5 reasons home sales fall through and how to prevent them
Common reasons home sales are cancelled
- Home inspection uncovers major problems
- Buyer’s existing home doesn’t sell
- Buyer’s financing falls through due to appraised value, title, property condition or borrower finances
- Seller can’t find a new home
- Miscommunication or cold feet
A signature alone does not guarantee a home sale or purchase. Even after both buyer and seller endorse a purchase agreement, there are many hurdles to overcome before the seller is paid and the buyer gets the keys.
Although binding, a purchase contract includes several contingencies that protect the buyer, the buyer’s lender and the seller from problems that may be discovered during closing. Recognize and avoid these five common reasons deals fall through to make your home sale or purchase as smooth as possible.
1. Home inspection uncovers major problems
The home inspection contingency protects the buyer if any major problems with the home are discovered. These must be significant issues identified by the home inspector such as mold, structural instability, pest problems or roof damage. Cosmetic concerns such as broken tile or outdated appliances and systems typically cannot trigger a home inspection contingency.
To avoid surprises at closing, sellers can arrange for a home inspection prior to listing to identify any issues. If problems are discovered during closing, sellers may offer to fix the issue or provide closing credit to cover the cost of repairs. Based on the home inspection contingency, however, the buyer is not obligated to accept these seller concessions.
2. Buyer’s existing home doesn’t sell
Buyers who already own a home may include a sale contingency in the purchase agreement, allowing them to walk away if they cannot sell their existing home. This is a risky proposition for the seller. Alternatively, sellers can refuse to accept a sale contingency; require documentation that the buyer’s existing home is in settlement; or add language to the contingency that grants them the right to accept a stronger offer.
Buyers without a sale contingency can consider obtaining bridge financing to purchase the new home before their existing home sells. Holding multiple mortgages at once is a costly situation, however.
3. Buyer’s financing falls through
Many prospective buyers require a mortgage to purchase a home. In these cases, lenders often include financing contingencies that allow them to rescind the mortgage offer should certain problems emerge.
If the buyer is not approved for a mortgage, the home sale stops right there. As such, sellers should carefully consider whether they want to accept offers from buyers who are not preapproved for a home loan. In some cases, even preapproved buyers may lose their financing if they lose their job, divorce or their credit score changes from when they were initially preapproved. Buyers are advised not to make any major financial moves while their mortgage is pending.
Lenders will not issue a mortgage worth more than the appraised value of a home. If the appraisal is lower, the price difference must be patched — either by the seller dropping their asking price or the buyer paying cash or getting a second mortgage to cover the balance. If you believe the home was inaccurately appraised, the lender may allow for a second appraisal. Provide the new appraiser with comparable sales information to back your case for a higher appraisal.
Specialized loans such as those backed by the Federal Housing Administration (FHA) may have certain requirements for the properties they finance. If the appraisal reveals any deficiencies, the buyer and seller must agree on how they will be fixed before proceeding with the loan.
There may be outstanding liens or other claims to the property without the seller’s knowledge. The lender will not move forward with the mortgage offer until the issues are cleared. In fact, the seller may not even have the right to sell the property if the liens are in place, so it is in everyone’s best interest to clear them.
Lender rejects homeowners association (HOA)
If the property for sale is governed by a homeowners association, lenders will assess the HOA’s solvency, any outstanding litigation and the ratio of owner-to-tenant-occupied units. Both buyer and seller should closely examine HOA documents as soon as possible to identify any issues with the association prior to signing a purchase agreement.
4. Seller can’t find a new home
The seller can add a sale contingency to the purchase agreement dictating that the home won’t be sold unless they find and close on another property. Like a buyer’s sale contingency, this puts the other party at significant risk. Buyers should ensure that the seller’s sale contingency details its timeframe as opposed to accepting an open-ended promise that could jeopardize the deal at any time. If sellers find this time period insufficient, they should seek a longer closing period or decline the buyer’s offer.
5. Miscommunication or cold feet
In some instances, buyers or sellers simply get cold feet. This is not a sufficient reason to cancel the deal scot-free, however. Signing the purchase agreement pledges your intention to buy or sell the property pending any extenuating circumstances outlined in the contract. If buyers put down an earnest money deposit, they lose the cash if they back out for little reason. If the sellers decide to withdraw from the agreement without cause, they will need to return the earnest money deposit and potentially reimburse the buyer for costs incurred during closing.
Much of the drama around home sale transactions boils down to miscommunication between buyer and seller. Both the listing agent and the buyer’s agent should ensure that their clients have a concrete understanding of the purchase agreement contingencies and how they are executed. Moreover, Realtors should facilitate dialogue, concessions and price negotiations between the two parties to support a productive and amicable transaction.