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This article was last updated May 9, 2023.
Selling a house can be filled with highs and lows, but one of the worst things to hear is, “The buyer just canceled.” It casts doubt on their home, and the efforts they may have put into preparing the home for the market, and it potentially introduces questions about the listing agent’s capabilities.
Truth is, you can never completely avoid buyer cancellations. Even with all contingencies removed, we have still seen buyers cancel even though it means they, in most cases, forfeit their deposit (almost $50,000 on one of our listings a few years ago). You CAN, however, with careful preparation, accomplish two important things:
- Prepare the property to head off potential cancellations
- Prepare the sellers so they are not alarmed if a buyer cancels
Here is our list of the top 11 issues buyers may try to use to get out of a contract:
1. Buyer issues
Buyer issues are the most difficult to resolve because they deal with the other party and conditions over which you have no control. These can include:
Sometimes buyers wake up the next morning and, acting out of fear, realize they are not ready or willing to buy. It is not usually about the property they have offered to buy — it is more the decision to buy at all. We have seen these types of buyers pull out of the market altogether and wait until they feel better about the buying process. There is usually nothing a seller can do to mitigate this type of situation.
This typically has to do with the terms for buying a specific property. This happens most frequently in multiple offer situations where they had to bid higher than expected, had limited inventory to choose from or were forced to overlook potential property issues to win the bid. Once the heat of the moment has cooled, these buyers conclude they have made a serious mistake and backpedal to get out of the deal.
In some cases, a better home hits the market and the buyers, seeing that there are better options, will try to get out of their existing purchase agreement. While unadvised, buyers, out of desperation, may have written concurrent offers on more than one property and, in an unlikely set of circumstances, actually landed more than one contract, leaving them in a situation where they would be unable to perform.
Unfortunately, things can happen to the buyer that makes the deal fall apart.
- Sudden loss of employment.
- Health issues. We have had clients suffer a heart attack or severe panic attacks that have completely derailed transactions. We have also seen other significant health issues such as the discovery of cancer stopping a transaction in its tracks. We have even encountered situations where a death halts an escrow.
- Loss of relationship. Buying a home is a very stressful event, and we have seen relationships blow up in the middle of an escrow, resulting in separation or even divorce.
- Extended family disagreement. Some cultures rely on their parent’s input and final seal of approval — especially if the parents are contributing to the purchase. As we have discovered over the years, not all parents sign off on their children’s choices.
Cannot sell their existing home
If the purchase is contingent on the buyer selling an existing property, if that home does not sell, then the current transaction will usually fail as well.
Costs to improve exceed projected estimates
In some cases, the buyer, within their inspection contingency period, may secure quotes for improving the property to their liking. If the quotes exceed the buyer’s expectations, they may walk.
As the global pandemic hit, stock markets took a massive hit, resulting in many buyers losing their down payments, making it impossible to complete their transactions.
2. Agent issues
I know it’s hard to believe, but some Realtors are just better than others.
Here are a couple of ways an agent can be responsible for blowing up a transaction:
Whether a newbie with little or no experience or someone who is truly incompetent, these agents can mishandle a transaction to such a degree as to force a buyer to cancel.
Even the best of us occasionally make mistakes: for example, missing a single checkbox can have serious consequences.
3. Lender Issues
Not all pre-approvals are the same. It is in the listing agent’s best interest to vet the buyer’s preapproval to ensure that the lender has done the necessary work to completely qualify the buyer.
A buyer may be qualified for a purchase at a specific rate and, if rates suddenly increase as they have in the past number of months, the buyer may no longer qualify.
Once in escrow, a lender will typically scrub the buyer’s file three times: once at the beginning, in the middle and just prior to closing. They are looking for any potential issues such as unrecorded documents including alimony or child support agreements, recent major purchases such as an automobile and so on. If something unexpected emerges in any of the scrubs, it could derail the transaction.
4. Appraisal issues
Appraisals have never been an exact science, and, in many cases, the primary goal is to determine whether the property can be valued at the contract price for the benefit of the lender, not what the actual value might be. The appraiser’s role is to provide a guarantee of sorts to the lender that the property they are lending on has a requisite value should foreclosure be required. Consequently, in our market, appraisals often come in at exactly the contract price.
Current market volatility, however, is making the appraisal process more difficult. Appraisals have three primary participants, all hoping for different results. The sellers are hoping for a value at least at the contract price. Buyers are hoping for a lower price so they can negotiate better terms. Lenders want to see a valuation in line with their in-house AVM numbers — if the appraiser’s number is off by more than 10 percent, the lender may request another appraisal. The appraiser’s job is made even more difficult in a declining market since lender AVMs are typically running a few months behind.
