Why Housing Deals Fall Through

Selling a home is usually not a simple process. However, it can become even more complicated and expensive if a deal progresses but eventually falls through. Therefore, as a seller, there are some things you need to know about late-stage exits. If you're thinking about selling your home, find out what you can do to protect yourself if you're not able to close the transaction.

How a Home Sale Can Fall Through

In a typical home sale, buyers will make an offer on a seller's home. When an offer is accepted, a contract is signed between the two parties. At that point, the property's status typically changes from "for sale" to "under contract" or "in contract." The change in status tells other buyers and real estate agents that the seller has a buyer and is in the process of closing the deal.

However, a home sale or purchase is not final until both parties have signed all necessary legal documents transferring ownership of the home at the closing. Buyers often have contingency clauses written into their contracts which are legal ways of "backing out" of the contract either at no cost or a small cost to the buyer.

A contingency clause is written into the sales contract whereby both the buyer and the seller agree to the terms in the contract. Some of the most common contingencies include:

Mortgage Contingency

The buyer must be able to obtain a mortgage for the property. Sometimes a condition can be written into the contract whereby if the financing falls through, the contract is nullified. It's important for sellers to ask the buyer to furnish a mortgage pre-approval letter. The conditions of mortgage contingency often include requirements for:

• Timing. The mortgage contingency period outlines how long the buyer has to secure a mortgage. The contingency may include an extension option if the buyer fails to secure a mortgage in the original allotment of time.
• Mortgage Type. Both parties must agree on the type of mortgage the buyer will pursue as part of the closing process. The buyer may opt for a conventional, fixed-rate, adjustable-rate, or other loan.
• Loan Amount. There are often clauses within the mortgage contingency outlining the specific loan amount a buyer must be approved for.
• Fees. The lender will often charge origination fees, processing fees, or underwriting fees. Because these may not be known in advance, the mortgage contingency establishes who pays these fees and what happens if a party is unable to do so.

Home Inspection Contingency

A home inspection contingency is placed on a potential sale if both parties agree on the result of a home inspection. Also called a due diligence contingency, this action gives the buyer the right to have the home inspected within a specific time frame. Depending on the severity of the findings, a buyer may be within their right to withdraw their offer.

Another outcome of the home inspection is the potential for re-negotiation of price. A buyer may attempt to negotiate that some or all objections to the report be fixed by the seller. Alternatively, the buyer may rescind their original offer and attempt to negotiate a lower price.

This contingency also relies on activity from the seller. After the inspection is complete, the current homeowner usually has a specific amount of time to respond to objections within the inspector's report. Should you not agree with the findings, you can decide to not proceed with suggested remedies, potentially causing the buyer to withdraw an offer.

Home Sale Contingency

A home sale contingency mandates that a deal is closed contingent on the buyer selling their current property. The home sale contingency helps buyers since it allows them to back out of the contract if their home doesn't sell—leaving the seller to start the process all over again. Although there is usually a set time period whereby if the home doesn't sell, the seller can opt-out of the contract; the seller might miss other offers from potential buyers who are ready to close.

Buyers often heavily push for home sale contingencies especially if they plan on leveraging the proceeds from the sale of their current home as part of the down payment for your home. In addition, the buyer often wants to ensure they are not obligated to pay multiple mortgages for multiple properties at the same time.

Appraisal Contingency

The appraisal contingency allows the buyer to have the home appraised to determine its value. The price of the home must either meet or be less than the official appraisal price. If the appraisal comes in at a lower price, the buyer can proceed with the purchase or ask the seller to lower the price of the home.

This contingency often arises due to requirements from lenders. Financial institutions often want to make sure the home being sold and the mortgage being underwritten is for a home that is not selling for more than its worth.

If the appraisal ends up materially less than what the home is being sold for, the lender may extend unfavorable loan terms or require additional compensation to make the sale for equitable. A buyer may hold the right to withdraw their offer depending on the result of the appraisal. Cash sales often do not have appraisal contingencies as there is no lender involved in the process.

Warning Signs

There are some other warning signs that a buyer might back out of the purchase. As you and a prospective buyer work towards completing a sale, be mindful of certain events such as:

• Failure to return papers signed, dated, and completed as instructed
• Failure to make required payments to third parties (i.e., inspectors)
• Not returning calls
• Missing appointments
• Numerous requests for contract changes

If you come across any of these, it may mean that your buyer is getting cold feet. Additionally, it is your right to enter into an agreement that you feel is fair for both parties. While it's understandable that a buyer wants the best deal on their end, it's also a warning sign if a buyer isn't willing to make any concessions during the negotiation process.

The Costs to Sellers

If you have a contract in hand for the sale of your home, there are several costs you'll incur if the prospective buyer backs out.

Opportunity Cost

Other buyers that may have been interested in making an offer on your home will begin looking at other properties on the market when your house goes "under contract." You might lose the opportunity to sell to those buyers when your home is under contract since they may have purchased another property.

Time

One of the most frustrating aspects of a home sale falling through is the time wasted. The seller is sent back to square one to start the process again to find another buyer. Often, you may have to relist your property and have a lower list price depending on publicly-disclosed information from the failed sale. Also, the delay could derail your plans to purchase another home or change your move-in timeline.

Your Next Home

If you're under contract to buy another home and that transaction was contingent on selling your current residence—because you needed the proceeds from the sale—you may not be able to buy the home. As a result, you might have to back out of the purchase or find another way to finance it.

Money

There's several unfortunate financial losses that may occur should your sale fall through. You may be required to continue to make mortgage payments on the home you are attempting to sell, continuing to incur interest charges and other nonrecoverable expenses.

Should the purchase of a new home be on hold, you may be required to rent property for a short period of time, especially if you are relocating on a fixed timeline. In addition, you may be required to break a contract with a prospective seller for another property, causing you to potentially incur fees or penalties.

You may be required to continue to pay operating costs of the home including property taxes, utilities, and landscaping costs. Alternative, you may be required to incur selling costs multiple times. For example, you may need to enter into a new contract or extend your existing contract with a home staging company.

Saving the Deal

There are steps you can take if your buyer wants to back out. First, make sure that the real estate agents involved, for you and the buyer, are communicating effectively. Be sure that you and the potential buyer receive copies of all communications in writing. If you or the buyer are not using an agent (or if you're not comfortable with the level of communication), try to speak directly with the buyer to understand their intentions or concerns.

Determine if there are any concessions you could make to keep your buyer on track to close. There may be hurdles to overcome regarding some of the contingencies discussed above; consider offering cash or a price reduction to compensate for a poor valuation or unfavorable inspection.

Review the contract to determine any recourse you might have as the seller if the buyer backs out. For example, is there a clause in your contract that would give you legal grounds to sue your borrower for breach of contract and obtain a percentage of the agreed-upon selling price? Or is there a clause that states the buyer is in default if they fail to cancel the deal within the stated time frame after signing the agreement?

Use an Escape Clause

An escape clause allows the seller to entertain and accept offers from other buyers even if there are conditions or contingencies written into the contract by the buyer.

If another offer has been made on the home, the seller would notify the original buyer who would have a set number of days to satisfy the contingencies or waive them. In other words, an escape clause helps protect sellers so that they're not missing out on opportunities to sell while waiting for the buyer's contingencies to be met such as the sale of the buyer's home.

The Bottom Line

There are a number of factors that can cause a home sale to fall through, including the failure to satisfy one of the contingencies or clauses in the contract or the buyer has a change of heart. Although there are downsides to this happening, there are ways you can increase your chances of closing and protect yourself in case the deal does fall through.