How Often Do Contingent Offers Fall Through?
Learn how often contingent real estate offers don't finalize, uncovering the reasons and implications for buyers and sellers.
A contingent offer in real estate represents a purchase agreement where the finalization of the sale is dependent on specific conditions being met. These conditions, known as contingencies, are clauses within the contract that must be satisfied for the transaction to proceed. They protect the interests of the buyer, the seller, or both parties. While common, these conditions introduce uncertainty regarding the deal’s success.
Common Conditions in Contingent Offers
A contingency clause outlines an action or requirement that must be fulfilled within a specified timeframe for the contract to become legally binding. Buyers typically request these clauses to protect their financial interests and provide an “out” if unforeseen issues arise. Sellers must agree to these terms for the contract to be executed.
The financing or mortgage contingency makes the sale dependent on the buyer securing a loan for the property. This protects the buyer from being obligated to purchase the home if they cannot obtain financing. An appraisal contingency ensures the property’s appraised value meets or exceeds the agreed-upon purchase price. If the appraisal comes in lower, the buyer can renegotiate the price or withdraw from the contract without penalty.
The inspection contingency grants the buyer the right to have the property professionally inspected for potential issues. If significant problems are discovered, such as structural damage or major system failures, the buyer can negotiate repairs or cancel the agreement. The sale of current home contingency stipulates that the buyer’s purchase of the new property is conditional upon the successful sale of their existing home. This protects buyers from the financial burden of owning two properties simultaneously. A title contingency ensures the property has a clear legal title, free from liens, ownership disputes, or other encumbrances, confirming the seller’s right to transfer ownership.
Primary Causes of Offer Failure
A contingent offer “falls through” when one or more of the agreed-upon conditions are not met or resolved within the stipulated timeframe, leading to the termination of the purchase agreement. This can occur for several reasons, often directly related to the contingencies initially put in place. The inability to satisfy these clauses is a leading cause of transactions failing before closing.
Financing issues frequently cause offers to collapse, even after initial pre-approval. A buyer might experience a sudden job loss, a reduction in income, or a drop in their credit score due to new debt or missed payments, leading to the lender revoking mortgage approval. Lenders also scrutinize a buyer’s debt-to-income ratio, and any adverse changes can result in loan denial. Without secured financing, the buyer cannot complete the purchase and can exit the contract under the financing contingency.
Another common reason for failure is a low appraisal. Lenders require an appraisal to confirm the home’s market value, and if it comes in below the agreed-upon purchase price, an “appraisal gap” occurs. The lender will only finance up to the appraised value, meaning the buyer must cover the difference in cash, renegotiate the price with the seller, or walk away from the deal if the seller is unwilling to adjust. Significant discoveries during the home inspection also frequently lead to offers failing. If an inspection reveals major structural defects, severe plumbing issues, or other costly problems that the buyer and seller cannot agree to resolve, the buyer may choose to withdraw.
The sale of a buyer’s current home can also present a significant hurdle. If the buyer’s existing property does not sell within the timeframe specified by the home sale contingency, they may be unable to complete the purchase of the new home. This forces the buyer to terminate the contract, as they cannot financially proceed with the new acquisition. Unresolved title defects, such as undisclosed liens, easements, or errors in public records, can prevent a clear transfer of ownership. If these issues cannot be rectified by the seller within the contingency period, the buyer has the right to terminate the agreement.
Navigating a Failed Contingent Offer
When a contingent offer falls through, the immediate step involves formal notification of contract termination, typically by the party invoking the unfulfilled contingency. This notification ensures the cessation of contractual obligations. The process allows both the buyer and seller to move forward without undue financial penalty, provided the contract terms were followed.
For the buyer, a failed contingent offer generally means the return of their earnest money deposit. This deposit, typically 1% to 3% of the purchase price, is held in escrow and is refundable if a valid contingency allows the buyer to withdraw. The buyer then needs to restart their home search. Despite the setback, contingencies prevent significant financial loss.
The seller faces different implications when an offer collapses. The property must be put back on the market, potentially losing marketing time and incurring additional costs. Sellers may also need to reassess the property’s pricing or address the underlying issue that caused the offer to fail, such as making repairs or adjusting the asking price due to a low appraisal. Clear communication between all parties, adhering strictly to contract terms, is important throughout this termination process to minimize disputes.