Contracts are collapsing as banks ‘play real estate agent’

Contracts on houses are falling over around the country, with some properties going through multiple back-up offers before eventually selling.

Agents are constantly renegotiating and lining up multiple offers for a house as the tough finance rules make it difficult for buyers to get the money they need to secure the home they want.

Hamilton-based Red Bricks director Rupert Bain says buyers are having offers on houses accepted only for them to fall over a week later because the bank won’t lend the buyer as much as they need.

“Our biggest dramas are finance,” he says.

“You can even have a purchaser willing to pay where the vendor sees it, but then the bank steps in and says, ‘well we are willing to give you this for it’, and they are basically playing real estate agent and giving them the number which they need to work to.”

The agent then has to go back to the vendor with the reduced offer and in most cases it's too much of a drop so the deal collapses, he adds.

“It’s not like they are coming back asking for a couple of thousand that you could probably lose. We’ve had some that have been tens of thousands, which once again mentally and emotionally is too much for most people. They’ve already started spending or figuring out what they want to do with that money and then suddenly they’ve got tens of thousands knocked off that price – it doesn’t usually go down well.”

Bain is selling an entry-level home in Huntly, Waikato, in the high $300,000s. The property is on its fourth contract after the three earlier offers – all from first-home buyers - fell over due to finance; one of the buyers couldn’t get finance and another buyer was given $20,000 less than their accepted offer.

While the Huntly deal involved first-home buyers, he says people who are looking to trade up to their second, third or fourth house are also impacted by the tough lending rules.

“Back-up offers weren’t as current as they are now, but as deals are falling over you will see more and more back-up offers and if they are all having the same issue – being that banks are not giving them the money – you put the deal on, it comes back on finance; you try and renegotiate on price or it falls over – next one in place.”

Often there is a chain of buyers and sellers involved so if one part falls over, they all do or each buyer has to go back and renegotiate which, Bain says, can be particularly difficult if there are a number of different agents involved.

Tremains Taupo sales manager Annalise Johnsen says they are constantly renegotiating deals and it often feels like they are selling the same property twice.

“Nothing is done until it’s done. We are consistently renegotiating. We might get it under the contract and then get something on their house, but it’s not enough to get it to happen so you go back to the next one, and you can have four people in that chain of transactions and we are having to reduce from all angles. Everyone has got to play a piece of the pie to make it all go.”

An aerial view of homes in Huntly. A house in the town has been under contract four times after the three previous deals all fell over due to financing issues. Photo / Getty Images

Johnsen agrees that getting finance is one of the biggest hurdles for buyers and knows of clients who have had about $50,000 shaved off their pre-approval between the end of last year and now.

She has recently been involved in a property deal which had a conditional offer on it for some time when another buyer showed interest. The escape clause was enacted and the initial buyers had seven days to go unconditional before it would default to the other party.

“You sort of feel like you are selling properties twice. So, somebody is going to miss out, but either way the vendor is going to get a result, and we work for the vendor and so we are working consistently – even though you are under contract – you never count your chickens at that point. You will be holding firm.”

However, not all deals are taking a long time to settle as there are still cashed-up buyers who have already sold their homes and are ready to pounce when the right house comes along, she says.

Hastie Mortgages director Campbell Hastie says it is common for deals to fall over at the moment, but it is due to affordability and not because the banks are dictating the price of a house.

The interest rate used to stress-test borrowers has been going up in the last six months, now it is a mid-7% interest rate, so the amount people can now borrow is shrinking and often that means tens of thousands of dollars less, he says.

“I’ve seen a case where the bank did say about $40,000 less the second time around and that meant that particular deal didn’t connect and they had to walk away from that.”

Most people making offers have pre-approvals, but they are only valid for a certain period so when they reapply the stress-test rate may have changed.

Hastie says it is common for contracts on new-builds to collapse because often there can be a five-month delay for the build to start and in the meantime the initial pre-approval may have expired.

“We are worried about the amount the person can get shrinking because they are usually in a state where they are ready to go on the contract – the builder is gagging to go etc, everyone is ready but because of the delays the finance might not stack up second time around.

Banks have pushed up mortgage rates following recent hikes in the Official Cash Rate. Photo / Fiona Goodall

“We are constantly going over that here – re-crunching the numbers to make sure they work. Re-crunch, re-crunch, re-crunch. I think of one case we’ve probably done it five times.”

Taverner Keys & Co director and property lawyer Penny Elliott says they are also having difficulty with contracts falling over, especially on purchases that are conditional on a sale because often they couldn’t sell the first property.

“We have experienced situations where everyone has managed to get where they need to be because real estate agents have assisted with renegotiating contracts – extending time limits for conditions but also renegotiating prices to more realistic levels so that the first property in a chain can be marketed more realistically and will sell.”

The Wairarapa-based lawyer says these negotiations take longer so transactions that last year might have taken three to six weeks are now taking months.

iCLAW managing partner and property lawyer Aasha Foley says things are also taking a lot longer for banks to approve finance. Her firm is seeing about two to three deals a week falling over because people can’t get the finance or not enough time has been given to get things over the line.

Foley says pre-approvals aren’t really pre-approvals anymore because they are subject to so many other rules such as the banks approval or a property and an independent valuation.

“There’s no cut-off day when you get approved that they stop investigating you, right up to the moment they loan you the money.”

Foley said contracts on off-the-plan developments and new-builds are more likely to fall over than those on existing residential properties due to the risks associated with them, including the rising costs of construction.