How Often Do Buyers Back Out of Closing And The Consequences of Seller Breaking a Real Estate Contract?

Buyers can back out of closing for various reasons, and the frequency with which this happens can depend on several factors, including market conditions, the specifics of the transaction, and the individual circumstances of the buyer. Here are some key points to consider:

General Frequency

National Average: It’s estimated that about 3-5% of home sales fall through after an offer has been accepted but before closing.
Market Conditions: In a seller’s market, where demand is high, the percentage might be lower as buyers are more motivated to follow through. Conversely, in a buyer’s market, where there are more options available, the percentage might be higher.

Common Reasons Buyers Back Out

Financing Issues:
- Loan Denial: The buyer fails to secure a mortgage.
- Appraisal Problems: The property appraises for less than the purchase price, and the buyer can’t or won’t cover the difference.
Inspection Issues:
- Major Problems: The home inspection reveals significant issues that the seller is unwilling or unable to fix.
- Minor Problems: Even minor issues can sometimes scare buyers off if they don’t feel prepared to handle repairs.
Personal Circumstances:
- Change in Employment: Loss of job or change in financial situation.
- Life Changes: Unexpected life events such as a family illness or divorce.
Contingencies Not Met:
- Sale of Current Home: The buyer is unable to sell their current home.
- Contingency Clauses: Other contingencies, such as obtaining insurance or reviewing and approving HOA documents, are not met.
Cold Feet:
- Buyer’s Remorse: The buyer gets cold feet or decides the purchase isn’t right for them.
Market Conditions:
- Interest Rates: Rising interest rates can affect a buyer’s ability to afford the home.
- Market Fluctuations: Changes in the market can cause buyers to rethink their decision.

Impact on Sellers

Delays: Backing out can cause significant delays in the selling process.
Costs: Sellers might incur additional costs such as carrying costs, additional mortgage payments, or having to make more repairs.
Emotional Stress: The process can be stressful and disappointing for sellers.

Mitigating Risk

Pre-Approval: Ensure the buyer is pre-approved for a mortgage.
Thorough Inspections: Have a thorough pre-inspection to identify and address potential issues beforehand.
Clear Contingencies: Make sure contingencies are clearly defined and reasonable timeframes are set.
Earnest Money: A larger earnest money deposit can deter buyers from backing out casually.

While buyers backing out of closing is not extremely common, it does happen and can be influenced by a variety of factors. Both buyers and sellers can take steps to minimize the risk, such as securing financing early, conducting thorough inspections, and maintaining clear communication throughout the process.

A basic form that purchasers and sellers fill out as part of a real estate transaction is the purchase and sale agreement, or P&S or PSA. After a buyer and seller agree on a home’s purchase price, it is often drafted by the seller’s agent or a real estate lawyer.

This document, as its name implies, serves as a preliminary agreement to buy a house and contains important information about the real estate transaction. Even though a house is frequently described as being “in contract” once the PSA is signed, the sale of the house is by no means finished or concluded because this document is not the same as a final contract.

Purchase cost

The P&S agreement will include the home purchase price that the buyer and seller have agreed upon.

Deposit money

Deposits made as earnest money, also known as good faith deposits, are specified. These serve as the buyer’s security deposit to the seller prior to a house purchase.

Included or excluded

The P&S will state if the seller intends to leave specific items or equipment, such as the washer and dryer, to the buyer as part of the property sale. Also specified will be whether they intend to take any fixtures with them.

Contingencies

Actions that must be completed by the buyer or seller before the home sale can proceed are known as contingencies. The buyer or seller may cancel the agreement if these conditions are not met. For instance, purchasers frequently stipulate in their purchase agreements that a satisfactory home inspection must be completed or that they must first sell their own home before making a purchase. The seller may specify that they are doing no repairs and are selling the house “as-is.” Alternatively, they might reserve the right to keep displaying the house.

Closing expenses

Any fees connected to the acquisition and sale of a home that the buyer or seller will pay at closing are typically included in closing costs. Although closing expenses are frequently the duty of the buyer, a seller could offer to cover some or all of them as an inducement for a buyer to acquire their home. Often, the PSA will specify who is responsible for what costs.

The deadline

The day the final paperwork is signed by both the buyer and the seller and money is exchanged is known as the closing date.

Warranty

The terms of any house warranties will be specified on the purchase and selling agreement if they are part of the deal.

What does a purchase and sell agreement not cover?