If a property fails to appraise at the contract price, lenders will typically lend to the appraised value only (unless the buyer has an unusually large downpayment), which means either the buyer comes up with additional cash to make up the difference or the seller lowers the price to the appraised value.
Because many sellers feel that they are already giving up large sums of money due to the shifting market, some are unwilling to lower their prices further. Conversely, if the market is still declining, many buyers are unwilling to pay more. If there is no consensus, a low appraisal can blow up a transaction.
Wise agents will discuss this possibility with sellers prior to going on the market rather than waiting until they are faced with a low appraisal. A frank discussion upfront can disarm surprises and give sellers time to consider a positive course of action. It’s important for a seller to realize that even though they may need to lower the price to meet the appraised value, the cost of going back on the market when it is declining could result in a loss substantially higher than a price adjustment now.
5. Inspection issues
Sellers in our region have discovered that it usually makes more sense to order inspections up front and preemptively deal with potential issues than wait for a buyer to provide inspections in the midst of a transaction and discover surprises that might derail the escrow. Although I understand this is a local practice and have had plenty of discussions with agents across the country with differing opinions, it works well for us.
We typically order three inspections: Property (or Home), Wood Destroying Pests and Roof. In some regions, the roof is included in the Property Inspection. If the reports point to significant issues, we might order additional inspections such as Foundation, Soils and so on. Some properties have pools, wells, septic systems and other special items that require separate inspections. Other inspections may be needed in specific regions, such as radon, indoor air quality, lead-based paint, EIFS, appliances and so on.
Foundations are like our feet: if everything is good, everything above is secure. If there are issues, however, it can translate to serious problems. While some minor cracks can be ok, more significant issues can be extremely expensive to resolve. When the market was hot, buyers were willing to overlook any number of issues just to get a home in contract.
Now that they have choices, they are getting very particular about what they buy. Buyers are particularly allergic to the word ‘foundation’ on inspection reports. If foundation issues show up on a property inspection, in my opinion, it is a good idea to get a recommendation from a certified foundation contractor so that costs and solutions are known upfront. This can then be remedied prior to sale or can be factored into the price.
Electrical codes have come a long way since their inception in homes almost 100 years ago. Most homes are sold with the building codes in place from either the time the home was built or from the last permitted upgrades. While buyers cannot reasonably ask for upgrades to electrical systems (for example knob & tube upgraded to romex), they can ask that dangerous conditions in the system be remedied.
For example, some electrical panels have been demonstrated to cause fires. It’s also common to find “homeowner improvements” that do not meet code. If a home has an older electrical system (eg. knob & tube), insurance companies may charge extremely high rates or refuse to insure: this factor alone can cause a buyer to bail.
Galvanized or lead pipes, slow drains, leaking showers, deteriorating fixtures … there is no end to issues that can hinder a home’s plumbing system from functioning effectively. Additionally, there have been some recalls with PEX products. While electrical issues can lead to fire, plumbing leaks can cause extensive water damage and dry rot. Buyers may be overwhelmed if they discover significant issues mid-escrow and choose to abandon the transaction.
A growing number of cities in our area are mandating that a sewer lateral inspection be included in every real estate transaction. If problems are discovered, such as broken pipes, root penetrations or other issues, the seller is expected to pay for upgrades prior to the close of escrow or secure a bond ensuring that the work will be done within a specific amount of time after the close.
The cost in our region can range between $6-$12,000. In a hot market this can be passed on to a buyer, however, once again, if the need to replace a sewer lateral is discovered mid-transaction, a failure to negotiate an amenable solution can result in a dead transaction.
While under all is the land, above all is the roof. Leaky roofing systems (including downs and gutters) can cause significant issues, including rot, mildew, mold and even foundation problems. Some roofs have been repaired numerous times while others may have a few roofs installed on top of each other. If a buyer thinks they may have to front the cost for an expensive roof repair or replacement anytime in the near future, that fact alone may give them a reason to bolt.
Over the years, a home may suffer from neglect, abuse or even structural modifications that are not to code. The result can be sagging roofs, cracks or bulges in drywall or stucco, windows or doors that have uneven gaps or will not open or shut, chimneys that are cracked or leaning, damp subareas and more. Some issues may only be cosmetic while others may require extensive repairs and upgrades. If the home has visible issues, it can be prudent to have associated repair costs available during the sale so buyers are not left guessing.
