Real-Estate Agents See More Deals Dissolving
DANIELLE REED and
JUNE FLETCHER Staff Reporters of The Wall Street Journal
Updated Dec. 6, 2002 12:06 a.m. ET
A few weeks ago, Ira Goldberg thought he'd sold his three-bedroom home in Beverly Hills, Calif., for close to his $1.975 million asking price -- and then it all fell apart. After making an offer on the home, which was being sold "as is," the buyer demanded Mr. Goldberg pay for termite and home inspections and then to fix whatever might be wrong. Mr. Goldberg concedes he may have to give in when the next buyer comes along. "If you don't, they get nasty," he says.
In a twist that's catching many people off guard, real-estate agents from Boston to San Francisco say they've seen more deals dissolve during the past year than at any time in recent memory -- as high as double the number a year ago in some places. It isn't just older homes, either: Gopal Ahluwalia, director of research for the National Association of Home Builders, estimates the number of "kickouts" on contracts for high-end new houses is up 30% from last year. "I've never seen so many deals come undone," says Bonnie Adams, a Realtor in La Jolla, Calif. "It's unbelievable."
Brokers say the unusually high fallout rate, with things unraveling somewhere between the accepted offer and the closing, is due to the shifting balance in luxury real estate. Increasingly, they say, the perception of the two sides is out of whack: While buyers think the market is weakening (meaning they should be able to wring out concessions), sellers still expect the high returns of the past few years and resent any negotiating. Especially, as is increasingly common, when it starts after they've accepted a bid. "Every deal is just excruciating," says Lanse Robb, a real-estate agent on Boston's North Shore, who's had one sale fall apart -- twice -- because the two sides couldn't agree on contingencies. "The whole process has become truly painful."
Kirk Henckels knows what he means. The New York City agent has had three buyers for a $5.85 million Upper East Side townhouse he says is "perfectly priced and perfectly located" during the past five months. But, "every time we thought we had a deal, the stock market dropped," he says. The brownstone has gone to contract with yet another buyer -- for a couple of hundred thousand less. Mr. Henckels isn't ready to celebrate. "When it's closed, I'll exhale, and not until then," he says.
Back to Due Diligence
Of course, before the real-estate run-up of the late '90s, this used to happen with some frequency, as buyers almost always did their due diligence before they'd close a deal. But as high-end markets heated up during the past decade, and with some houses selling in as little as a few days, an increasing number of buyers simply went without home inspections and didn't dare ask for repairs. After all, there usually was someone else waiting in the wings if they backed out. Indeed, in a hotspot such as northern Virginia, as recently as 18 months ago only about half of buyers bothered to get a home inspection. Now, 80% do, McLean, Va., broker Patrick Jablonski says.
It's Not Over
With the high-end real estate market slowing, buyers and sellers are increasingly at loggerheads -- even once they've agreed on a price. We asked brokers around the country what percentage of top-end deals they were seeing fall apart after a contract was signed, and how that compared to last year. Here, the results:
AREA NO DEAL COMMENTS
San Francisco 10% With prices falling by as much as 20% in the region, buyers are willing to give up a deposit if they find a better bargain. Brokers say twice as many deals have fallen apart this year as compared to last.
Chicago suburbs8-10%Percentage of high-end sales falling through has doubled, though numbers are still small, says Wendy Bergseth, of Koenig & Strey in Lake Forest, Ill. Still, "we don't break out the Champagne until a deal closes now," she says.
New York City 1-2% Holding steady. Because most New York sales are of apartments, there are fewer inspection issues. Still, one $5 million-plus townhouse has had four accepted offers.
San Diego 8%Up 50%. Agents say the market is healthy but not as intense as it was a year ago. Most of the deals come apart because buyers are overextended and can't get financing.
Boston suburbs 12% About a third more are falling through this year than last. Buyers are making negotiations drag on and on, increasing the likelihood that upper-end properties will fall out of agreement at least once, brokers say.
Washington, D.C. 6-10% Up 50% from last year. Although the metro area is still very hot, agents say prices are softening and negotiations are getting harder. "Buyers aren't throwing in the towel and just paying the price like they used to," says McLean, Va., agent Lilian Jorgenson.
Source: Local agents
In a boon for home inspectors, at least, many buyers are adding to the list of potential problems they want investigated. These days, the typical inspection includes not just the house's mechanical systems and plumbing, but everything from carbon monoxide to "toxic" mold. Stephen Gladstone, vice president of the American Society of Home Inspectors, says the number of would-be buyers who ask for a mold-and-mildew inspection has jumped by a third during the past year. More and more, if anything turns up, it can be a deal breaker: When mold was discovered in the attic of one $1.6 million Virginia home, the buyer demanded a whole new roof -- and walked away when the seller balked.
Squeezing Out Concessions
To be sure, plenty of deals are still closing. Though it's softened in many spots, the real-estate market has been one of the bright spots in the economy, and some agencies say they're having record quarters. It's just taking a lot more work to make sure sales happen. Buyers who've been burned in the stock market are especially wary of overpaying, adding to their diligence. "No one wants to be the last person to buy at the peak of the market," says New York agent Loy Carlos.
Indeed, in places like San Francisco, where high-end prices have fallen by as much as 20% during the past year, some buyers are jumping in and out of deals, looking to squeeze out concessions or score bargains. Among the more uncommon demands: A sport fisherman buying a condo wanted to put a refrigerator next to his parking space in the garage to store his daily catch. When the condo association said no, he backed out.
Then there's the boomerang effect: Anthony Papadakis, for instance, really wanted a condominium in the city's Cow Hollow neighborhood, but the one he liked was too pricey. So he went to contract on a cheaper place in the Marina district -- even putting down a $27,000 deposit and giving his friends his new mailing address. Then, not one but two buyers for the Cow Hollow home backed out, and the broker called him to let him know it was back on the market -- and marked down. Though it meant forfeiting his deposit on the condo, Mr. Papadakis leapt, getting the place for a little more than $1 million, or about $200,000 less than the original asking price. "It was too good to turn down," he says.
It isn't just buyers, of course. Many sellers are living in the (admittedly, recent) past, when even a house in need of repairs could be a hot property. In Northeast Harbor, Maine, agent Story Litchfield says one $3.75 million home was damaged in a fire and needs several hundred thousand dollars in repairs. Despite that fact, the sellers won't budge on the price, even though two successive deals have fallen apart -- and there's no third buyer in sight. "A year ago," Ms. Litchfield says, "this would have sold at a dinner party."
While Mr. Robb, the Boston agent, hasn't had anything quite that extreme, he expects the standoff between buyers and sellers to keep getting worse. These days, he says, buyers have a long list of requirements, "and each one becomes a negotiating point" -- from leaky windows to broken doors. Meanwhile, sellers feel under siege and resist compromising. The longer the whole thing drags on, the more likely it is the sale will fall apart. When it comes to real estate, Mr. Robb says, "time kills all deals."