How Often Do House Contracts Fall Through?

Real estate transactions involve a signed agreement between a buyer and a seller. While many agreements close successfully, a notable number encounter obstacles. Understanding why these contracts do not reach completion is important for anyone in the housing market, providing insight into potential challenges.

Defining Contract Failure

When a house contract “falls through,” a signed purchase agreement does not successfully progress to the final stage of property transfer. This occurs when contract conditions or terms are not met, or when issues prevent finalization. Unlike an unaccepted offer, a contract falls through after both buyer and seller have formally agreed to the sale.

The property sale will not be completed, potentially leading to relisting. This involves the dissolution of an existing agreement, often requiring formal documentation to release both parties from their obligations.

Statistical Overview of Contract Failure

The frequency of real estate contracts failing to close fluctuates with market dynamics and economic conditions. Reports from major real estate associations show that roughly 10% to 15% of all signed purchase agreements nationwide terminate before closing.

This rate varies considerably by market, time of year, and interest rates. During economic uncertainty or rapidly changing interest rates, terminations may increase as buyers face new financial constraints. In competitive seller’s markets, the rate might be lower as buyers are eager to secure property and use fewer contingencies.

Key Reasons for Contract Failure

A frequent reason for contract failure is buyer financing. This occurs if the buyer’s loan application is denied, or their financial situation changes after pre-approval. Lenders conduct thorough underwriting, and new debt, job changes, or credit score fluctuations can jeopardize loan approval. Additionally, if the property’s appraised value is lower than the agreed-upon price, a financing gap can emerge that neither party can bridge.

Home inspection discoveries also cause contracts to fall through. An inspection might reveal substantial defects like structural damage, severe roof issues, or major plumbing and electrical problems not apparent during initial viewings. Buyers often have an inspection contingency, allowing them to negotiate repairs, request credits, or withdraw if issues are too extensive or costly. If negotiations fail, the buyer may terminate.

Appraisal gaps are another common challenge, especially in competitive markets where bidding wars drive prices above the appraised value. Lenders typically finance only up to the appraised value, requiring the buyer to pay the difference in cash. If the buyer cannot or will not cover this gap, or the seller refuses to lower the price, the contract often terminates. The appraisal contingency protects buyers from overpaying based on the lender’s valuation.

Various contingencies in the purchase agreement can also lead to contract failure if not met. A common example is the sale of the buyer’s current home contingency; if their home does not sell within the specified timeframe, the new property contract can be voided. Title issues, such as undisclosed liens, easements, or ownership disputes, can also prevent a clear transfer of title, leading to termination if unresolved before closing.

Procedural Aspects of Contract Termination

When a real estate contract terminates, a formal process releases all parties from obligations. This begins with one party providing written notice to the other, citing the specific clause permitting termination. For instance, if a financing contingency is not met, the buyer formally notifies the seller of their inability to secure the loan. This written notice documents the contract’s dissolution.

A mutual release agreement is often executed by both parties to formally acknowledge termination and release each other from liability. The disposition of the earnest money deposit, funds held in escrow to demonstrate buyer commitment, is a key component. The purchase agreement specifies conditions for earnest money return to the buyer or forfeiture to the seller, depending on the reason for termination.

If termination is due to an unmet contingency, like a failed inspection or appraisal, the earnest money is generally returned to the buyer. If the buyer defaults without a valid contingency, the earnest money may be awarded to the seller as liquidated damages. The escrow agent, often a title company or attorney, disburses funds according to the mutual release or an arbitration decision. Once terminated and earnest money disbursed, the property can return to the market.