Top reasons why houses fall out of contract during a sale

Written byStephanie Visscher

Despite what she jokingly calls “Miami Vice” décor (picture mirrored cabinets and pink carpet), Kynse Leigh Agles knew her listing was a hidden gem. The 2,300-square-foot waterfront property in Cape Coral, Florida, offered easy boating access to the Gulf of Mexico while still sitting high enough to be outside of a flood zone.

“The boat dock, the pool, all of it was in fantastic condition,” says Agles, a real estate agent with RE/MAX Realty Group in Fort Myers, Florida. “The bones of the house were really, really good, it was just outdated.”

Agles wasn’t alone in seeing the home’s potential, and purchase offers soon piled up. But just days after going under contract, an inspection found polybutylene piping throughout the house. The material was commonly used for plumbing in homes built between the 1970s and 1990s, and can be prone to bursting. The pipes would need to be replaced before the home could be insured.

The potential buyer asked to renegotiate the sales price for $100,000 less than the original offer, which Agles’ client quickly declined. The deal (and the next one…and the next) fell through.  

A critical repair is one of many surprises that can show up when a home is under contract – the typically 30-day window between when an offer to purchase a home is accepted and when the keys are handed over at closing. If the buyer and seller are unable to negotiate a new sales agreement to accommodate a different sales price or a repair, then both parties may be left back at square one.

According to the National Association of REALTORS®, 9% of sales contracts were terminated in January 2021, most commonly for issues found during the inspection, a low appraisal, or the buyer’s financing falling through. Understanding potential complications can help both buyers and sellers better position themselves for a smoother closing.

“Every state is different, but in Texas, there are 19 ways for buyers to get out of a [real estate purchase] contract,” says Fernando Gonzalez, an agent with RE/MAX Associates in El Paso. “One of the most prevalent ones is what we call an option period, which gives buyers the option to terminate the contract for any reason and be able to get their earnest money back.” 

Earnest money is the lump sum a buyer pays into a third-party account called escrow when the home first goes under contract. During the contract period there are several opportunities, including the inspection, when the buyer can raise issues with the property. If a buyer asks to renegotiate or terminates the contract after pre-agreed upon deadlines, they may lose their earnest money, which is often then paid to the seller.  

Needless to say, a lot is at stake when a property goes under contract – not least of which are the hopes and dreams of a new buyer turning a house into a home.

Below, Agles and Gonzalez share the most common reasons they’ve seen a home fall out of contract, and how working with an experienced agent may be able to help buyers and sellers proactively address potential issues:

1. The inspector finds items that need to be repaired

After an offer is accepted, a buyer typically has seven days to work with a professional to conduct an inspection. Based on the findings, they may ask for certain items to be fixed prior to the sale or for the seller to reduce the price to cover the cost of making repairs.   

“I’ve never seen an inspection report come back with fewer than five items,” Gonzalez says. “It’s really up to the buyer to decide if an issue is common wear and tear that doesn’t affect the quality of the home, or if they want the the issues to be addressed before they can move into the home.”

Common items an inspector may flag are issues with grout or tile, tears in the carpet, or countertops that need to be resealed. Home inspectors also look at roofing, cooling and heating systems, as well as the electrical and plumbing of the house.

Gonzalez says he almost always expects buyers to send an amendment to the contract requesting repairs after the inspection. To help his seller decide next steps, he gathers quotes from multiple contractors and walks his client through an itemized list of what it would cost to make all of the updates.

“Even in such a strong seller’s market as we’re currently in, I always recommend the seller completes at least some of the items,” Gonzalez says.  

But as was the case with Agles' waterfront listing, if an agreement can’t be reached, this is one of the first opportunities in the contract period when a buyer may be able to back out without losing their earnest money.

An experienced real estate professional can offer sellers guidance on the particular requirements and common practices of their state, which may include getting an appraisal before listing a home so issues can be fixed up front or sellers can be prepared to offer concessions in the contract.

