By Elizabeth Perez Barletta, Ligris + Associates
When buyers or sellers terminate their home sale contract, either justifiably or for no cause, it affects all parties involved. According to a Redfin report, around 60,000 deals fell through in June 2022—14.9% of all homes under contract and the most in any month since the pandemic’s early days. To provide further context, this number is well above the more typical 11.2% cancellation rate from a year earlier, and the third-highest on record behind March and April 2020, when COVID-19 lockdowns forced a wave of cancellations.
After feeling the pressure of a seller-driven market the past two years, buyers are finally feeling what a more balanced housing market looks like—and using it to their advantage.
Why do buyers terminate contracts?
Homes are sitting on the market longer, giving buyers more room to negotiate after inspections. In a seller’s market, homebuyers often settle for any home they can get despite its flaws. Now, without the worry of a bidding war, buyers are able to write inspection contingencies into their terms, giving them the power to terminate the contract if the property has any unacceptable conditions.
Other factors that affect a buyer’s decision to terminate include appraisal and mortgage-related issues. Today, there are fewer offers with appraisal gaps, giving the buyer the ability to terminate the contract of sale in the event the house doesn’t appraise, rather than being obligated to still close and pay the difference in cash at closing. Also, with the recent mortgage rate hike, many buyers who have been house hunting for a while are no longer able to afford homes they were previously able to, forcing them to walk away from a sale they might otherwise pursue once denied via a mortgage contingency.
How can sellers and buyers protect themselves?
Following a prolonged seller’s market where contingencies were being waived, today, more offers are being accepted with contingencies. Sellers need to understand that it’s simply the state of the current market and accept the fact that time may pass and they may need to return the buyer’s deposit. Some sellers may feel that the appearance of these contingencies places them at a disadvantage. However, this is what a normal market looks like. Having all contingencies waived and contracts written as completely seller-sided is not typical in the real estate market. The inclusion of these contingencies has now balanced the market from a seller’s market to a normal market.
Conversely, if a seller backs out of a contract for no cause, the buyer has the option to sue. There are several ways to go about this, depending on the buyer’s goals, such as:
- Trying to force the sale based on “specific performance,” which means the court can order the sale to continue and transfer the title to the buyer regardless of sellers’ wishes.
- Trying to receive monetary compensation by suing for damages, which means the court may force the seller to pay for certain costs the buyer paid because of the situation, which can include legal fees, inspection costs and more.
Because of the changing economic conditions, home sale cancellations are beginning to occur more frequently. Despite the trend, buyers and sellers need not fret. While the increase in home sale cancellations seems sudden, it indicates that the housing market is slowly making its way back to normal.
To successfully represent and satisfy customers, and to prevent sales from falling through, brush up on your negotiation skills with the classroom course “Win-Win Negotiation Techniques,” available at CRS.com/learn.
Photo: iStock.com/maxsattana
