The Coronavirus, Quarantine, and Atlanta Real Estate

Coronavirus has created uncertainty in our entire lives, including the real estate market. Since things are moving so quickly with the pandemic, it is certain that things have changed by the time you read this (the deadline for this article submission was mid-April). So, as always, if you have real estate related questions or need some guidance during these confusing times, please call me for the latest information.

But I can give you some general information about the effects of the virus on the real estate market that are likely to continue for some time, and point out contractual provisions that are particularly relevant. First, as you might imagine, when “shelter in place” orders started to go into effect in Georgia, most of us did only “virtual” showings, meaning showings via Facetime, Zoom, or the like. Other agents simply supplied lots of antibacterial wipes and hand sanitizer and gave instructions for buyers and agents not to touch anything in the house. All lights were left on prior to showing so there was no need to touch light switches, for example. (In Georgia, real estate was deemed an “essential business” such that it was allowed to continue to operate even during the statewide shut down). But showings were way down – appropriately – and requirements for qualifying for showings also became more stringent. While previously a buyer might look at houses prior to having an immediate need, many agents made it an absolute requirement that a buyer who expected entry into a home be ready to purchase quickly and supply a prequalification letter or proof of funds.

And of course our housing inventory dropped quickly and significantly. Many pulled their homes off the market - called “delisting”– a 148% delisting increase from last year. Other sellers decided to wait to list to see how things would shake out. The sellers who remained in the market were sellers who really “needed” to sell; either they had already moved and couldn’t carry two mortgages, or had lost a job and had to sell. Virtually every other seller fell out of the market, at least for the short term.

The number of buyers also dropped, as buyers either lost their jobs, worried that they would lose their job, or had salaries reduced or bonuses eliminated. Further, buyers who were depending upon stock market holdings to fund a down payment lost some of that security with the market drop. As a result, “pending” homes sales (houses under contract) fell more than fifty percent.

As things open back up and we get back to our new “normal”, where will home prices be? It’s likely that they won’t recover to full pre-pandemic pricing for some time. Not everyone will have a job to get back to. Our economy will be adversely affected for a while. So while it’s impossible to say how much home prices will drop, it seems certain that they will.

One interesting development is the increased interest in rural areas, small towns, and second homes, at least online. Housing portals like our company’s (Keller Williams), Zillow, and Redfin report that the number of “page views” for rural homes and small towns is way up since mid March. The density that helps make a city appealing – offering amenities and convenience– become a downside and a cause for concern during a pandemic and apparently many buyers at least considered moving out of urban areas. While there has not been a huge increase in home sales in rural areas – yet – rural areas have not been hit as hard as urban areas and are likely to rebound faster.

Now, imagine if, during this confusing time, you were selling your home and buying a new one and that you were scheduled to move just as “shelter in place” orders were issued. Plenty of our clients found themselves in that very position, and the guidance we gave to them will help others who might be planning to buy and sell homes during this period of national upheaval.

A “FORCE MAJEURE” clause is one that provides guidance n the event of an unforeseen and unforeseeable “Act of God” that prevents a client from fulfilling their duties under a contract. Many commercial contracts do have them, but alas, our Georgia Association of Realtor forms, used in virtually every Georgia home resale transaction, do not. Therefore, there is not an “out” pertaining to a pandemic. The contract is just as binding after the pandemic as it was before.

But the penalties for a buyer who want “out” of a residential purchase contract are minimal under the GAR forms. The 2020 form, section C(2)(a) states: “Remedies of Seller. In the event this Agreement fails to close due to the default of the Buyer, Seller’s sole remedy shall be to retain the earnest money as liquidated damages.” The standard earnest money amount in Georgia residential real estate transactions is one percent (so, on a $1,000,000 home, $10,000). A Buyer who gets cold feet, then, is out only the earnest money and the seller cannot come after the buyer for other damages or for specific performance (i.e., the seller cannot force the buyer to buy the house).

Therefore, we saw many of the contracts that had been signed right before the coronavirus shut-down terminated by buyers who either felt financial insecurity of their own or who feared they were overpaying for a property that would soon drop in price in response to the pandemic. (Note that while the seller is limited to earnest money as liquidated damages, the real estate brokers who would otherwise be entitled to a commission have a potential legal case for entitlement to a commission, but I would think that most agencies would not seek that avenue given the circumstances).

This is not the case with new construction, which usually requires a much larger down payment. For clients under contract to purchase new construction, there was much more at stake. And since new construction contracts are those of the builder, who require the buyer sign their contracts, sometimes there is not a liquidated damages provision, meaning that in addition to losing their earnest money, the buyer could risk the builder suing for enforcement of the contract via specific performance or suing for more damages.

Shortly after it became clear that the pandemic would wreak havoc on our transactions, GAR released a special stipulation to be inserted in contracts addressing COVID-19. Through that stipulation or others that I have personally drafted, we are now attempting to reduce the uncertainty caused by the virus.

So as you can see the coronavirus’ effect on real estate in Georgia is multifaceted and ever evolving. Please do not hesitate to call or email us for a more specific and current evaluation of your particular circumstances.