Friday, July 03, 2020

Deal Killers

I have compared closing a real estate deal to completing a 100 meter hurdle while carrying a tray of full martini glasses without spilling anything. Those hurdles represent all the possible deal killers that exist between the contract acceptance (starting line) and the closing table (finish line). It's difficult enough knowing that the hurdles are there. Not anticipating those hurdles makes successfully clearing them much more difficult. Regardless the hurdles, a transaction that begins with unreasonable expectations from any of the principals is usually doomed from the start.

Unreasonable expectations: This is a big one. A buyer who makes an offer already intending to renegotiate the price after inspections has a very tall first hurdle. It's not unreasonable to renegotiate if a hidden defect is found but planning to renegotiate later for obvious defects is not a good strategy. It's a rare seller that's going to consider a price concession for something that was plainly visible or disclosed before the offer. The offer price should reflect all visible defects. Hidden defects like a leaking swimming pool or failed AC system justify asking for concessions after their discovery. Speaking of AC systems, unless the exterior AC unit is brand new it's going to be rusted and showing signs of age. This is the beach and everything is rusty. Exterior AC compressor units typically last from five to ten years on the beach depending on where the unit is installed (ground or roof) so asking for a price concession for a functioning unit showing wear is not reasonable.

Appraisals: This one is legitimate. With so many properties overpriced to begin with, the incidence of low appraisals is fairly high. Buyers who have struggled finding a suitable property might offer more than the comps tell them the property is worth hoping that the appraisal will save them from overpaying. Problem here is sellers tend to become married to their contract price even when advised that it is optimistic. Asking the seller to renegotiate the price after the appraisal comes in low is justified and is often resolved if the parties are reasonable. It doesn't always require a seller to match the appraisal. A buyer may be satisfied with some price concession as a show of good faith and make up the difference out of their pocket, especially if there isn't a suitable alternate property available at the moment.

Condo Association: This is one that tends to drop out of the sky unexpectedly. The buyer is approved by the lender, the inspection went well and the appraisal matched the contract price. Then the underwriter rejects the loan because the association only has a line item of 5% of budget for reserves. Or it is discovered that there is some unresolved litigation involving the association, or one owner owns multiple units or too many owners are delinquent on their monthly dues. This is one reason that cash buyers are more attractive than mortgage buyers. Disqualifying criteria may be fewer for a high down payment loan. Requirements are different for primary residence than for second home or investment property purchases. It is a good idea for condo sellers to get their hands on a condo review questionnaire and know how their association will answer the questions before being blindsided several weeks into a deal.

I suggest that anyone in an association without a line item in the budget of at least 10% going to reserves needs to consider that that fact eliminates a lot of potential buyers from buying any unit in the complex. Changing the budget after a mortgage has been denied will probably be impossible but alerting the other owners to this issue at the next meeting might encourage them to vote to change the budget to compliance before they are the ones affected. If one entity or person already owns more than 10% of the units in the complex it may not matter. In that situation, a full review mortgage will likely not be possible even if the other requirements are met.

Cocoa Beach and Cape Canaveral property inventory is at an unprecedented low level. There are just 156 existing units and a mere 31 single family homes for sale this morning on the MLS. Consider that we closed 17 homes and 77 condo units in June. That pencils out to about a two month supply of both homes and condos. Slim pickings.

Coronavirus has arrived with a vengeance in Cocoa Beach. In the three weeks since my last post we have increased from 15 to 105 confirmed cases in our two cities. Several restaurants and the Cocoa Beach Country Club are shut down due to positive test results among employees. We are headed into the July 4th weekend with no additional restrictions other than limiting beach groups to 10 people and distancing between groups to 10 feet. It's disappointing that the City didn't take a more careful approach knowing that our little town would be packed this weekend with visitors from inland areas with high prevalence of virus. I understand the political ramifications of trying to limit parking and crowds. The decisions that matter the most are always the hardest to make.

At the time of that last post on June 13 Florida's 3 day moving average of daily new cases was 1657 having tripled in the previous two weeks. It has more than quadrupled since then and is at 7588 average new cases daily after yesterday's record 10,109 new cases. Y'all might want to reconsider wearing masks as a tool to reduce the spread even if you think it's a unfair imposition. They work to reduce the spread and we desperately need that right now. It's but one slice of Swiss cheese in our protection strategy. To the businesses in Cocoa Beach who have maskless employees. What y'all thinking? It's sending a bad message.

"In risk management it’s called the swiss cheese model. Stripped down, it means many layers of overlapping imperfect security can add up to an effective solution." __unknown