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BlogArrowCoronavirus UpdatesArrowUnder Contract in Shaky Times? Here’s What to Do
Coronavirus Updates Apr 29, 2020

Under Contract in Shaky Times? Here’s What to Do

Tamar Hermes
Expertise: Coronavirus Updates
18 Articles Written
indecision

Six months ago, my husband and I decided to move from Los Angeles to Austin in the summer of 2020.

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We did an initial search to find the area we wanted to live in and went to several open houses. We finally saw a house we loved online in mid-February and flew out the next day, knowing it may not have been available past the weekend. A bidding war ensued, and we got the property.

Then, COVID-19 came, and the world changed overnight.

Our first inclination was to get out of the contract. The economy was suddenly so uncertain. We were purchasing at the top of the market, and if a correction came, the home would lose value. Plus, our current home was not even on the market yet.

Before long, we decided to move forward with our plans. We based our reasons on the foundational rules of real estate. After you read the analysis, I will give you the specifics on our situation and our current status.

Variables to Consider

Austin Skyline in the evening and bluehour

The following criteria work the same whether you are buying a home for yourself or an investment property. They also require you to ask the same questions whether the house is a $200,000 or $2,000,000 purchase.

What’s Going on in the Market?

The first variable, and the most important one to look at in buying a home, is whether or not the instability of the market will affect your ability to afford the home.

How Stable Is Your Income?

You need to consider whether your income will fluctuate over the next few months or years and thus create a situation where it will put unnecessary stress on you financially. Remember to consider that you are not just paying the mortgage, taxes, and utility bills. You also need to have savings put aside for unforeseen expenses.

How Will You Handle Repairs?

With any home purchase, make sure to get a home warranty plan for at least the first year. This way, you may need to pay a deductible for repairs, but won't run into anything huge if you decide to move forward.

Do You Qualify for Financing?

During the crisis, the criteria with lenders have also changed. While interest rates are still low, lenders know that many people now have less-stable incomes, and they want to make sure that you will be able to make payments.

If your original lender now declines to let you borrow and you believe you can still afford the home and want it, you need to call more lenders. They often have different measures, and while one lender says no, another may be a yes.

Can You Afford to Ride Out a Recession?

Realize that we may be entering into a recession. In fact, according to Bloomberg and other experts, based on historical data, one is almost sure to come in the next 12 months.

Home values could decline in value substantially in the next few years. You need to make sure you are buying the home for at least three to five years at this time, because if you buy it for $250,000 this month and in one year when you want to sell it is only worth $200,000, you will lose money.

If you want to stay in the home long-term, it is likely that if the market dips, you will continue making your payments and not be too concerned with the home value. Over time, your property will be worth more than what you purchased it for, but you need to be able to ride the wave while it declines and goes back up.

Can You Achieve Desired Rents?

When you buy a home as an investment you need to be asking yourself the same questions. Make sure that you can get the same amount of rent you projected. In a recession, rents will often decrease, as well.

Should You Renegotiate?

If you think the home is worth less than what you purchased it for two weeks ago, this is the time to go back to the seller and offer them a lower price based on the unprecedented circumstances. If the seller wants and needs to sell now, you may be in a good position to renegotiate.

Related: 13 Tips for Skillful Real Estate Negotiation

The real estate market went from a seller being able to dictate pricing three weeks ago to the buyer having more leverage, meaning a great ability to negotiate. In other words, you have a leg up, if you will.

If you like the home you got under contract, but do not love it, you might consider what deals will show up on the market in the next six to 12 months. A year from now, you may get a home you could not afford now at a discounted price.

Terminating a Contract

Terminating a contract at this time has never been easier. States all have addendums to the agreements. If both parties agree to a new deal, one can be made. If you want to get out of an agreement, you may be able to reason it as force majeure.

Force majeure means that based on unforeseen, unpreventable events, you can no longer fulfill the contract. Therefore the agreement is null, and you should be allowed to exit it without penalty.

