Home sales contracts are falling apart at the highest rate since the depths of the COVID lockdowns in 2020.

Why are all of these pending home sales failing? What does that mean for you as an investor? How can you most profitably navigate this phase of the real estate market?

New Record High Number Of Contract Cancellations

According to new data from Redfin, the number of home sales contracts has hit its highest levels in two years. From back in the pit of the lockdowns when nothing was moving.

Both June and July saw increases in contracts being canceled. Nationally, that stands at 16% of all pending deals falling through. With some markets in Nevada and Florida seeing almost 30% of deals failing.

There may be a variety of reasons for this. Including lenders changing their minds after providing loan commitments, as well as rising interest rates which can kick buyers out in the middle of the process.

Buyers may also be canceling if they fear values may come down. If lenders see declining markets it can lead to a spiral in re-appraisals, lower LTVs, and even fewer contracts making it to closing.

Managing This Factor For Real Estate Investors

The number one thing this means for investors is that they need to build in these ratios to their numbers. If you put 10 deals under contract next month, only expect 7 of them may close. Or if your goal is to sell 20 properties a month, you may need at least 30 under contract to hit that goal. Expect this failure rate to increase as well.

One of the best strategies to beat this is to focus on real estate wholesaling. Meaning you don’t close on the buy side until you have it sold. This way you won’t get stuck with properties. Additionally, this strategy enables you to finance your acquisitions using transactional funding that doesn’t rely on appraisals to close.

In order to keep your ratio of contracted to closed deals strong you want to be extra diligent in vetting buyers and their offers before locking into them. Prioritize cash buyers, big down payments, higher credit scores, and faster closings.

You may also build in steeper financial penalties for those buyers that do cancel. For example, larger, non-refundable deposits, to compensate you for your time and potential losses if they cancel the contract.

You can also prevent issues by pricing your deals lower. Instead of pushing the peak of the market, list under market value to give them a better deal, and remove the risk of financing issues.

 

The market has been waiting for a real estate correction. What are the best strategies and moves to make when you need to make money, but aren’t sure when the dip is going to happen?

The Next Shift

Despite the media drooling over competitive housing markets and fast growing property prices, experienced investors have been warning that the distress hangover triggered by the events of last year still haven’t begun to kick in yet. Even regular individuals have been watching and shaking their heads on the sidelines as they see property prices balloon to mind blowing sums.

There are a lot of things driving this craze. There are fundamentals which may be supporting this activity and are making it more sustainable than the run up to 2008.

However, the latest round of data is already showing signs of a slow down. Robert Shiller of the Case-Shiller Index said March 2021 house prices grew at their fastest pace in 15 years. While he hasn’t forecast an immediate crash, he does predict a coming correction that will cause some pain as people watch their home values drop.

CNBC reports that home sales volume already fell by almost 3% in April 2021. That’s coupled with the Wall Street Journal’s Marketwatch observing “pending home sales sink as the housing market falls back to earth.” Pending home sales fell by 4.4% in April, and are a leading indicator of the direction of closed home sales in the months ahead.

April ought to have been a busy month with more new listings, and plenty of cash in the market as home buyers enjoy getting their big tax refund checks.

This suggests that the next correction could have already begun. Though there are also factors which could stretch out the current run for another year or two.

What To Do

Real estate wholesaling is the obvious play here. It allows you to get in, out and paid fast.

Though how you do it can make a huge difference in how much you can make, versus setting yourself up for financial disaster.

Fully leverage acquisitions: Keep cash to market for volume, maximize sales prices, and maintain emergency funds and liquidity.

Sell first and fill the orders: This strategy is often called reverse wholesaling.

Use back to back closings: So you don’t get caught holding the hot potato.

 

Buy low: Build in a cushion for change. Though don't sit on sidelines when properties are going up in price daily, and some are doing instant flips at market value.