You’ve readied your home for sale, endured an open house or two, and a buyer has submitted an offer. It’s time to celebrate… right?
Don’t break out the bubbly too quickly. Sales fall through all the time — the average home sale takes about 50 days to close, and a lot can change in almost two months.
Whether your home sale is pending — the seller accepted an offer, but the sale hasn’t closed yet — or it’s a contingent sale. Don’t celebrate too soon. Here’s what to expect and what can still go wrong.
What Is a Contingent Offer?
A contingent offer means that the offer on the house has clauses to protect the buyer. The buyer or seller must meet specific conditions before the sale can close. If these conditions aren’t satisfied, the buyer has the right to withdraw from the purchase. Contingent offers on houses can protect the buyer from:
- Losing earnest money, or the money put down before closing.
- Involvement in a deal they can’t afford.
- Delegated issues that may arise during the house-buying process.
Sellers can accept, reject or change the buyer’s contingent offer. The aim is for the buyer and seller to reach a mutual agreement that benefits both parties. The buyer is responsible for choosing the initial contingencies or terms to include in the offer before presenting it to the seller. Afterward, the seller can propose changes if they don’t want to accept the initial contract offer.
How Does a Contingent Offer Work?
When buyers find a property they’re interested in, they can add a contingency to their offer to the seller. Once the seller receives the offer, they can decide whether to accept, reject or make a counteroffer that eliminates the contingency.
If the seller accepts the offer, they usually have two options. First, they can choose to take their home off the real estate market in hopes that the buyers meet stipulations within the contingency clause. The other option allows the seller to write a “kick-out clause” into the contract, enabling them to keep their property on the market to accept another offer while contingent. If the seller receives a better offer, they have to let the original buyer have a chance to purchase the home within a specific time frame.
What Percentage of Contingent Offers Fall Through?
At the height of the pandemic, many homes were taken off the market, and deals fell through. In March 2020, about 18% of contracts were canceled, but this rate returned to regular levels within a few months.
In 2022, the National Association of Realtors reported that 7% of purchase contracts fell through. While this number shows that most home sales go through closing, a significant portion of home sales doesn’t make it to closing. The possibility that a contingent home offer can fall through is a cause for concern for home buyers. There are many reasons why pending sales and contingent offers fall through. Let’s look at common causes of failed sales.
Why Do Pending Sales Fall Through?
Many factors come into play with pending home sales that can cause them to fall through. Below are some common reasons a buyer might back out of a non-contingent offer:
1. Financial Difficulties
You probably won’t be surprised to learn that financing difficulties cause pending sale failure, especially since 87% of buyers finance their home purchases.
- Changes in financial status — such as losing or switching jobs, taking on new debt or changes in lending guidelines — may lead to a lender canceling a pre-approval
- Lenders may deny a loan to buyers who have high debt-to-income ratios
- Buyers may have liens filed against them that they don’t know about until they apply for a loan— lenders won’t offer a loan until these liens are cleared
A mortgage contingency allows the buyer to walk away from the deal without losing their earnest money if they can’t secure their financing or it’s delayed.
2. Home Inspection Trouble
Another common sale obstacle? A home inspection contingency. An inspection contingency enables the buyer to walk away if an inspection reveals unexpected problems. After the initial offer is made, it’s common to have a home inspected.
Unforeseen issues with the property can affect a buyer’s interest in the property. A home inspection contingency allows the buyer to renegotiate or back out of the contract after the inspection. The buyer can insist that the seller make repairs or lower the asking price to make up for the cost of the repairs. If the buyer or seller can’t agree with the repairs, the buyer can walk away.
3. Lower Than Expected Appraisal
Then there’s the appraisal. Lenders require that a property is appraised before they agree to provide financing for the buyer. Lenders won’t finance a property for more than the appraised value, but bidding wars often raise prices above market value in a seller’s market. If an appraisal comes in low, options may include reducing the cost, the buyer paying the difference in cash or the buyer choosing to back out.
What if someone looking to buy your house has written a home sale contingency into the offer? A home sale contingency enables the interested buyer time to sell their home if they choose to buy the seller’s property without a loan or want to get rid of their first mortgage. Many buyers can’t pay two mortgages, so they won’t buy another house until their current home is sold. They can walk away if their home doesn’t sell within an agreed-upon time.
4. Buyer’s Remorse
Finally, a buyer may simply get cold feet. Consider that 26% are first-time home buyers who may experience stress when making the most significant financial decision of their lives. Buyer’s remorse is all too common.
Different circumstances in a person’s life can cause them to back out of a contract. People can experience buyer’s remorse if they’re not 100% certain they want to buy a new home, if they’ve rushed into the decision or if another aspect of their life forces them to change their decision. Whatever the reason, buyer’s remorse can stop a sale before it can close.
Inexperienced buyers can also cause a pending sale to fall through. Buyers with little to no experience may overestimate their budget and put an offer on a home that’s more than they can afford. First-time buyers may also have a lack of credit which can affect the application process for a mortgage. Sellers need to note if they’re working with a first-time buyer since there’s a possibility for risk.
5. Attorney Selection
While not all states require that a real estate agent be present, some do. If a buyer or seller chooses an attorney without the proper experience or expertise for the job, it can cause the sale to fall through by:
- Missed deadlines: If a buyer misses a deadline within the home buying process, it can cause them to lose certain rights. The attorney’s responsibility is to help the buyer keep up with the deadlines so they can stay on top of things.
- Misunderstandings: If an attorney doesn’t fully understand the specifics of a sale, it can make it challenging to complete a deal, potentially causing it to fall through. Buyers need to choose an attorney with the experience and expertise to understand what needs to be done to close the deal.
- Failed document delivery: The buying process requires many documents from each side to ensure a successful closing. Buyers should choose a real estate attorney with plenty of experience to ensure they can deliver the correct records and avoid delays that could cause a deal to fall through.
It’s essential for buyers to choose the right real estate attorney if they need one to prevent the buying process from falling behind.
How to Keep Your Home From Returning to the Market
Fortunately, sellers do have options. You don’t have to agree to contingencies; however, rejecting a home sale contingency may decrease the buyer’s ability to secure a loan. You also have other options, including:
- Writing a “kick-out” clause: Sellers can choose to include a “kick-out” clause, which allows them to keep their property on the market so they can continue to take offers while the buyer sells their home. If a seller receives an offer they want to accept, they must first give the sellers a notice to give them a chance to purchase the property if they can.
- Being selective: While the highest offer may be tempting, it’s not always the option that will help you close, and it may not make it through the appraisal process. Instead, you should prioritize offers with fewer contingencies to help increase your chance of a successful closing.
- Pre-inspecting: One way to avoid surprises if you accept an offer with a contingency is by pre-inspecting your property. You’ll know what repairs you need to make before selling or adjust your price to account for repairs and renovations the buyer will become responsible for.