Real estate brokers in the Washington area have all but left the business of guaranteeing sales of single-family homes after being badly burned last fall when rising interest rates dried up the real estate market.
A "guaranteed sale," or a "trade sale" as it is sometimes called in the industry, takes place when a broker agrees to buy a home at a predetermined date for a specified price, usually 10 to 20 percent less than its appraised value.
In return for agreeing to the price cut, the seller gets the assurance that his house will be off his hands by a certain time. This may appeal particularly to someone who has to have cash from the sale to buy another house.
Guaranteed sales became a commonplace -- and generally successful -- practice in the real estate business here between 1979 and 1981, members of the industry said. Real estate brokers said that 19 times out of 20, they did not have to buy the houses they guaranteed, since they routinely sold on the market before the predetermined purchase date. The few homes they did have to buy usually sold shortly thereafter, yielding the buyers sizable profits on the transactions.
But that changed last year when interest rates headed ever higher and home sales ever lower.
Realtors who had routinely entered into guaranteed sales contracts during the spring and summer of 1981 found homes taking much longer to sell. Brokers found themselves buying a larger number of guaranteed properties and having more trouble selling them afterwards than they had bargained on.
Since brokers finance these purchases through borrowing, the longer they carry an unsold property, the more money they lose. If a guaranteed home does not sell within three to four months after the broker buys it, it usually becomes a money-losing proposition for the firm.
A result of this scenario last year was a financial disaster in the guaranteed-sales business for many Washington-area real estate firms. The number and type of guaranteed-sales contracts now being made by Washington real estate brokers and developers has been severely restricted as a consequence.
"Yes, we got burned," says Herman Methfessel, vice president of Long & Foster and general manager of the firm's Virginia offices. "I would say that we lost a considerable amount of money on those homes that we bought."
Other real estate brokers who had participated in guaranteed sales share Methfessel's assessment of last year's guaranteed sales debacle.
"We're still in a negative position," says Robert Koger, owner of United Realtors in Falls Church. "It kind of plays hell with the cash flow. We're still trying to salvage what we can from what was a bad situation."
When the real estate market was good, brokers took discounts as low as 8 percent off the appraised or fair-market value on homes whose sale they guaranteed. High interest rates and the slow selling time for most homes have increased discounts to well over 20 percent on those few contracts still being written.
That means a broker offers the seller of a home valued at $100,000 less than $80,000 for his house on a guaranteed contract.
Brokers say such terms now make guaranteed sales arrangements undesirable to most sellers, except in a few cases, such as distress situations.
"I've put guarantees out of my mind completely because they're economically infeasible for me and the seller," says Antonioli of Apex Realty.
Antonioli says he might consider taking on a guaranteed contract with a 35 percent discount off the fair-market value of the house, but he doubts any homeowner would take him up on the offer.
The president of Mt. Vernon Realty, W. Howard Rooks, says his firm entered into guaranteed sales contracts at the rate of one per week last year, but that's now been cut to about one per month.
Rooks reports that Mt. Vernon still is carrying about 12 houses it was forced to purchase from guaranteed sales contracts, but he doesn't consider that to be a large inventory for his firm.
At United Realtors, Koger says his firm stopped doing any guaranteed arrangements nine months ago but was still left with two properties it had to purchase. He says the firm rented out the homes while trying to sell them to a permanent buyer.
Methfessel at Long & Foster reports that the pace of guaranteed sales there has dropped from two to three per week to one per month. Methfessel says Long & Foster guaranteed the sale on about 400 homes in 1980. In 1981 the firm guaranteed a total of 250. This year, they've done only a handful, he said.
Last fall the firm had to buy about 60 properties, Methfessel estimated. The firm managed to sell most of them but still are left with a few, he added.
"It was a big problem," he says.
At Better Homes Realty, President Tom Shafron says his firm guaranteed the sale of 200 homes in 1980, 75 last year and about 30 so far in 1982. He says his firm is carrying a few homes from last year and is having to buy about one in three of the homes it now guarantees, up from one in 15 before last fall.
