How Often Do Homes Fall Out of Escrow?

When a home sale begins, it enters a phase known as escrow, a period designed to protect all parties. However, not every transaction reaches its final conclusion, and some homes “fall out of escrow.” This term indicates that a purchase agreement has been terminated before the sale is finalized, leading to a need to restart the process. Understanding the role of escrow and the factors that can lead to a transaction’s failure provides insight.

Understanding Escrow and Its Role

Escrow is a contractual arrangement where a neutral third party, known as an escrow agent, holds funds and documents. This arrangement safeguards both the buyer and seller by ensuring all conditions in the purchase agreement are met before property and funds change hands. The escrow officer acts as a facilitator, managing the process, verifying all contractual obligations are fulfilled.

A primary function of escrow is to secure the buyer’s earnest money deposit. This deposit is held in a separate account and is disbursed only when all agreed-upon terms are satisfied. The escrow process also involves handling essential documents, such as the property deed and loan funds, until closing conditions are met.

Frequency of Homes Falling Out of Escrow

The majority of real estate transactions close after entering escrow. However, deals often encounter hurdles leading to termination. Recent data indicates that approximately 5% to 6% of home sale contracts are canceled, while an additional 13% to 15% experience delays before closing.

These percentages can fluctuate based on market conditions, including interest rates, home inventory, and buyer demand. For instance, some reports have shown cancellation rates reaching as high as nearly 15% during specific periods of market volatility. Despite these variations, the data consistently shows that most pending sales do reach completion.

Common Reasons for Homes Falling Out of Escrow

Buyer financing is a frequent reason for a home to fall out of escrow. Even if a buyer has a pre-approval for a mortgage, their final loan approval can be denied if their financial situation changes, such as a job loss, acquiring new debt, or a drop in credit score. Lenders conduct thorough checks up to the closing date, and any adverse changes can result in the loan not being approved.

An appraisal gap is when the home’s appraised value is less than the agreed sales price. Mortgage lenders will only finance up to the appraised value, leaving the buyer to cover the difference out of pocket or renegotiate the price with the seller. If the parties cannot reach a new agreement, the transaction may be terminated.

Issues discovered during the home inspection often lead to deals falling through. Buyers often include an inspection contingency in their purchase agreement, allowing them to back out if significant problems are found (e.g., structural damage, mold, extensive repairs). If the seller is unwilling to address these issues or offer appropriate concessions, the buyer can typically withdraw without penalty.

Title problems are another common obstacle. A clear title is necessary for a property transfer, and a title search may uncover unresolved liens, judgments, boundary disputes, or ownership discrepancies. Resolving these issues can be a complex, time-consuming process, and if they cannot be cleared in a timely manner, the sale may not proceed.

Sometimes, a buyer may simply experience a change of heart, often referred to as buyer’s remorse, and decide not to proceed. While this is less common, especially after contingencies have been met, it can still occur. In some regions, difficulty in obtaining affordable hazard insurance has also emerged as a reason for transactions failing in areas prone to natural disasters.

The Process After a Home Falls Out of Escrow

When a home falls out of escrow, the initial step is understanding the reason for termination. For the seller, this often means the property will be placed back on the market, often relisted as “active” or “back on market.” The seller may need to address the issues that led to the fallout, such as making repairs identified during an inspection or potentially adjusting the listing price if an appraisal gap was the cause.

For the buyer, return of earnest money depends on the purchase agreement and reason for termination. If the contract was terminated due to a contingency that was not met, such as a failed inspection or financing falling through, the buyer typically has the right to have their earnest money returned. However, if the buyer withdraws for reasons not covered by a contingency or after waiving contingencies, they may risk forfeiting their deposit to the seller.

Both parties must assess their positions and determine next steps. Sellers might need to re-evaluate their pricing strategy or make necessary property improvements to attract new buyers. Buyers, in turn, may need to reassess their financial situation or adjust their search criteria based on the issues encountered in the previous transaction.