Five Common Ways Real Estate Deals Fall Through

When the real estate market was red-hot like it’s been over the past few years, it was common for buyers to give up some of the wiggle room that is built into common contingencies found in a standard purchase contract.  Now that the market has cooled off, many buyers are submitting contracts that include language that allows them to walk away from the deal and still get their deposit back. 

Once a deal is made, what can cause it to go south?  We turned to one of our favorite Real Estate bloggers, Eli Tucker of Eli Residential Group, to learn more about the most common ways real estate deals fall through.

 Understanding the Earnest Money Deposit

The Earnest Money Deposit, or EMD, is a negotiated amount of money (usually between 1% and 5% of the sales price) that is typically held by a third party during the contract phase of the real estate transaction.  The general idea is that if the buyer fails to follow through on the obligations spelled out in the contract, then the seller may claim default and keep all or some of the deposit as damages. When the deal goes to closing, the EMD is applied to the total amount owed by the buyer (down payment + closing costs less EMD).”

But once an EMD is secured, how can buyers back out of the deal?  The answers can be found in clauses throughout the contract, which stipulates if, and how, the buyer can get out of the contract without losing the EMD. Eli explains the most common protections that home buyers have, which are also the most common ways a contract can fall through: 

Home Inspection

The Home inspection is an opportunity for a buyer to access the property and engage a licensed inspector to closely inspect the property and issue a detailed report.  A Home Inspection contract contingency allows a buyer to either void the contract and/or renegotiate the terms based on the report. Because the contingency allows the buyer to void without penalty during the contingency period (usually in the first 3-10 days of the contract) it is a very common reason for a deal to fall through.

Financing

The next most common reason deals fall through is the Financing Contingency. If a financing contingency is written into the contract, the buyer can walk away from the deal if they are unable to obtain a loan to purchase the property.  Even though most contingencies are worded to prevent buyers from self-sabotaging their efforts to obtain a loan, that can be hard for sellers to verify.  Depending on the contract, buyers may even be protected up until the actual day of closing.  That’s why Eli recommends that sellers should require a verified pre-approval letter from a reputable lender who has reviewed the buyers’ financial information and documents before entering into a contract.

Appraisal 

If a loan will be required to purchase the property, the lending bank will usually rely on an independent third-party appraiser to analyze the current market value of the home.  If the appraiser determines that the property does not meet the value of the purchase price written in the contract, the appraisal contingency comes into play.  In some cases, the seller may have the opportunity to lower the sale price to the appraised value without voiding the contract, and the buyer may have the option of voiding if they can’t reach a suitable agreement. It’s critical to have a real estate professional who understands the terms governing your jurisdiction when it comes to appraisal contingencies.

Homeowner’s Association Document Review

When the property is a part of an association such as a condominium association or homeowner’s association, there may be additional contingencies that allow a window of time in which the buyers can review the bylaws, overall health, financial standing, and operational details of the association they are buying into.  During the review period, the buyers may be able to unilaterally void the contract without stating a specific reason or allowing the sellers to rectify the issue.  For this reason, buyers with cold feet will sometimes use the association review period as an easy way to walk away from the deal without losing their EMD.  Eli recommends that anyone selling a property that is governed by association rules should have all of the association documents ready for quick delivery to the buyer to facilitate the review period as quickly as possible.

Title

Sellers are contractually obligated to deliver a title (ownership)that is “good, marketable, and insurable”. If the seller is unable to deliver a “clean” title by the closing date, they may be found in default, which would give the buyer a way to walk away from the contract.  Title problems that arise may include unreleased liens or administrative errors and may give the buyer the right to void the contract.  A reputable title company is your best defense to clear up any title issues that threaten the deal.

In comparison with buyers, sellers typically have far fewer ways of backing out of a sales contract in which the buyer is performing all of their contractual obligations.  That’s why sellers should work with experienced real estate professionals who have first-hand experience with contract contingencies and a strong track record of taking their contracts to completion at the closing table. 

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