The one phone call all real estate agents hate to make to their clients the bad news their pending sale has fallen out of contract.
Home buying and selling is an emotional roller coaster. As real estate professionals, we share in your excitement when an offer comes to the table and even more thrilled when the parties agree on the purchase terms.
But, as we know from experience, the work doesn’t stop there. Please remember just because a home is under contract doesn’t mean the sale will close. Anything can happen between opening escrow and actual closing day to cause a property transaction to crash and burn. In our career, we’ve seen all the road bumps. One notable moment happened when a car went through the front of a house. We were able to assist the sellers and today they’re living in their new dream home off Eagle Mountain Lake.
The majority of home sales do close. The rate of failed pending sales was 3.9 percent in 2016, a minuscule number in the scheme of things. Chances are, with the right real estate expert guidance, your home sale will close. That doesn’t mean you should not be prepared in case the deal goes awry. Let’s look at common reasons homes under contract fail to close and what to do to prevent this from happening to you.
Buyer financing falling through
This is the most common reason a transaction fails to close. The National Association of Realtors® (NAR) found in 2018’s Home Buyers and Sellers Generational Trends Report 88 percent of home buyers finance their homes. Chances are, your buyer will seek financing and make it a contingency in their contract.
As to why buyers fail to secure financing, there’s a range of reasons. These include, but are not limited to:
- Buyer’s employment status changes
- Buyer experiences a personal hardship, like an unexpected health issue
- Buyer separates from spouse
- A negative credit issue
- Buyer accrues more debt
- Lender guidelines change
A pre-approval letter is an excellent way to show the buyer is qualified to purchase the home, but it not a guarantee they will be approved for a loan.
What to do: In this scenario, the burden falls on the buyer. Do look for a pre-approval letter or proof of funds, but don’t take it as set in stone.
Smart mortgage loan officers and buyer real estate agents will counsel the buyer not to make any significant purchases that would impact their credit rating and debt-to-income ratio while the home is under contract. Unfortunately, not all buyers heed this advice and in their excitement, rush to finance new furniture or buy a new car.
It’s disappointing, but your best bet is to get your house active on the market again.
Home inspection contingency fails
The majority of purchase contracts include a home inspection contingency. This home inspection reviews the home from top to bottom to ensure it’s in good working order. Even newer homes have some problems.
Buyers can use the home inspection report to amend the contract. This includes requesting repairs before closing or asking for a credit to repair defects. Sometimes, buyers do make unreasonable repairs or credit requests. A real estate agent has insights into what’s acceptable and what’s over the line.
When the seller and buyer don’t agree on amendments, the pending sale can be canceled. If the seller agrees to repairs and fails to make them on time, the contract can also be terminated.
Note: A mortgage lender’s appraisal can also request minor home repairs before closing.
What to do: Your home should not fail this contingency if you have an experienced real estate professional for two reasons:
- They should thoroughly look through your home to find issues that might impact the sale
- They should recommend you get a pre-listing professional home inspection to spot any issues they miss
The pre-listing inspection gives you time to amend your listing price or make necessary repairs. The buyer’s home inspection should reveal zero surprises.
If you do agree to repairs, please make sure to finish by the determined date. Your real estate professional can offer a list of contractors to complete the necessary work.
Buyer’s home contingency
This contingency means the buyer must sell their current home before purchasing your home. They have the leverage to pull the offer if their current home does not sell within a certain period. Buyers use this contingency when they can’t afford two mortgage payments or need the equity for a down payment on your home. Contracts with this home sale contingency risk staying pending for a long time.
Home sale contingency sets up a domino effect. While all homes can sell with the right real estate guidance, some take longer than others.
What to do: Talk with your real estate agent if you receive an offer with a home sale contingency. You might want to find out where the buyer is in their home sale. Have they not listed it yet? Is it pending closing? It’s your decision if you want to accept this contingency in the purchase agreement, but be well-educated about what it means. Know that your home could be pending for a long time, and has a higher risk of falling out of contract.
One option is a “kick-out” clause. Sellers retain the right to cancel the contingent buyer if another buyer wants to buy the home without a home sale contingency. This clause enables you to keep actively marketing the property while the potential buyers close their home sale.
Low appraisal
A bidding war for your property is exciting, but multiple offers do come with risk. If the bidding war lifts the price beyond the home value, there might be trouble with the lender’s appraisal report. Mortgage lenders will not finance a home for more than its appraised amount. It’s how they protect themselves from bad investments.
What to do: In this scenario, where the lender’s appraisal does not align with the purchase price, the first step is to look at the price difference between the two amounts. If the difference is small, the buyer can choose to make up the difference by paying cash or try to renegotiate with the seller to come into agreement with the appraisal amount. It’s up to you if you accept this renegotiated price.
Instead of these options, especially if the dollar figure if more than a few thousand, the buyer might opt to order a second appraisal from the different vendor and submit their report to the mortgage lender. They might protest with comparable sales that do support the sale price.
If there are concerns the home will not appraise accurately, be ready with a home fact sheet to provide the appraiser and underwriter. These include repairs that may not be as obvious but add to the home’s value, like a new roof or a recent renovation.
Title issues
A problem with the title will stall or kill the purchase contract if it cannot be resolved. The buyer’s lender will verify there are no unpaid debts or outstanding financial responsibilities on the property. The lenders will not issue the loan until these title liens are removed.
