The phone call all real estate agents hate to make to their clients is the bad news their pending sale has fallen out of contract.
Home buying and selling is an emotional roller coaster. As real estate professionals, we share in your excitement when an offer comes to the table and even more thrilled when the parties agree on the purchase terms.
But, as we know from experience, the work doesn’t stop there. Please remember just because a home is under contract doesn’t mean the sale will close. Anything can happen between opening escrow and actual closing day to cause a property transaction to crash and burn.
The majority of home sales do close. The rate of failed pending sales was 3.9%, a minuscule number in the scheme of things. Chances are, with the right real estate expert guidance, your home sale will close. That doesn’t mean you should not be prepared in case the deal goes awry. Let’s look at common reasons homes under contract fail to close and what to do to prevent this from happening to you.
1. The buyer’s home inspection finds issues with the seller’s home.
During the option period, the buyer may hire a home inspector to check out the seller’s house. If they find unexpected problems the seller didn’t disclose, they can back out. They can also renegotiate the sale price or ask the seller to make repairs. If the seller refuses, the deal can fall through.
2. The buyer’s financing falls through.
A mortgage contingency lets the buyer off the hook if they don’t get final approval for their home loan. In other words, closing the contract is contingent on the buyer’s final loan approval. That’s why in a multiple-offer situation, some sellers might accept a lower cash offer instead of a higher offer that’s dependent on a buyer’s loan approval.
3. The house is overvalued.
An appraisal contingency allows the buyer to back out if an appraisal determines the contract price is higher than the home is worth. In a hot real estate market, it’s common for this contingency to be dropped from a contract since buyers are willing to pay more.
Where it can still come into play is if the buyer’s bank has the property appraised for less than the contract price. In that case, the buyer would have to come up with the difference in cash to close the deal. If they can’t, the seller can lower the price, or the deal will be over.
4. The buyer can’t sell their house.
With a home sale contingency, the buyer must sell their house first before they can close on their new home. There’s a limited time for the buyer to complete the sale of their current home, after which the seller is free to terminate the contract.
5. Either party gets cold feet.
If one of the parties in a real estate contract changes their mind at the last minute, that’s typically a breach of contract. A buyer will often give up their earnest money deposit if they back out of the deal, and a seller could sue for damages. If the seller backs out, the buyer could sue for damages or to force the sale to proceed.
6. The seller doesn’t have a clear title.
If a title search uncovers a cloud on the seller’s title to the property or the existence of liens against the property, the buyer may back out of the deal.
Money the seller will lose:
If a deal with a buyer falls through, the seller stands to miss out on other offers. Once a contract is in place, the seller must close the deal with the buyer — even if they received a more valuable offer after the fact. If the initial contract falls through, that better offer may have already moved on. If the seller is trying to buy another home at the same time, the failure to close on the sale of their current property could also cause them to lose the house they want to buy.
Money the buyer will lose:
If the buyer backs out under a valid contingency, they’re entitled to get their earnest money deposit back. If they breach the contract without a valid reason, the seller can keep the earnest money. Earnest money is about 1% to 2% of the home price, and the buyer pays this deposit when they sign the contract. The funds are placed in an escrow account and applied toward the buyer’s closing costs when the transaction concludes.
How to prevent a home sale from falling through:
Ideally, both principals in a real estate negotiation will be motivated to close the transaction. When principals and agents deal fairly and honestly with each other from the very beginning, things are less likely to fall apart. Both buyers and sellers need to understand their obligations and follow through with them to make sure everything goes smoothly. For starters, that means that everyone involved needs to sign and submit the required paperwork on time.
Buyers can proactively protect their deal from falling through by working closely with their lender to ensure their financials are in order and knowing ahead what they can comfortably afford.
For sellers, there are a few things they can do to ensure that a sale goes through. First, disclose any problems with the home upfront and don’t attempt to conceal anything. Otherwise, a home inspection will find it and give the buyer cause to reconsider. Sellers should also satisfy any liens and establish a clear chain of title before putting their home up for sale. Finally, sellers should carefully consider a potential buyer’s ability to close a deal by finding out if they are pre-approved for a loan or have cash in hand.
The bottom line
Buying or selling a home can be an uncertain process, but most real estate deals go as planned. Contract contingencies can allow buyers to back out under certain conditions. However, contingencies are negotiable when the parties are drafting the contracts.
Frequently asked questions
Why do pending home sales fall through?
They often fall through if a buyer exercises a contract contingency, such as a home inspection or home sale contingency.
Why would a house be pending for so long?
In a contract, the buyer and seller can mutually agree to extend the closing date, usually, if the buyer needs more time for loan approval or pending the sale of their current home.
Can a realtor show a house that is pending?
Yes. A real estate agent can still show a pending home, as long the seller approves. It’s often beneficial for sellers to continue showing the home in case their current contract falls apart.
Who pays for a home inspection if the deal falls through?
The buyer usually pays for a home inspection no matter what. The inspection is solely for their benefit.
What is the difference between sale pending and under contract?
A sale that is “under contract” means an agreement has been made between the seller and buyer, but the sale is still subject to contingencies. In a “pending sale,” contingencies have lapsed, and the deal is near closing. A pending sale can still fall through if there’s an issue with financing or the home inspection.