are the 10 issues, not that big of a deal. And then they'll offer no inspection. But if they buy the house, then they have an inspection, and then they see these other 10 issues, their response is very different from a process standpoint just based on when they're learning that information. So I think it works really well.

The only thing on that, and I've never had a seller do a pre-inspection, the only thing that makes me a little bit squirly is that you want to probably be pretty upfront about expectations with their sellers if they're doing pre-inspections because you don't always know what the inspector will find. Right. And it could be something really big. And then the seller might look at you and go, why did we do this, now I have to fix this and we don't even have an offer. I mean, I think the expectation

you'd set with somebody, and I will admit, too, I haven't done a lot of those types of things as well with my clients because we haven't been in a situation where I felt like it was the best decision for them. But I think it does make some sense either way

because the reality is, is most buyers, at least in certain markets, are going to want to have inspections, specifically at this point after what happened during COVID. So if it comes up now or comes up later, it's still likely to come up. That's a good point. So especially if it's a big issue, people are going to be able to see it and it's likely to happen.