What to Do If You're Under Contract During COVID-19

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

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

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.

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.

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.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.