There are many reasons that buyers back out of a signed purchase agreement. Real estate contracts can be complicated. They can include many contingency clauses allowing both the buyer and seller to get out of the contract after it’s signed but before the deal closes. However, it’s the buyer that backs out of almost one third of the signed deals.
Financing Falls Apart
Although traditional financing requirements have eased marginally, they remain tough. Few if any realtors will work with a buyer that isn’t preapproved for a loan. So, you would think it would be very seldom that a deal falls apart because of financing.
However, the fact is that a preapproval isn’t an approval. Buyer’s circumstances can change after being preapproved for many reasons. A financial emergency can sap money out of the down payment account. Or Employment can change just to mention a couple. Also, the lender typically preapproves based on nothing more than what the buyers verbally tells them and a quick check of the buyer’s credit score. Once the official application (for a signed deal) is submitted, the lender does a much more thorough background check of the buyer. Many things can show up that the buyer didn’t previously disclose. It only takes tiny discrepancies to kill the financing.
It doesn’t have to take anything more than a small increase in mortgage rates to put financing out of the reach for someone that was just barely prequalified at a lower rate.
Appraisals and Inspections Can Kill the Deal
Appraisals are heavily dependant on past sales in the neighborhood. In a market with rising prices, it takes time for recent documented sales to catch up with the appraiser’s records. Even when the seller and buyers agree on a fair sales price, if the appraisal comes in below that price, either the buyer or lender can kill the deal.
Same thing with home inspections. Inspections are not a “pass” or “fail” rating. These are only a listing of the defects in the home. Every home has some defects, including new construction. The typical inspection clause of a purchase contract allows the buyer to back out for any reason. The lender can also drop the financing based on the inspection. For example, the inspection states the roof needs to be replaced within a year and the buyer agrees to absorb the cost. But the lender thinks that adds too much risk to the deal and backs out.
In today’s continuing weak economy, it doesn’t take much to scare buyers away from a commitment for the largest asset they are likely to ever purchase. It could be nothing more than a rumor at work that the company is in financial trouble or that they are looking at laying people off. Or maybe it’s a poor economic report from the Federal Reserve or Moody’s or anybody else.
The buyer can simply have a change of mind to decide this isn’t the ideal home for them. The buyer often does more research after having the offer accepted. They could find they don’t like the school system or the neighborhood isn’t to their liking. The wide-open inspection clause can always be used to back out of a deal even if the reason has nothing to do with the inspection.
Not that seller’s can do much to keep signed deals from falling apart but they can now at least understand the key reasons almost one out of three signed deals never make it to the closing table.
Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.