Housing Deals That Fall Through

Selling a home is usually not a simple process. But it can become even more complicated and expensive if a deal is made and then falls through –  because the buyers back out at the last minute. 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 the deal falls through.

Legal Late-Stage Exits

In a typical home sale, buyers will make an offer on a seller's home and, when it's accepted, a contract is signed between the two parties. At that point, the property's status typically changes from "for sale" to "under contract"/"in contract." That 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 actually complete until both parties have signed all necessary legal documents transferring ownership of the home at closing.

Buyers often have contingency clauses written into their contracts which are legal ways of "backing out" of the contract at no (or nominal) cost to the buyer. The most common contingencies include:

  • Mortgage Loan Contingency: The buyer must be able to obtain a mortgage for the property, usually within a specific period of time of signing the contract.
  • Home Inspection Contingency: The home for sale/purchase must either pass inspection or the seller must agree to make any necessary repairs noted by the inspector. (Learn more about home inspections in Do You Need A Home Inspection?)
  • Sale Contingency: The home purchase depends on the buyer selling his or her current property.
  • Appraisal Contingency: The price of the home for sale must either meet or be less than the official appraisal price.

When a deal falls through, it is because either the buyer or seller has a change of heart - or one or more of the clauses in the initial contract has not been met - and one party is no longer willing to go to closing.

Warning Signs

Not meeting one of the contract contingencies is a pretty clear-cut, and justifiable, reason not to close. Those aside, however, there are some other, more subjective warning signs that a buyer is about to back out:

  • Failure to return papers signed, dated and completed as instructed
  • Failure to make required payments to third parties (i.e., inspectors, etc.)
  • 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. Call your buyer (or his representative) sooner rather than later if you're concerned that the closing is in jeopardy.

The Cost to Sellers

If you have a contract in hand for the sale of your home, you have a few things to lose if your buyer backs out:

Interest
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 may not be able to entice them back when your initial deal falls through.

Time
One of the most frustrating aspects of a housing deal falling through is that you have to go back to square one and find another buyer. This takes time and could throw a wrench into your plans to purchase another home and/or your moving timeline.

Your Next Home
If you are buying another home and the contract on that property was contingent on selling your current residence (mainly because you needed the proceeds), you may find yourself unable to financially move forward. You may have to back out of the purchase or figure out another way to finance it.

Money
You may lose money as a result of the deal falling through if you:

  • Failed to include a contingency in your next home purchase contract and you need to break it
  • Need to continue making the mortgage payments on your current home and make a mortgage payment on a new home or pay rent
  • Have to continue paying to keep the property up (i.e. utilities, lawn/landscaping, cleaning, etc.) to show the home when it's put back on the market

Saving the Deal

There are steps you can take if your buyer wants to back out. First, make sure that both of the real estate agents involved are communicating and that both you and your buyer are getting copies of all changes or communications in writing. If you or your buyer are not using an agent (or if you're not comfortable with the level of communication you're getting), try talk directly with your buyer to ensure that you fully understand his or her intentions and concerns. See if there are concessions you could make to keep your buyer on track to close. While you may not want to reduce the sale price of your home or lay out more money to make repairs, it may be worthwhile if the potential losses due to a broken deal would be more costly than making desired concessions. (Learn more on how to sell your home in a rough market in 12 Worst First-Time Homeseller Mistakes.)

Also, check your contract to determine what recourse you have as the seller. 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 set percentage of the originally agreed-upon selling price? Or is there a clause that states the buyer is in default if she or he fails to cancel the deal within the stated time frame after signing the agreement?

The Bottom Line

When a deal falls through, it is because one or more of the clauses in the initial contract has not been met, or one of the parties has had a change of heart – usually the buyer. You can protect yourself from a fickle buyer by being an informed and empowered home seller. Know the details of the contract and make sure that your agent knows how to get what you're entitled to (i.e. earnest money deposit, potential interest, etc.). You may want to have a real estate lawyer review the contract and inquire about your recourse options, including the ability to sue your buyer if necessary.