What Are Pending Real Estate Contracts?

Pending Real Estate Contracts

Question: On a frequent basis I see news reports concerning “pending” home sales. What are they and are they significant?

Answer: Pending home sales are a measure of real estate activity released monthly by the National Association of Realtors. “A sale is listed as pending,” says NAR, “when the contract has been signed but the transaction has not closed, though the sale usually is finalized within one or two months of signing.”

The idea is that if pending agreements are up or down we can have some idea of where closed sales may be heading in a month or two. In other words, a leading indicator, a broad clue regarding general market trends.

However, while pending offers are “usually” finalized they don’t always lead to a sale. Some percentage fall through and never make it to closing.

We don’t know the exact percentage of real estate offers that fail but we can get some idea  from mortgage applications.

In a real estate purchase situation a buyer usually has a given time within which to apply for a mortgage, say 10 days. However, it’s entirely possible for a sale agreement to break down before 10 days and therefore there’s no need for a loan application.

How many contract offers do not even make it to the loan application stage? We don’t know.

However, we do know what happens with loan applications: Large numbers of them fail, meaning that without a second and successful application the purchase offer does not close.

Figures from Ellie Mae tell the story: 67.2 percent of all purchase money mortgage applications succeeded in February 2015. That also means 32.8 percent did not.

When a loan application fails a borrower can surely apply again elsewhere. That said, how many people apply with more than one lender?

“For most borrowers,” said the Consumer Financial Protection Bureau in a January report, “the mortgage shopping process stops after their first application.”

 There’s no rule which says a second or third mortgage application will be successful. In general, it seems safe to assume — very safe — that when loan applications fail so do home sales.

Pending Real Estate Contracts

Why do real estate offers fail?

Virtually all real estate agreements today are contingent arrangements. They’re dependent on such things as a satisfactory home inspection, the ability to get financing or other buyer requirements. So, in some cases, a pending agreement never becomes a final and firm contract because a contingency has not been met.

This is especially the case with financing. For instance, an appraisal may reflect a fair market value which is less than the sale price or, when re-checking credit reports just before closing, the lender may find new debt which pushes the borrower from qualified to unqualified.

In some cases it may not be the worst thing in the world if a pending offer falls through. The reason is that the prospective buyer might then make an offer on another property and the seller may find another purchaser.

While sale statistics are hard numbers, pending sale reports are best seen as approximations, a hint of what’s happening in the marketplace. Measuring today’s pending sales with those from a year ago can be useful and meaningful — provided one understands that pending sales do not always close.


Syndicated originally to newspapers nationwide by Content That Works. Revised, modified, expanded and updated. Posted with permission.

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