The terms of the real estate transaction are described in the purchase and sale agreement, although they are frequently left out. For instance, on a P&S, you won’t find a breakdown of all the real closing expenses, just an estimated sum of the significant ones. The closing statement you receive later on in the house buying process, usually three business days before the closing day, will provide the whole breakdown.

How enforceable is a purchase and sale contract?

Before you finalize a purchase and sale, it’s critical to understand that, despite the innocent-sounding word “agreement,” a P&S is actually an official contract, a signed statement that Party A would sell the property to Party B. According to Michaela Green, a certified real estate agent and member of the Houston Association of Realtors, “It may not complete a sale, but it is legally binding. “The other party has the right to pursue legal action if either the buyer or the seller fails to abide by the terms of the contract.”

However, if your P&S specifies any conditions, such conditions must be satisfied before the sale or purchase of your home can proceed. Both the buyer and the seller have the right to terminate the agreement if these conditions are not met.

For instance, a buyer may be entitled to back out of the deal if the home inspection reveals a number of expensive and significant issues with the property that the seller is unable or unable to address. Or, if the buyer cannot secure finance by a specific date, the seller may declare the agreement dead and consider other offers. Everything depends on the stipulations that have been agreed upon by the buyer and seller. What happens to the earnest money is sometimes stated out in the P&S as well.

Purchase agreements versus purchase and sale agreements

Despite having names that are similar, the buy and sell agreement and purchase agreement have different objectives. The P&S, which expresses desire to transfer property, is created early in the home-buying process. The official contract for buying or selling a property is the purchase agreement, which is often signed during closing. The P&S serves as a preliminary statement, and the purchase agreement, which is signed on closing day, completes the deal. It may contain many of the same details as the P&S, but it does so as a completed transaction rather than an intent to acquire.

Nevertheless, the buy and sale agreement is occasionally referred to as a “purchase agreement” for short, which is a confusing but common slang term.

When a seller breaks a real estate contract, the consequences can be significant and varied. The specific consequences depend on the terms of the contract and the circumstances of the breach. Here are some potential outcomes and actions that can be taken:

Legal Consequences

Breach of Contract Lawsuit: The buyer can file a lawsuit against the seller for breach of contract. If successful, the court may order the seller to pay damages to the buyer.
Specific Performance: The buyer can seek a court order for specific performance, which forces the seller to complete the sale as originally agreed. This remedy is more common in real estate transactions because each property is considered unique.
Damages: The seller may be required to compensate the buyer for any financial losses incurred due to the breach, including additional costs incurred by the buyer, such as temporary housing, moving expenses, and any difference in cost if the buyer has to purchase a more expensive property.

Financial Consequences

Return of Earnest Money: The seller must return the buyer’s earnest money deposit. In addition, the seller may be required to pay interest on the deposit or additional compensation if stipulated in the contract.
Compensatory Damages: The seller might have to pay for any direct financial losses suffered by the buyer due to the breach. This can include the cost of inspections, appraisals, and other expenses related to the failed transaction.

Contractual Penalties

Liquidated Damages: Some contracts include a liquidated damages clause, which specifies a predetermined amount that the seller must pay if they breach the contract.
Attorney’s Fees: If the contract includes a clause that the losing party must pay the prevailing party’s attorney’s fees, the seller could be responsible for these costs if the buyer prevails in a lawsuit.

Practical Consequences

Reputation Damage: Breaking a real estate contract can harm the seller’s reputation, especially in smaller communities or if the seller is a professional involved in real estate.
Market Impact: The property may become stigmatized, making it harder to sell in the future. Potential buyers may be wary of dealing with a seller who has a history of not honoring contracts.

Avoiding Breach of Contract

To avoid breaching a real estate contract, sellers should:

Understand the Contract: Fully understand all terms and conditions before signing.
Communicate Clearly: Maintain open communication with the buyer and real estate agents to address any issues promptly.
Negotiate Changes: If circumstances change, negotiate with the buyer to amend the contract instead of unilaterally breaking it.

Steps Buyers Can Take

If a seller breaches a contract, buyers can:

Review the Contract: Understand their rights and remedies as specified in the contract.
Seek Legal Advice: Consult with a real estate attorney to evaluate the situation and determine the best course of action.
Document Everything: Keep detailed records of all communications and expenses related to the breach.

In summary, sellers breaking a real estate contract can face legal, financial, and reputational consequences. It is crucial for sellers to understand their contractual obligations and for buyers to know their rights and remedies.

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