Selling a home is usually not a simple process. However, it can become even more complicated and expensive if a buyer makes an offer, and the sale falls through because of the buyer backing out. 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.
- Buyers often have contingency clauses written into the contract, which are legal ways of "backing out" of buying a home.
- If an offer on a home sale falls through, the seller loses time, money, and misses out on other buyers who were ready to close.
- An escape clause helps sellers since it allows the seller to entertain offers from other buyers despite contingencies in the original offer.
How a Home Sale Can Fall Through
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" 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:
The buyer must be able to obtain a mortgage for the property, usually within a specific period of time of signing the contract. 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.
Home Inspection Contingency
The home for sale must either pass inspection, or the buyer can request that the seller make the repairs that are outlined in the inspection report. If repairs are done, a follow-up inspection is typically ordered to ensure the home passes. Alternatively, the buyer can use the information in the inspection report as leverage to negotiate a lower selling price.
Home Sale Contingency
The new home purchase can depend 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.
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.
When a home sale falls through, it's typically because one of the contingencies outlined above has not been met, or the buyer or seller had a change of heart.
Not meeting one of the contract contingencies is a justifiable reason not to close. However, there are some other warning signs that a buyer might back out of the purchase, and they include:
- 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. Call your buyer (or their representative) if you're concerned that the closing is in jeopardy.
The Costs to Sellers
If you have a contract in hand for the sale of your home, you have a few things to lose if the buyer backs out:
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.
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. 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.
You may lose money as a result of the deal falling through if you need to continue making the mortgage payments on your current home—that you're selling—while also paying for the mortgage on the home you just purchased. Also, you might be paying rent for an apartment until you close your new home purchase, especially if it's far away from the home your selling. In short, a buyer backing out could increase your monthly housing costs temporarily.
If you're under contract to buy your new home and the prospective buyer of your current home backs out, you might have to pay for breaking the contract to buy the new house.
The ongoing maintenance costs of your current home will continue including property taxes, utilities, and landscaping. And since it's important to keep the home looking presentable to attract a new buyer, the costs can add up over time.
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. Also, determine if there are any 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 pay for updates and repairs, it may be worthwhile if the loss of the sale is more costly than the repairs.
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.
However, sellers can protect themselves by being informed and knowing the details of the contract. Sellers must make sure that their agent is working and communicating effectively. Also, if you're the seller, you might consider having a real estate lawyer review the contract, suggest any clauses that could protect you, and suggest recourse options if the buyer backs out—including the ability to sue your buyer if necessary.