The offerings of guaranteed sales tend to move more or less in synch with conditions in the real estate market. As Methfessel puts it, "When houses are easy to sell, guaranteed sales are easy to do."
The reason real estate brokers now do so few guarantees can be traced directly to the difficulties in financing home purchases. Now few will guarantee a sale unless there is an assumable mortgage at low interest rates on a home.
"In this market, where financing is the key, to do a guaranteed sale you have to have financing available," Methfessel says. "If it requires new financing, then we're very reluctant to take it on."
As brokers were getting out of the guaranteed sales business, at least one developer was getting in, however, in an attempt to attract more buyers to his projects.
The Charles E. Smith Cos. is offering buyers of its condominiums at Crystal Gateway and Skyline Center a guaranteed sale on their old home or condominium.
John Klea, vice president at Charles E. Smith, said the firm started the guaranteed sales program in January for Skyline and in March for Crystal Gateway. Condominiums at Skyline average $125,000; at Crystal Gateway $260,000.
Klea explains: "What we find is that, in our price range, many of our buyers are moving up to our product. They have a home that they have to get rid of. In order to attract that segment of the market, we needed to do something."
When the company explored the possibility of arranging guaranteed sales through a broker, Klea said no one was interested. "We couldn't find any broker that would do it, so we had to do it ourselves," he says.
Klea reports that Smith has guaranteed the sale of homes or condominiums for about 15 to 20 buyers since the programs began earlier this year. Smith has had to buy nine properties, five of which Klea said now have been resold.
Klea says those 15 to 20 buyers probably would not have purchased condominiums at Skyline or Crystal Gateway without the guaranteed sales program.
For most homeowners trying to sell their houses, a guaranteed-sales contract provides an insurance policy of sorts in the event it takes an unusually long time for the house to sell.
But the experience of one homeowner in Arlington illustrates some of the problems both brokers and homeowners can get involved with in a guaranteed sale.
William and Virginia Shapiro signed a guaranteed sales contract with Mt. Vernon Realty last November. If the Shapiro's home did not sell by March 10, Mt. Vernon was to buy it from them, at about 15 percent off the home's appraised value, according to the agreement.
In February, Mt. Vernon Realty notified the Shapiros that they had "defaulted on the terms and conditions" of the contract, writing that stipulated repairs had not been completed and that the basement was wet and leaking.
Meanwhile, the Shapiros were committed to purchase a house in McLean and needed the cash from the sale of their Arlington home to complete the deal.
William Shapiro says the necessary repairs were made and that Mt. Vernon was aware in advance of the contract's signing that there were problems with the basement.
When Mt. Vernon refused to negotiate, Shapiro said he filed suit in Arlington against Mt. Vernon Realty.
Mt. Vernon and the Shapiros resolved their differences without going to court, and Mt. Vernon eventually purchased the house from the Shapiros in April.
But in the meantime, Shapiro said that Mt. Vernon President Rooks indicated that if the company defaulted on its part of the agreement, Mt. Vernon would stand to lose only a $500 deposit paid to the Shapiros when the contract was signed, because of a clause in the contract limiting the company's liability in case it decided not to buy the home after all.
Rooks says he placed a forfeiture clause in his guaranteed-sales contract because a few years ago the firm had had to purchase an expensive home with serious structural damage. Rooks says if the forfeiture clause had been in the contract then, he would have had more "leverage" in dealing with the homeowner, who Rooks says misled him about the condition of the home.
Shapiro, a lawyer, says he was aware of the existence of the forfeiture clause allowing Mt. Vernon to renege on the guaranteed purchase for $500 but that he believed it was legally unenforceable since it was contrary to the intent of the contract.
It is difficult to determine how isolated the difficulties in the agreement between the Shapiros and Mt. Vernon Realty are. Other brokers surveyed in the Washington area say they have no such "forfeiture" clauses in their guaranteed purchase agreements.
Despite the strains guaranteed sales have placed on area real estate firms during the past year, most brokers say they are eager to resume a busy guaranteed-sales business when the real estate market improves.
Until then, they say they will be making few, if any, of the agreements and those they do make will carry substantial discounts off the fair-market value of the house.