Earnest money is the lump sum a buyer pays into a third-party account called escrow when the home first goes under contract. During the contract period there are several opportunities, including the inspection, when the buyer can raise issues with the property. If a buyer asks to renegotiate or terminates the contract after pre-agreed upon deadlines, they may lose their earnest money, which is often then paid to the seller.  

Needless to say, a lot is at stake when a property goes under contract – not least of which are the hopes and dreams of a new buyer turning a house into a home.

Below, Agles and Gonzalez share the most common reasons they’ve seen a home fall out of contract, and how working with an experienced agent may be able to help buyers and sellers proactively address potential issues.

2. The home is appraised for less than the offer price

After the inspection, many contracts require a property appraisal. Most lenders won’t finance a home for more than the appraised value. If the appraisal comes in short, either a seller will have to agree to a lower sales price or a buyer will have to pay for the difference in cash. It’s common for contracts to have an addendum that allows a buyer to back out of the deal if the appraisal comes in short and a new agreement can’t be made.

“If there’s enough equity in the property, it may not be a big deal,” says Gonzalez. “But if there’s not enough equity to cover closing costs and drop the sales price to the appraised amount, the seller may face losing money on the sale of the house. That’s when they may not want to renegotiate the contract.”

He adds that agents take several factors into consideration when setting the listing price for a home, including looking at what comparable properties recently sold for. But even the most experienced agent can be surprised by an appraisal.

When faced with a low appraisal, Gonzalez says he presents the facts to the seller and discusses their options. Occasionally, a seller may be able to contest an appraisal if an agent is able to show comparable properties that sold for a higher price or show the home received multiple offer letters at or above the asking price. Ultimately it will be up to the appraiser if they feel the need to adjust their original valuation.

3. The buyer’s financing falls through before the home can close

After the inspection and appraisal, both parties can feel a bit more optimistic that the contract will close successfully. At this point the buyer should have enough information about the home to feel confident in – and excited for – their purchase. There also are fewer options that allow them to back out without losing their earnest money, which can reassure sellers the buyer is serious about the deal.

But there’s one more complication agents have commonly seen derail a contract, even just days before closing: When a buyer’s financing falls through.

“I once received a call from a lender four days prior to closing. It turns out, the buyer hadn’t filed his taxes in two years and could no longer obtain a loan,” Agles says. Despite offering to work with the buyer on trying to find alternative financing to help the deal close, she never heard from the buyer or their agent again. And because all of the other deadlines to back out of the contract had passed, the buyer lost the $20,000 they had deposited in escrow.

Failure to pay taxes aside, some contracts do have addendums to protect the buyer from unexpected emergencies that may jeopardize loan qualification such as a job loss, which Agles has also seen cause a contract to be terminated. While there are some circumstances a buyer won’t be able to predict, Agles says having as much of the loan process completed prior to putting in an offer can help set them up for fewer complications down the road.

“Buyers should have all of their financial paperwork turned into their mortgage professional so all that’s left during the contract is the inspection, appraisal and final verification of income,” Agles says. “The mortgage professional  may also need to get an updated credit score [called a “gap credit report”] shortly before closing, so buyers should think carefully before purchasing new furniture on a credit card or buying a new car, as it could change their score and potentially impact their ability to  qualify for the loan they applied for or may impact the terms.”

Falling out of contract can be inconvenient for buyers, sellers and real estate agents alike, but Agles assures that while frustrating, it’s not the end of the world. With some extra patience, the right buyer will come along.

“Once buyers saw my property in Cape Coral go on and off the market, I think they thought they might be able to get a deal. But we knew what the property was worth, and stuck to it,” Agles says. “Just because this property wasn’t one person’s cup of tea didn’t mean there wasn’t a buyer out there. It wasn’t the first or second try, but eventually we were able to find a buyer who loved the home, and the property sold for the original listing price. My seller was very happy with the end result!”