Disclaimer: This article is originally written by Michele Lerner on Washington post & shared NOT written by Sisters Who Buy Houses.
Real estate sales contracts were canceled at a higher rate in June than since the pandemic-related housing boom began: Nearly 15 percent of them were canceled that month, according to analysis by Redfin real estate brokerage.
Whether you’re a buyer or a seller, once you’ve signed an agreement to transfer ownership of a house, you probably want that transaction to be completed. But contracts can be canceled by either side for different reasons, so it’s smart for buyers and sellers to understand their rights and responsibilities when it comes to real estate contracts.
We asked for advice from Kelly Martinez, a real estate agent affiliated with the Vienna/Tysons Corner office of Coldwell Banker Realty in the Mid-Atlantic; Corey Burr, a real estate agent with TTR Sotheby’s International Realty in Washington; and Andrew Detweiler, founder and broker of the Rockville Real Estate Exchange in Rockville, Md. All three answered via email and their responses were edited.
What are common reasons for a contract to be canceled?
Detweiler: The most common reasons for a contract to be canceled are the buyer’s financing falling through, a home inspection producing undesirable finding or an appraisal not reflecting the value of the offer for the home. In the case of home inspections and appraisals, these issues can usually be resolved if both parties can reach a meeting of the minds during a negotiation process.
Burr: The most common reasons for the cancellation of a contract are the inability of the seller and buyer to resolve issues discovered in an inspection, having an appraisal valuation come in below the sales price and the lender’s not approving a loan in underwriting. These three areas of the contract are typically covered by standard contingencies, but in the white-hot market of the last two years, many buyers decided to not include them. As the market cools a bit, the marketplace is seeing these typical contingencies return more often.
Martinez: Buyers are voiding under home inspection contingencies when sellers are refusing to do repairs or under financing contingencies with rapidly changing interest rates stifling affordability, especially in the new construction space where contracts may have been ratified more than six months ago when rates were much lower. Additionally, in the less competitive market, FHA and VA buyers now have an opportunity to purchase with appraisal contingencies, which have stricter requirements than other financing options, which are also resulting in more canceled contracts.
Is it typically the buyer who cancels a contract — or do sellers sometimes cancel?
Detweiler: It is almost always the buyer who is going to be the one to cancel the contract because they are the ones protected by contingencies and have multiple “outs.” Unless the buyer does not perform in accordance with the contract, the seller does not have the right to cancel. Probably the most common example of when a seller might cancel the contract would be if the buyer has repeatedly missed their settlement date and the seller does not believe the buyer will be able to complete the transaction.
Martinez: In most states, once a contract is ratified, sellers don’t have a right to cancel, unless they don’t want to agree to something the buyer is requesting, such as home inspection repairs or reducing the price due to low appraisal.
Burr: Contracts are typically canceled because of buyer actions. For example, a buyer with a financing approval contingency can cancel a contract if the loan is not approved. A buyer can cancel a contract that includes an appraisal contingency if the appraisal valuation comes in below the sales price and the buyer and seller can’t agree on a price revision. The standard language in most local associations of Realtor’s forms allows for either a seller or buyer to cancel a contract if the two sides can’t reach an agreement on the resolution of inspection issues.
How can buyers protect themselves in a transaction and make sure they’ll get their deposit back if a contract must be canceled?
Detweiler: The best way for buyers to protect their deposit during a transaction is to work with someone who understands the contract and ensures appropriate protections are in place. Again, the most common protections include financing, home inspection and appraisal contingencies — but there are others as well. These contingencies come with timelines, so it’s important to keep an eye on those, too. In most cases, it is extremely hard for a buyer to lose their deposit unless they do something very egregious from a nonperformance standpoint.
Martinez: A stable market means that home inspection contingencies are back on the table, and this is a good thing for buyers, as it gives them a level of confidence that they are making a solid investment in a suitable home. The key to buyers getting back their deposit is to ensure they are not in default. The contract must be canceled under a contingency or HOA/condo document review period for the buyer to keep their deposit.
How can sellers protect themselves and increase the likelihood of their contract going through?
Burr: Sellers can greatly increase the chances that a contract will not be canceled by being very reasonable in the resolution of items discovered by the buyer’s inspection. By either agreeing to address issues at the seller’s cost prior to settlement or providing a seller credit to the buyer’s closing costs so the buyer may address these items at the buyer’s expense after settlement is the best way to move a sale forward to settlement. Trying to make sure the buyer has the financial ability to get a loan approved is essential. This can be achieved by insisting on a lender preapproval letter that states the buyer’s credit report has been reviewed and is satisfactory as well as having a discussion with the lender to make sure the buyer’s assets, income and debts have been verified.
Martinez: Sellers need to understand that the market is rapidly changing and stabilizing. With the market being more balanced, so too are negotiations and sellers may have to agree to do home inspection repairs to keep a contract in play. Getting contingencies cleared and removing the opportunity to cancel as soon as possible is critical. Sellers should order HOA/condo docs before going active so that docs can be delivered with a ratified sales contract.
Detweiler: It sounds overly simplistic, but I advise sellers the best way to make sure they get to the finish line is to try to discern whether the person offering to buy your house really wants to buy your house. It is usually very, very easy for a buyer to find a way out of a contract. However, if the buyer really wants it, there is almost always a way to get to the finish line. Between conversations with the other agent as well as signals in the offer itself (for example, a low earnest money deposit), there are often subtle indicators as to whether the buyer really wants the house or is more likely to walk away, as is often the case with an investor or a nervous first-time home buyer. If the buyer is financing, it’s also extremely important for your agent to vet the buyer’s lender and understand the due diligence done on them — and, to every extent possible, understand the buyer’s financial stability. A buyer who is spending every penny they have to make a down payment is going to be much more likely to walk away if, for example, it looks like they must replace the roof in a few years, than someone who has ample reserves.
Any other tips about contracts?
Detweiler: Read them! And make sure your agent can explain them in detail. However, you should also understand there is an enormous amount of latitude and gray area in contracts and in the business. On the buyer’s side, you’ll want to make sure the contract is written so your earnest money deposit is protected and if you do want out, you’ve made your right to do so as indisputable as possible. On the seller side, even if a buyer violates a contract provision, it is extremely unlikely for it to be worth a seller’s time to pursue any legal recourse.