How Often Do Real Estate Closings Fall Through?

Real estate transactions involve numerous steps, each with potential complications. This article explores how frequently real estate closings fall through and the factors that cause disruptions.

Understanding Closing Failure Rates

Most real estate transactions proceed to closing, but a notable percentage do not. Industry reports indicate termination rates for contracts range from 5% to 15%. For instance, data shows about 6% of contracts are terminated, while 14% experience delays.

These percentages fluctuate significantly based on market conditions. In periods of high competition or economic uncertainty, termination rates might increase. Some reports indicate cancellation rates reached as high as 15% to nearly 29% during specific periods. Cancellations are common in the dynamic real estate landscape.

Common Reasons for Closing Failures

Financing Issues

Financing issues are a frequent reason for a real estate deal to fail. A buyer’s pre-approval letter does not guarantee final loan approval. Changes in their financial situation, such as job loss, new debt, or a late bill payment, can lead to mortgage denial. Rising interest rates can also make the mortgage payment unaffordable, causing the buyer to withdraw.

Appraisal Problems

An appraisal below the agreed-upon purchase price can derail a transaction. Lenders finance a property only up to its appraised value, not the contract price. If the appraisal is lower, the buyer needs to pay the difference in cash, the seller might reduce the price, or the deal could be canceled.

Home Inspection Issues

Significant defects discovered during a home inspection often lead to contract termination or renegotiation. Buyers have an inspection contingency period to conduct a professional inspection. If major issues like structural problems, water damage, or faulty systems are found, the buyer can request repairs, a credit, or terminate the contract if an agreement cannot be reached.

Title Issues

Problems with a property’s title can cause a closing to fall through. A title search ensures clear ownership and reveals claims against the property, such as undisclosed liens, boundary disputes, or unpaid taxes. If unresolved issues are found, they prevent the transfer of ownership until cleared.

Contingency Failures

Many purchase agreements include contingencies, conditions that must be met for the sale to proceed. These can include the buyer needing to sell their current home or securing specific financing terms. If these conditions are not satisfied within the stipulated timeframe, either party may terminate the contract. Unmet contingencies, particularly financing, inspection, and appraisal, are common reasons for deals to fail.

Buyer or Seller Cold Feet

Sometimes, despite all conditions being met, a buyer or seller may decide not to proceed. This “cold feet” can stem from personal reasons, changing financial circumstances, or buyer’s remorse. It can lead to a party backing out, potentially with financial or legal consequences depending on the contract terms.

Key Stages When Closings Are Vulnerable

Certain stages of real estate transactions are particularly susceptible to issues that can cause a closing to fail. The initial period after an offer is accepted and the contract is signed is often a vulnerable time. During this phase, buyers conduct their due diligence, including the home inspection.

Discoveries from the inspection, such as significant defects, can lead to renegotiations or termination if parties cannot agree. The appraisal process often follows the inspection period. If the property appraises for less than the agreed-upon price, this can be a major hurdle, especially if the buyer’s loan is contingent on the appraisal value.

Financing issues often become significant closer to the closing date as lenders finalize underwriting. Changes in the buyer’s financial status during this period can jeopardize loan approval.

Factors Influencing Closing Success

Several elements impact the likelihood of a real estate closing succeeding. Market conditions play a substantial role. In a seller’s market, buyers may waive contingencies or accept properties “as-is,” potentially reducing reasons for failure.

Conversely, a buyer’s market can lead to increased buyer demands and a higher likelihood of deals falling through due to unmet expectations or tougher negotiations. Thorough due diligence by both parties also influences success. Comprehensive pre-contract research and clear contract terms can preempt many potential issues.

Effective communication among all involved parties—buyers, sellers, agents, lenders, and attorneys—can prevent misunderstandings and facilitate timely problem resolution. The experience and competence of real estate professionals, including agents, lenders, and legal advisors, also contribute to a smoother process. Their expertise in navigating regulations, managing timelines, and negotiating terms can mitigate risks.