With any investment property, all reasons for staying in a deal need to operate as a business transaction. The transaction is about the numbers and investment variables only. When it is a home you are going to live in, you need to factor in your quality of life and what you want as well.

Analyzing Our Situation

Here is how my husband and I looked at our particular situation.

We offered well over the asking price for the property because we loved the home and we gauged what we could afford on the price we could get for our current home. Even at a conservative estimate amid the virus, we should be able to get equal to more than than the purchase price in Austin.

Also, our current home is 75% paid off, so our mortgage will not be excessive. Paying down your home has lots of mixed opinions with investors. Many believe that you want to hold onto as much cash as possible. We like to have a low mortgage payment and also have saved money to invest in more real estate. The value of a small mortgage on our primary home is comforting, especially during a global pandemic.

Our job situation remains stable. We do not expect to see a dramatic decrease in income, and we can verify those numbers to our lender so we will still qualify for the loan.

Due to various conditions that we negotiated with the seller, we scheduled to close on June 12. In other words, we do not need to pay for the property for a while. The cushion of time can also now be pushed back for 30 days if both parties agree based on the Texas real estate addendum. If the closing date were at the end of March, we likely would have pulled out of the deal. Our home still was not listed on the market, and in the heat of the mandated lockdown, we have chosen to pull out the contract.

Related: 6 Negotiating Tips for Lowering Your Closing Costs

In real estate, you want to mitigate variables that you cannot control. Having to hold two mortgages on primary homes at the end of March would mean paying out a substantial amount of money for an unforeseen future.

No one ever wants to buy a home at the top of the market and overpay for it, but since we are planning to live in the home for at least five years, when the market dips, we will still be able to make all of our payments comfortably. In a December 2019 article, Business Insider called Austin one of the hottest real estate markets for the next 10 years.

Regardless of an economic downturn, it is unlikely that our new home won’t be worth at least what we paid for it or substantially more in several years. We are 20 minutes from a city that excels in job growth in insurance, healthcare, education, and technology.

Conclusion

You should now have a strategic way to decide whether or not to proceed with your home purchase. Remember that it is not always as simple as yes or no. Once you work through all the variables, you need to ask yourself what makes the home worth purchasing during this time.

You may be able to get a discount on the price or push the closing date back. Regardless of whether or not you love the house, if the numbers do not make sense and you cannot come to a revised agreement with the seller, you need to know that there will be another home.

It may feel like this is your best opportunity, but a home is only worth buying if you can enjoy it without the stress of having to afford it. As for our Austin home, at the time of writing this article, we are still under contract, and we listed our California home last week.

Are you in the process of buying property right now? What did you decide?

Tell us about your situation in the comments below.

By Tamar Hermes
Tamar Hermes is a full-time real estate investor and educator. After building successful businesses in the retail and entertainment industries, she turned her attention to real estate with a missio...
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Tamar Hermes is a full-time real estate investor and educator. After building successful businesses in the retail and entertainment industries, she turned her attention to real estate with a mission to get more women to become investors and continue to build her portfolio. Tamar has been investing for over 20 years with a focus on appreciation with buy and hold single-family homes and duplexes in Los Angeles. In the past few years, she has expanded her portfolio to include passive multi-family investments across multiple states, private lending, and Airbnb properties. She bought her first duplex when she was 28.
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20 Replies
    David Pere Rental Property Investor from Oceanside, CA
    Replied 9 months ago
    I'm under contract right now, and agree the financing has a few more hoops to jump through. The rest of this seems like things you should know before going under contract, recession or no-recession though.
    Tamar Hermes from Los Angeles, CA
    Replied 9 months ago
    Hey @david Pere! I completely agree. Even pre-corona these variables are all considerations. Still, this is an unprecedented time, and the way we analyzed properties pre COVID now has an extra lens on it that we never imagined. An economy completely shut down and millions out of work aren't something any of us imagined to calculate for 6 weeks ago. Good luck with your purchase! Where is your house? Is it an investment or your primary residence?
    David Pere Rental Property Investor from Oceanside, CA
    Replied 9 months ago
    SW Missouri, another investment property.

