by Anna Varnell
on Monday, February 20th, 2023 at 8:16am.
The most common reason for buyers backing out of a contract is due to the results of a home inspection. The home inspection notes any issues in regards to safety, structure, and functionality. It allows the buyer to make an informed decision about what they are purchasing. While typically the buyer will negotiate with sellers on repairs to be done or money to go towards repairs, if a buyer has an inspection contingency in their offer they have the right to walk away. A buyer is most likely to walk away if they cannot come to an agreement with the seller or a major issue like water intrusion or foundation issues pop up.
Seller tip: There are two things a seller can do to help prevent a buyer from walking. Fixing necessary items prior to listing and being negotiable. While a leaking sink may not deter a buyer, that plus a long list of to-dos can quickly become overwhelming. Second, if you are not willing to do any repairs or negotiate, it is important to price your home accordingly.
2. Loan denial
When looking at an offer presented to you as the seller, having proof of funds is one of the most important documents in your offer package. Having a pre-approval letter shows that they are actively working with a lender who has pre-approved them based on their financial documentation vs a pre-qualification letter which is given based on very basic details in many cases without any documentation. While a pre-approval letter does not guarantee a closing as things can always pop up in underwriting, it is a much stronger documentation that a pre-qualification.
Seller tip: Always make sure you have proof of funds. This can look like bank statements if it’s a cash offer or a pre-approval letter from a reputable lender. Also be sure to vet their lender. This is where having an experienced agent on your side can be make or break. Having a great lender can help make the process a smooth and seamless transaction.
3. Home sale contingency
While selling a house hasn’t been too much of an issue these past few years, we have started to see homes taking some time to sell. If the buyer cannot sell their current home for whatever reason, they may not be able to purchase a new one.
Seller tip: Look for contingencies in the offer like a first right of refusal or a kick-out clause. Sellers can still advertise and accept another offer if the current buyers are not able to sell remove their home sale contingency in a certain amount of time. This can protect a seller from missing out on another opportunity.
An appraisal gives the value of a property. Typically, a lender will require an appraisal to be done to ensure that a buyer is not paying $300,000 for a house that is only worth $250,000. That would simply be a bad financial investment. If an appraisal value comes back under the offer price, it doesn’t necessarily end the contract. You can still negotiate. For example, if a buyer and seller are under contract on a house for $300,000 and the appraiser says the home is only worth $280,000, this means the lender will only loan the buyers $280,000 for the house. Some options on how to handle this situation are the sellers can lower the price, the buyers can bring cash (not a loan) to make up the difference, or they meet in the middle. If neither buyer nor sellers are willing or able to come to an agreement and move forward with the new price of $280,000, the buyers can walk away if they have an appraisal contingency.
Seller tip: Have the comparables to support your asking price as well as the purchase price. Accepting the highest offer is not always the most advantageous decision if you are worried about an appraisal value.
5. Cold feet
Lastly, buyers can simply get cold feet. This is where having a knowledgeable and experienced agent is crucial. While every situation is different as it depends on what your specific contract says, if a buyer walks away, the seller may be entitled to keep the earnest money or (again, depending on the contract terms and state legalities) sellers can take legal action. While a real estate agent is not an attorney and cannot give you legal advice, it is their job to know the terms of the contract and protect you to the best of their ability as their client. They can advise on the breach of a contract and make a referral to an outside professional as needed.
Seller tip: Have a reputable real estate agent! I cannot express this enough as each and every contract is different. A knowledgeable agent will know the ins and outs of what the contract states and it is their job to protect you to the best of their ability every step of the way.