Real estate is a tough business. Buyers spend countless hours searching for their dream home, just for the right to pay a huge financial sum to make it theirs. Even after scraping together a good offer and getting it accepted, that doesn’t mean it’s a done deal.
On the flip side, if you’ve been trying to sell your home for a long time and you finally accept an offer, things could still go sour. An accepted offer doesn’t constitute a done deal.
The good news? According to the most recent data from Trulia, just 3.9% of real estate contracts fell through for any reason in 2016, meaning 96.1% got done successfully. Here, we’ll discuss how often home sales fall through at different stages of the transaction and examine some of the reasons why it may happen. If you’ve accepted an offer to sell your home and it’s under contract, the odds are in your favor. Still, knowledge is power when you’re trying to avoid becoming a negative statistic.
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We’ve covered closing day problems at length elsewhere, so we won’t spend too much time here. Closing day is the final hurdle of the home buying process and, most of the time, it’s not a problem. Sometimes closing may get delayed, but as long as you address any issues, it will be alright.
The biggest takeaway here is to remember that preapproval for a mortgage is not approval for a mortgage. If a mortgage falls through on closing day, it’s because it failed to elevate from preapproval to approval.
That doesn’t happen often, but it’s an important concept to understand. Any buyer must get preapproved before putting an offer on a home. But after submitting an offer, the lender conducts a credit check, ensures they’re financially able to take on the loan, and approves the loan before closing. The lender will also usually ask for an appraisal and inspection before approving the loan.
A preapproval is essential to making an offer, but a buyer still needs official approval from their lender to get the mortgage.
A real estate listing moves from “active” to “pending” after a seller accepts an offer, but the sale hasn’t closed yet. Real estate agents also use the phrase “under contract” for this post-offer, pre-close period.
Pending sales can fall through for a number of reasons, but most of them you won’t have to worry about. If the buyer makes a straight offer with no contingencies, the process should go without a hitch. Offers with contingencies may cause some hiccups, but we’ll get into those below.
Still, even normal offers may get derailed during the pending period. Some of the things that may cause that to happen include:
In a seller’s market like the one we’ve seen in most of the U.S. for the past couple of years, bidding wars may raise prices beyond a home’s real value. If a lender-ordered home appraisal determines a buyer’s offer is well above the home’s appraised value, they may not approve the mortgage. Instead, a buyer will have to come up with cash to pay the difference in the offer and the appraised value or the seller will have to come down on the price.
We’re all human, right? Buying a home is a massive financial and personal decision and every so often buyers just change their minds after submitting an offer. In 2021, first-time home buyers made up 31% of all home buyers. That’s a lot of people who haven’t made this decision before and it’s possible they will try to find a way out of it.
Before closing, a buyer’s lender will conduct a title search to ensure there are no liens, outstanding financial responsibilities, or potential title claims for the property. But title searches aren’t ironclad. Many things can impact the title transfer from seller to buyer and sometimes a search just misses things. Even if you conduct a title search, issues may arise during the pending period that could prolong closing or cancel a deal completely.
To avoid issues, get a pre-inspection before putting your home on the market to ensure your home is in good shape and will appraise as highly as possible. Be careful about the offer you select, making sure to avoid contingencies and leaning towards higher cash offers so lenders will have less of a say in the process. Being thorough before accepting an offer will help avoid surprises during the pending period.
If you do accept a contingent offer, though, you’re more likely to experience challenges or see a sale fall through.
Unfortunately, most real estate offers contain contingencies, making it a bit more likely for them to fall through. It’s not a dramatic increase, however. In October 2021, a National Association of Realtors (NAR) survey showed that 5% of contingent contracts were terminated.
Contingencies are legal clauses stipulating certain requirements that must be met in order for a contract to close. Buyers use contingencies to allow themselves to exit the contract with their earnest money if they cannot fulfill stated requirements.
In theory, more contingencies increase the likelihood of a home sale falling through. There are just fewer obstacles to closing the deal. In truth, the market tends to dictate the amount of contingency offers made. In a buyer’s market, there are fewer offers and sellers will agree to more contingencies to secure a sale. In a seller’s market, there tend to be more offers with fewer contingencies as buyers try to make their offer stand out.
That said, it doesn’t always work that way. At the height of the COVID-fueled housing spike in May 2020, that same NAR survey showed 76% of recent closed sales contained purchase contingencies.
Here are some of the most important contingencies to monitor.
A home sale contingency says that a buyer’s offer is contingent on them being able to sell their home before closing. For sellers, this is a risky one. It’s rare but can add some serious pressure to the deal.
Everything may be going smoothly but if a buyer is struggling to sell their home, you may have to delay closing or cancel the sale entirely if they can’t sell their previous home. If, as the seller, you already bought your next home and are ready to move, this could become an extremely expensive headache.
Sellers may avoid accepting offers with this contingency and buyers should try to avoid using them unless they’re really concerned their previous home won’t sell.
A financing contingency means a buyer’s offer is contingent on their lender approving their mortgage. This kind of contingency may sound like it shows a lack of confidence in the offer, but financing contingencies are common today. Most buyers use financing to purchase their homes and 72% of recent buyers put down less than 20% of the home’s price as a down payment. That means they’re probably taking on a sizable loan.
As we’ve mentioned before, even preapproved buyers risk financing falling through. If sellers consider an offer with a financing contingency, they should reach out to the buyer’s lender to vet the likelihood of the offer falling through. Your agent can ask a lender for details on the buyer’s employment to determine if they’ve lost a source of income or acquired debt after the initial application.
Another common contingency, the inspection statement says the buyer’s offer is contingent on the home inspection report. Buyers often use inspection findings to negotiate a better deal or to ask the seller to handle repairs or include repair credits in the sale. With a contingency, the buyer can walk away with their earnest money if the seller refuses to fix any issues that arose in the inspection report.
In October 2021, 21% of buyers waived the inspection contingency, indicating the strength of the seller’s market. Buyers will compromise to get through closing and the inspection contingency is often the culprit in contract terminations or delays.
For sellers, try to avoid this problem by conducting a pre-listing home inspection. This will give you time to discover issues and tackle repairs before you handle offers.
Another one we’ve touched on before, the appraisal contingency states that a buyer’s offer is contingent on the home appraising for an equal or higher value than the offer amount.
According to mortgage giant Fannie Mae, just 5% of home appraisals come in low. However, CoreLogic research indicates the number is actually closer to 20% in the current market.
Most lenders will insist on an appraisal contingency, but 23% of buyers were able to waive it in October 2021. Sellers can negotiate to remove the contingency with both cash and financed buyers. Financed buyers, however, just need to be ready to produce more cash to make up the difference between the offer and the appraised value.
Appraisal contingencies don’t cancel many home sales but they can be something of a nuisance for buyers caught in a bidding war.
Real estate deals fall through for a number of reasons, but it’s not very common. If you’ve made it to closing day, there’s a good chance you’re going to make it through the finish line. However, during the pending and offer periods, things can go awry. Be sure to examine each offer’s contingencies and think through the process every step of the way.
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