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    Barry H. Investor from Scottsdale, AZ
    Replied 9 months ago
    TAMAR - like David Pere states - I think you have outlined important factors to consider in any market, but in a recession, these things are likely even more important. As a Turn-Key Seller of SFH rental props in Kansas City Mo, I am finding no slow down in purchase interest. Inventory (for turn key) is almost non-existent and rents remain strong in Kansas City MO. I offer seller-financing, so the whole lending thing is a non-issue. The Buyer / Borrower walks into 20%+ annual ROI (after all Cap-Ex and loan costs) which seems to be attractive regardless of home pricing. I thought it was interesting you mention "Force Majeure" as a way to exit a contract with no penalty. I agree a month ago that would have been a valid reason but I question whether that would hold up (if disputed) at this point in the COVID game.
    Tamar Hermes from Los Angeles, CA
    Replied 9 months ago
    Hi @Barry H. Thank you for sharing. I would think that as long as the mandatory quarantine is in effect, the force majeure could be a valid way to exit a contract. It does depend on where you are in the country. I am surprised how many deals are still going under contract during COVID-19, especially in less liberal parts of the country. I love Kansas City for investing as the cash flow it so attractive. I will take 20%+ ROI any day. The fact that it is slowing down may be temporary. I'd love to know more about how you work. Let's connect!

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    Vinh Doan Investor from Los Angeles, CA
    Replied 9 months ago
    This is great information to clear up questions that lots of people have going though these times. Thanks for sharing.
    Tamar Hermes from Los Angeles, CA
    Replied 9 months ago
    Thanks @Vinh Doan It is harder to think clearly at these times, so it helps to map it all out. We are still in the process of locking our loan in Austin and selling our house. COVID-19 won't last forever. The good news for investors is all the deals that will be coming soon!

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    Alex Olson Real Estate Agent from kansas City, MO area
    Replied 9 months ago
    Great article. MF has not slowed down much in KC. I put a complex under contract for a group 2 weeks ago and am closing on another for a group on Friday. Banks are just slowed and require more down.
    Tamar Hermes from Los Angeles, CA
    Replied 9 months ago
    Congrats! @alex Olson, I appreciate the positive response as it is my first published article for the Bogger Pockets blog!!
    Alex Olson Real Estate Agent from kansas City, MO area
    Replied 9 months ago
    No congrats to you!!! Looking forward to seeing more blogs.

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    Jared Bigman Rental Property Investor from Irvine, CA
    Replied 9 months ago
    Thanks for sharing, Tamar. Great insights for me as I start to build a framework for OOS investing in MF. My wife and I are thinking about buying our own primary residence in OC. For the time being, we're sitting tight -- my prediction is in a few months, inventory will continue growing and we'll be able to find a home in a slightly reduced market. Out of curiosity, how has the experience been in selling your LA home...lots of interest? Any in-person showings?

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    Tamar Hermes from Los Angeles, CA
    Replied 9 months ago
    Hey, @jared Bigman, I know a lot of Realtors who are moving properties in L.A. even during this time. My property is sitting, but it is due to a few reasons. First, it is a multi-million dollar home. Jumbo loans are much harder to get right now, and that price point can also be tricky in a turbulent market. I ended up pricing it a bit higher than I probably should have as well. I want to sell it, but I am not desperate. Last, the homes in my area traditionally don't sell immediately. Once Los Angeles opens up, and there are a few open houses, I will likely lower the price. I am going to sell a condo in Frogtown in June, and that one will be priced to sell. Congrats on all the great Real Estate deals you are working on!! Remember in every market there are eager buyers and sellers. If you are at the right price and location, you can move Real Estate.

