Real estate sales contracts were canceled at a higher rate in June than since the start of the pandemic-related housing boom: nearly 15% of them were canceled that month, according to the analysis of the real estate brokerage Redfin.
We asked advice from Kelly Martinez, real estate agent affiliated with the Vienna Office/Tysons Corner of Coldwell Banker Realty in Mid Atlantic; Corey Burr, a real estate agent with TTR Sotheby’s International Realty in Washington; and Andrew Detweiler, founder and broker of Rockville Real Estate Exchange in Rockville, Md. All three responded via email and their responses have been edited.
What are common reasons for canceling a contract?
Detweiler: The most common reasons for canceling a contract are failure to finance the buyer, a home inspection producing undesirable results, or an appraisal that does not reflect the value of the offer for the home. In the case of home inspections and appraisals, these issues can usually be resolved if both parties can come to a convergence of views through a negotiation process.
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Burr: The most common reasons for cancellation of a contract are the inability of the seller and the buyer to resolve problems discovered during an inspection, an appraisal being lower than the sale price and the lender does not approve a loan upon underwriting. These three areas of the contract are usually covered by standard contingencies, but in the hot market of the past two years, many buyers have decided not to include them. As the market cools down a bit, the market is seeing these typical eventualities return more often.
Martinez: Buyers are canceling under home inspection contingencies when sellers refuse to make repairs or due to financing contingencies with rapidly changing interest rates stifling affordability, especially in the new construction space where contracts may have been ratified more than six months ago when rates were much lower. Additionally, in the less competitive market, FHA and VA buyers now have the option of purchasing with appraisal contingencies, which have stricter requirements than other financing options, which also leads to more canceled contracts.
Is it usually the buyer who cancels a contract or do sellers sometimes cancel?
Detweiler: It is almost always the buyer who will be the one who terminates the contract because they are the ones who are protected by the unexpected and who have multiple “outs”. Unless the buyer fails to perform in accordance with the contract, the seller has no right to rescind. Probably the most common example of where a seller might cancel the contract would be if the buyer has repeatedly missed their settlement date and the seller does not believe the buyer will be able to complete the transaction.
Martinez: In most states, once a contract is ratified, sellers don’t have the right to rescind, unless they don’t want to agree to something the buyer requests, such as inspection repairs. home or a price reduction due to a low rating.
Burr: Contracts are usually canceled due to the actions of the buyer. For example, a buyer with a financing approval contingency can cancel a contract if the loan is not approved. A buyer can rescind a contract that includes a valuation contingency if the valuation is lower than the sale price and the buyer and seller cannot agree on a price revision. The standard language in most local associations of real estate agent forms allows a seller or buyer to cancel a contract if the two parties fail to reach an agreement on resolving inspection issues.
How can buyers protect themselves in a transaction and ensure that they will get their deposit back if a contract needs to be cancelled?
Detweiler: The best way for buyers to protect their deposit in a transaction is to work with someone who understands the contract and makes sure the proper protections are in place. Again, the most common protections include financing, home inspection and appraisal contingencies, but there are others as well. These eventualities come with time limits, so it’s important to keep an eye out for those as well. In most cases, it is extremely difficult for a buyer to lose their deposit unless they do something very egregious from a non-performance perspective.
Martinez: A stable market means home inspection contingencies are back on the table, and that’s a good thing for buyers, as it gives them a level of confidence that they’re making a solid investment in a decent home. . The key to buyers getting their deposit back is to make sure they are not in default. The contract must be canceled within an emergency or HOA/condo document review period for the buyer to retain their deposit.
How can sellers protect themselves and increase the likelihood of their contract being successful?
Burr: Sellers can greatly increase the chances of a contract not being voided by being very reasonable in resolving items uncovered by the buyer’s inspection. By agreeing to fix issues at Seller’s expense prior to settlement or by providing Seller a credit at Buyer’s closing costs so that Buyer can address those issues at Buyer’s expense after settlement, this is best way to move a sale through to settlement. Trying to ensure that the buyer has the financial capacity to get a loan approved is essential. This can be achieved by insisting on a pre-approval letter from the lender stating that the buyer’s credit report has been reviewed and is satisfactory, as well as talking with the lender to ensure that the assets, income and the buyer’s debts have been verified.
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Martinez: Sellers need to understand that the market is changing and stabilizing quickly. As the market is more balanced, so are negotiations, and sellers may have to agree to make home inspection repairs to keep a contract in play. Eliminating contingencies and removing the ability to cancel as soon as as possible. Sellers must order HOA/condo documents before becoming active so that the documents can be delivered with a ratified sales contract.
Detweiler: It sounds overly simplistic, but I advise sellers that the best way to make sure they get to the finish line is to try to discern if the person offering to buy your house really wants to buy your house. It’s usually very, very easy for a buyer to find a way out of a contract. However, if the buyer really wants it, there is almost always a way to reach the finish line. Between conversations with the other agent and signals in the offer itself (e.g. a low earnest money deposit), there are often subtle indicators as to whether the buyer really wants the house or is more likely to go away, as is often the case. the case with a nervous first-time investor or buyer. If the buyer is financing, it is also extremely important that your agent verifies the buyer’s lender and understands the due diligence being done to them – and, where possible, understands the financial stability of the buyer. A buyer who spends every penny he has on a down payment will be much more likely to walk away if, for example, he looks like he will need to replace the roof in a few years, than someone who has sufficient reserves.
Any other advice on contracts?
Detweiler: Read the! And make sure your agent can explain them in detail. However, you also need to understand that there is enormous latitude and gray area in contracts and in the business. On the buyer’s side you will want to make sure the contract is written in such a way that your earnest money deposit is protected and if you wish you have made your right to do so as indisputable as possible. On the seller’s side, even if a buyer breaches a provision of the contract, it is extremely unlikely that it will be worth the seller’s pursuit of legal recourse.