Typical liens are for unpaid property taxes and other debts, like a medical lien. There could be entitlement issues, through a will or a divorced spouse. Perhaps restrictions limit your property’s use. Until these encumbrances are removed, the sale will not go forward.
What to do: Next steps depend on the issue. If you have a third-party on the deed, you’ll need to resolve the sale with that party. Inheritance issues might mean consulting with a probate lawyer and dealing with a probate court.
If you know an ex-spouse or a family member is on the deed, discuss the sale before listing. Document any agreement, preferably with a law professional.
Unpaid Property Taxes
During the title check, you may discover unpaid property taxes or other debts placed on your home. These unpaid property taxes might originate with the home’s previous owner.
A property tax lien prevents the property from being sold or refinanced until the tax is paid. Texas is considered a “tax deed” state, which allows the state to sell the property to collect the amount of tax due. The initial tax deed sale process takes 1-2 years and there is a six-month period where the owner can still redeem the property.
What to do: In your initial purchase of the property, you should have been presented with a final title document before closing. Hopefully, you reviewed the title report carefully. Look at the chain of owners and any claims or debts on the property. Ideally, you should have resolved any known issues before closing. If you were not given a final title document, you have the right to pursue legal action against the professionals handling your home sale.
Title searches aren’t foolproof, especially if the lien is levied after you closed on this property. Title insurance helps protect yourself from an old tax lien on your property. If a tax lien does appear, the insurance will pay your costs and fees. If you mortgaged the home, your lender likely required you to buy a title insurance policy.
Without title insurance, one option is to pay the prior owner’s unpaid taxes and pursue legal action against the former owner for the unpaid bill. You can allow the government to take the house in payment for the taxes, or you might need to sell the home to pay the past due taxes.
Survey disputes
Property surveys generally are reliable, but this is not always the true. Sometimes, different surveys exist showing different boundaries. This allows another party to claim ownership to part of your property. It may bring up issues with land use and zoning, fences and boundary lines, or rights to resources.
What to do: All descriptions of the property in legal documents must be as clear as possible to reduce the need of a property survey. If your home hasn’t been surveyed in years, or has been impacted by eminent domain, consider a new property survey before listing.
Title insurance requires properties have a new survey on file. If you did not file a new survey, it will not assist you in a legal dispute.
Hire a different professional surveyor from a different vendor to survey the property boundaries. This helps resolve the ambiguities in differing reports.
In the case of a conflict, your best course of action is to consult with a real estate lawyer. They will get to the root of issue and how local laws impact your claim. Property survey dispute resolution sometimes requires paying a damage award.
Real estate deed/mortgage fraud
CoreLogic found mortgage fraud risk jumped more than 12.4 percent year-over-year. This amounted to 1 in 109 applications. It’s not the only risk: deed fraud occurs when a scammer steals someone’s identity to claim ownership of the home. These con artists turn around and sell the property.
What to do: The numerous steps and regulations in the real estate process are designed to prevent and catch fraud. Still, nothing is foolproof. Unsavory characters are always finding ways to exploit the system.
In the case of deed fraud, be on the lookout for warning signs: notices of foreclosure, unpaid utility bills, and not receiving your tax bill. Scammers often prefer to snag vacant properties, like vacation homes or those with recently deceased owners. Redirect the mail to your primary residence. Do everything possible to keep the exterior in good conditions, and visit the vacant property on a regular basis. Check the windows and locks.
Discovering someone else has claim to ownership of your home while it’s under contract is stressful and disconcerting. Your first steps are to contact law enforcement and secure a real estate attorney. Collect all the documents proving you are the owner: the original deed, mortgage documents, and insurance policies. It can take time to clear the fraudulent claim, but a real estate attorney will help.
For mortgage fraud, the deal is done. You don’t want to work with these buyers. A real estate professional helps you find qualified buyers intent on following the transaction process according to the law.
Buyer changes their mind
Buyer’s remorse is real. Sometimes, they simply change their minds after submitting their offer. Sometimes the buyers will use a contingency or another loophole to cancel the offer. When the contract cancels for a contingency, they do receive their earnest money back.
What to do: It’s understandably frustrating to have a buyer get cold feet. Cut your losses and let your listing professional get back to work finding the right buyer genuinely interested in your home.
Hiring the wrong real estate agent
Did you notice a trend with the reasons a pending sale falls through? It often has to do with oversight. A ball was dropped at some point in the transaction process.
Listing your home with the wrong person is the start of these problems. Lots of inexperienced or unprofessional real estate agents get lucky securing purchase contracts for their clients, but that never guarantees the home will sell. The wrong person makes the process frustrating.
A skilled real estate agent does everything possible to make sure your home sale doesn’t fall out of contract. You’ll keep hearing from them as the closing date draws closer. They stay on top of the deadlines and paperwork. They read for key clauses and know where to check the fine print. Their advice to you is backed by industry knowledge.
What to do: Take your time interviewing and hiring a real estate agent. Ask for referrals, see their track record, and learn how they operate.
The Chicotsky Real Estate Group has seen it all when it comes to hurdles to closing. Our real estate services extend beyond securing you the best contract for your home. We stay with you every step of the way. We hope your first signed contract is the only contract, but if something goes awry, we will support and guide you through it.