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    Stephon Mosby Williams Rental Property Investor from Philadelphia, PA
    Replied 9 months ago
    I’m in Philadelphia and I backed out of a contract today on a triplex I had under contract for almost two months. I was scheduled to close on 3/20/20 but with the city enforcing the stay at home order and shutting down businesses it caused me to not be able to get all the docs my loan officer needed in time. Once I was able to get all my docs over a week later I had to go through maybe another week or so waiting for a response from the underwriter. Then my loan officer lets me know I’m now required to have 9 months of reserves on top of my down payment/closing costs to close. The next day my loan officer calls and says I need 15 months of reserves to close. At this point I went from needing $3000 in reserves to $18000 in reserves, I offered almost exactly what the house was worth and I had to put at least another $20K into it for it to cash flow how I liked so I just didn’t think it was worth it. I’m still waiting to see if I’ll have to fight for my $3000 EMD but nonetheless I don’t regret my decision and I’m sure I’ll find a better deal in the near future. I also found out that my job is making staffing/budget cuts so that also motivated me to seek a more favorable deal.
    Tamar Hermes from Los Angeles, CA
    Replied 9 months ago
    Hey, @Stephon Mosby Williams, I love your attitude. It is all part of being an investor, and we all know that mindset is the toughest part of the game. Lenders pivoted overnight, and lots of people lost funding. You are right. The next one will be better. Keep requesting your money back. Each state is operating differently, but you do have a good argument for a refund. I know it can be disappointing to put in all the effort and have the deal fall through, but you will always do well when you keep your eyes open. Congrats on being on the journey!

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    Jose Ortega from Philadelphia, Pennsylvania
    Replied 9 months ago
    Hi, Stephon. I am in Philadelphia also. Trying to close a purchase also. Who was your lender? I think this data point would be useful. So far, I didn't get into the same troubles, but I had to let a property go because I couldn't get a conventional lender to lend me a conventional loan for a mix-use property with 51% commercial property. It was going to be owner-occupied. Alas.

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    Jose Ortega from Philadelphia, Pennsylvania
    Replied 9 months ago
    @Stephon Mosby Williams. I am in Philadelphia also. Trying to close a purchase also. Who was your lender? I think this data point would be useful. So far, I didn't get into the same troubles, but I had to let a property go because I couldn't get a conventional lender to lend me a conventional loan for a mix-use property with 51% commercial property. It was going to be owner-occupied. Alas.

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    Deniz Eker from Philadelphia, PA
    Replied 9 months ago
    Recommend changing your lender who is not keeping his/her word Also if there is a possibility of loosing your job might not be a good time to invest either..

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    Shawna Davis
    Replied 9 months ago
    Thank you for this article, couldn't come at a better time! My husband and I were also set to put our house on the market in May and move out of state this summer. The word from a couple of realtors was either do it this week when inventory is low and people still have jobs and money or wait a couple of years. Our income is in flux at the moment, so it looks like we'll be staying. I appreciate your POV!
    Tamar Hermes from Los Angeles, CA
    Replied 9 months ago
    Glad I could provide some clarity, Shawna! You are correct. You do not want to make big moves with too many variables in your income.

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    Steve Morris Real Estate Broker from Portland, OR
    Replied 8 months ago
    Just a couple of gen comments. Just closed a deal in Portland and buyer used FMAC loan. Since it's representative: 1) Be aware, used to be you'd go in contract and give the lender a rent roll and actual I&E, wait 90+/- days and close. With FMC they want a monthly update on rents and I& until close. Plus they may require <5% vacancies - Prep your seller to be ready to supply this info (which they should do normally). 2) Some non-FMAC lenders are getting really picky on how "clean" the loan is. So may only lend to friends-n-family (i.e. current/previous borrowers). 3) You should check with your preferred lender forst due to 1) and 2). Or better yet, get a good mort broker. They can save you a bunch of time/sweat/heartache and get you the best rates for your situation instead of just one lender.

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