Nearly one out of every seven home sales fell through in March – that’s about 13.4% of all transactions, which is tied with March 2023 as the highest percentage of contract cancellations since the chaotic market in March 2020 when the pandemic began, according to Redfin. A higher-than-normal percentage of transactions were cancelled in January and February, too.
A big reason for this, according to Redfin, is that buyers now have the upper hand in many housing markets. They’re more willing to back out if they feel confident they can find another home to buy in the future. The data bears out that theory: the biggest percentages of cancelled contracts are in places that are firmly in buyer’s market territory – with more homes available for sale than demand – such as San Antonio, Orlando, Atlanta, Las Vegas, and Riverside, Calif.. In seller’s markets – such as in Seattle, Nassau County on Long Island in New York, and Milwaukee – contract cancellations are just 3.5% to 8.5% of planned transactions.
There are multiple factors at play influencing the decision to break a contract, says Sara Briseño Gerrish, broker/owner of REMAX Unlimited in San Antonio.
“Consumers are dealing with high inflation, higher interest rates than they have been since the pandemic and low housing stock,” she says. “We’ve seen buyers fail to close because they don’t qualify for financing because of a job change, their debt-to-income income ratios have changed or insurance is higher than what was planned for; or they feel like the home needs too much work or the appraisal is too low. Of course, the human component of buyer’s remorse can sometimes play a part.”
Buyers sometimes find they can’t get financing even though they have a prequalification letter from a lender, says Tara Hurst, a real estate agent with Coldwell Banker Realty in Marietta, Ga. The bigger issue, though, often comes down to the condition of the home, such as unexpected repairs found during the inspection that the seller was not prepared to correct. FHA and VA loans often have higher requirements for repairs than conventional loans, and sometimes sellers can’t afford to pay for those repairs before the loan closes, she says.
“We’re seeing some issues with roofs over the age of 15 years—this causes homes to not be ‘insurable’ at times,” Hurst says. “So, my team has built relationships with some roofing contractors who will complete the roof prior to closing and get paid at the closing table.”
If you’re a buyer considering canceling a contract, the most important thing is to make sure it can be done without losing your earnest money deposit. Deposits are typically provided when an offer is accepted and are held in escrow until the sale closes. An earnest money deposit is often 1% to 3% of the home price, according to Realtor.com and Zillow, but it can go up to 10% in some cases. The deposit amount depends on local practices and market conditions. For example, a buyer may make a higher deposit in a seller’s market to increase their chances of winning a bidding war.
Who Cancels Whom?
Typically, the buyer cancels a contract, since sellers have no “right to cancel” and could be sued, says Hurst.
“The buyer has more contractual outs in our Texas contracts than the seller, so we see buyers more often exercise their right to cancel,” Gerrish says. “Some of these contractual outs include the option period, third party financing contingency and an appraisal contingency.”
The “option period,” which is common in Texas, is a few days negotiated into the contract that allows the buyer to cancel for any reason. Other locations have time-limited contingency periods when they can hold an inspection, finalize their financing and have the property appraised – and, if any of those things fall through or are unsatisfactory before the time limit, the buyer can cancel without penalty.
In rare cases, such as a title issue or a dispute about repairs, a seller can cancel the contract, Gerrish says.
“The seller could be considered the party cancelling if a buyer requests repairs during due diligence,” Hurst says. “The seller has the right to say no to repairs or negotiate the number of repairs they are willing to do. If the buyer finds this unacceptable, the buyer could terminate the agreement during due diligence, and the earnest money would be returned.”
New Construction Home Contracts
Contracts for newly built homes work a little differently than the legal documents used to buy resale homes.
“Builders use their own contracts, and those contracts are often much more restrictive,” Gerrish says. “In many cases, deposits are not fully refundable, especially once construction has started or selections have been made. Buyers need to understand those terms upfront and should absolutely have representation to help navigate that process.”
Typically, there’s a limited window for canceling a new construction contract, Hurst says. She says the maximum she usually sees is 10 days.
“Many builders require buyers to pay for all or a large portion of upgrades prior to construction beginning,” Hurst says. “The builder has their own contracts drawn up that protect the builder more than the buyer, so it is rare for a buyer to be able to get any deposit back once the initial due diligence term expires. Many builders also require or give incentives to buyers to use their lender so the pre-approval process with that lender coincides with the initial due diligence term. Doing this also eliminates a separate financing contingency.”
Buyers: How to Avoid the Drama of a Cancelled Contract
Working with an experienced agent, especially one who tries to anticipate worst-case scenarios, can help buyers avoid cancelled contracts for both new construction and resale properties, Gerrish says. Even more importantly, buyers and their agents need to pay attention to all deadlines stipulated by their contract.
“Timing is everything,” Gerrish says. “Buyers are protected if they terminate within their option period or within the timelines tied to their financing or appraisal contingencies. The safest strategy is to always have an option period in place, pay attention to deadlines and submit termination paperwork properly and on time. Missing a deadline is where buyers risk losing their earnest money.”
Buyers can cancel their contract for any reason during the option or “due diligence” phase of contracts in many states, or if their financing or appraisal doesn’t come through before the deadline. However, once they’re approved for financing and the home appraises, they cannot "just decide" to change their mind and receive their earnest money back, Hurst says.
Here’s how to avoid losing a deposit because of some common issues:
Sellers: Steps to Increase Your Chances of Contract Completion
While sellers can’t entirely prevent a cancelled contract, they can take some steps to reduce the likelihood that their buyers will back out, such as:
Pricing their home correctly. Overpricing can lead to appraisal issues, Gerrish says.
Do a pre-listing inspection. Hurst says an inspection helps sellers avoid financial surprises after a buyer’s inspection. “It would be even better to take care of repairs prior to listing,” she says. “Service the HVAC unit prior to listing and keep the termite bond current so there is no fear of termites being discovered at inspection.”
Be transparent about the home’s condition. The seller’s disclosure is so crucial to the transaction, Gerrish says. “Surprises during the inspection are one of the fastest ways to lose a buyer,” she says.
Vet the buyer. Gerrish says sellers and their agents should make sure the buyers have a strong lender and a solid loan preapproval before accepting an offer.
Most deals that fall apart are preventable,” Gerrish says. “It comes down to preparation, communication and having the right professionals guiding you through the process. When buyers and sellers understand what to expect and have a strong team around them, the path to closing becomes much smoother.”
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