How Often Do Buyers Back Out Before Closing?

Backing out of a real estate transaction refers to a buyer withdrawing their offer after it has been accepted by the seller but before the property’s ownership officially transfers. This means the sale agreement, often called a purchase agreement, is terminated before the closing date. Understanding the frequency and circumstances surrounding these withdrawals provides insight into the dynamics of real estate transactions. This article explores how often buyers withdraw from accepted offers and the common reasons behind such decisions.

Understanding Buyer Withdrawal Rates

Buyer withdrawal rates in real estate transactions fluctuate based on various market conditions and economic factors. While specific figures vary by region and time, industry data indicates a notable percentage of accepted offers do not reach closing. Some reports suggest that between 5% and 15% of real estate contracts might terminate before completion.

These rates are influenced by broader economic stability, such as employment figures and interest rate changes, which can impact a buyer’s financial capacity or willingness to proceed. A buyer’s market, characterized by more homes for sale than active buyers, may see higher withdrawal rates as buyers have more options. Conversely, a seller’s market, with fewer available homes, might experience lower withdrawal rates due to increased competition. Seasonal trends can also play a role.

Key Reasons for Buyer Withdrawal

Buyers primarily withdraw from real estate contracts due to specific clauses within the purchase agreement known as contingencies. These provisions allow a buyer to terminate the contract without financial penalty if certain conditions are not met.

Financing Contingency

A common reason is the financing contingency, which permits the buyer to withdraw if they cannot secure a mortgage loan within an agreed-upon timeframe, typically 21 to 30 days from the contract’s effective date. Lenders evaluate a buyer’s creditworthiness and the property’s value before approving a loan, and a denial can lead to contract termination.

Home Inspection Contingency

Another frequent reason is the home inspection contingency. This clause allows buyers to have the property professionally inspected for defects or significant issues. If the inspection reveals problems like structural damage or major system failures, the buyer can request repairs or credits from the seller. Should the parties fail to agree, the buyer typically has the right to terminate the contract, often within 7 to 14 days of the inspection report.

Appraisal Contingency

The appraisal contingency also provides a common ground for withdrawal. Lenders require an appraisal to ensure the property’s value supports the loan amount. If the appraisal comes in lower than the agreed-upon purchase price, the buyer may not obtain the necessary financing or the lender may require a larger down payment. In such cases, the buyer can negotiate with the seller for a lower price or, if negotiations fail, withdraw without losing their earnest money.

Title and Other Contingencies

A title contingency protects buyers from issues with the property’s ownership. A title search ensures the seller has a clear legal right to sell and that there are no undisclosed liens or encumbrances. If title defects are discovered that the seller cannot resolve, the buyer usually has the right to terminate the agreement. Buyers with an existing home may also include a sale of current home contingency, allowing them to back out if their current property does not sell by a specified date.

Non-Contingency Reasons

While less common and typically resulting in earnest money forfeiture, buyers might also withdraw for non-contingency reasons. These could include a sudden job loss, a family emergency, or simply “cold feet.” Unless specifically outlined in a contract clause, such withdrawals usually constitute a breach of contract, leading to different financial consequences.

Impact on Earnest Money and Contracts

When a buyer withdraws from a real estate contract, the fate of the earnest money deposit is central. Earnest money, often 1% to 3% of the purchase price, is a deposit made by the buyer to demonstrate serious intent. This money is typically held in an escrow account by a neutral third party until closing.

If the buyer withdraws due to a valid reason covered by a contract contingency, their earnest money is typically returned. For example, if the financing contingency period expires and the buyer cannot secure a loan, the purchase agreement usually stipulates a refund. Similarly, if a home inspection reveals significant issues that cannot be resolved, the buyer’s deposit is protected.

However, if a buyer withdraws without a valid contractual reason or in breach of the purchase agreement, the earnest money is typically forfeited to the seller. This forfeiture serves as liquidated damages, compensating the seller for the time the property was off the market and any expenses incurred. The exact conditions for forfeiture are outlined in the purchase agreement.

Upon a buyer’s withdrawal, the real estate contract becomes voided. The property then returns to the market, allowing the seller to seek new offers. This process can cause delays for the seller, potentially impacting their financial plans or timeline.