Water is insidious and can do all sorts of damage once allowed inside a structure. Most interior products are not designed to deal with water and will quickly deteriorate when exposed to moisture. Water can come from leaking roofs, clogged gutters and downspouts, plugged drains, unsealed windows and doors, faulty appliances and fixtures, leaky pipes, failing showers, un-waterproofed basements and more.
Over time, the damage can be catastrophic. Care should be given to ensure that all the plumbing supply and waste lines are in good condition, the home is properly weather sealed and so on. Steps should also be taken to ensure water is diverted away from the exterior: the roof should be in good condition, gutters and downspouts must be free of leaks and debris, diverters should be installed at the bottom of gutters to direct runoff away from the home, and, if necessary, French drains or other methods of diverting exterior water should be in place. If damage is discovered while in escrow, it might throw cold water on your hopes of closing.
Whether HVA systems, pools, wells, septic systems and so on, preemptive inspections will identify potential issues that can be corrected prior to going on the market. If the seller is hoping for an as-is sale, the more knowledge a buyer has upfront the better the offers you can expect to receive and the less likely they will bail after finding something unexpectedly.
6. Infestation issues
A recent seller insisted that a previous rat problem had been resolved. Imagine the surprise of a buyer and their agent when they opened the front door and were welcomed by a large rat sitting in the front hall. They turned around, locked up and left. While this prevented an offer from being written, envision what might happen should this scene be repeated mid-transaction. There is any number of critters that can derail an escrow, including:
A partial list includes ants, cockroaches, bedbugs, lice, earwigs, flies, silverfish, house centipedes, spiders, fleas and ticks.
Rodents and other creatures
Whether rats or mice, rodents not only carry disease, but they can also do extensive damage extending deep into inaccessible areas. Their droppings and urination are a definite health issue. Other pests can include raccoons, skunks, squirrels, gophers, opossums, birds and bats.
Wood destroying pests
These include termites, carpenter ants, wood-boring beetles, wasps, bees and more. If left unabated, they can cause significant structural damage. In our region, fungus (dry rot) is included in this category. Many buyers do not understand that damage from wood-destroying pests can be repaired and, in some cases, better than when built.
Because emotions are involved in a purchase, we have seen many buyers quit when faced with this type of damage: some are alienated by the type of damage, some do not believe it can be adequately repaired and others, in as-is sales, are not willing to absorb the cost.
Mold and mildew
Whereas mildew is a surface condition that can usually be easily treated, mold is more insidious and can burrow deep inside surfaces and structures. Mold, if it has gone deep, can be expensive to remediate. The source of mold is always moisture: find the water source first, deal with it, and then remove the mildew or mold.
Most often mildew can be removed by the homeowner with a surface treatment while a serious mold issue often requires professional treatment and frequently requires the removal of affected materials and replacement with new ones. If the mold is serious enough, it can cause significant health issues and deter a sale. Since there is so much misunderstanding about mold and mildew, it is best to have it identified and remedied prior to a sale.
7. Neighborhood issues
Whether barking dogs, a neighbor who holds loud parties, registered sexual offenders, trains, airplanes, busy streets and intersections, nearby highways or transit, or industrial zones … the list of potential neighborhood issues is almost endless. While the majority of these cannot be controlled by any given homeowner, they can be disclosed upfront so that any potential buyer is aware of their existence prior to a purchase contract. It is in no one’s best interest to discover these issues once a home is in contract: This could force a cancellation and harm a home’s future prospects.
Disclosure laws vary from state to state: in California, for example, state regulations mandate that all potential neighborhood issues be disclosed. Other states have almost no disclosure laws, putting the proof of discovery firmly in the buyer’s court.
Care must also be given in the content being disclosed: as an example, registered sex offender addresses are notoriously inaccurate and, if incorrect information is disclosed, could be tantamount to slander. Care must also be given so as not to violate any fair housing laws. A thorough knowledge of federal and local regulations is critical.
We recommend that your sellers disclose all facts as required by local, state and federal laws and have the disclosures available while the home is being shown and before you get into contract. We require buyers submitting an offer on our listings to sign a receipt stating that they have not only received the full disclosure package prior to writing an offer but have read it as well.
8. Legal issues
There are any number of legal issues that can scuttle a deal. Here are the top issues we have encountered over the years:
We do a significant number of sales with trusts and have discovered that due diligence upfront can prevent a number of issues once in escrow. We are seeing an increasing number of sellers who have placed their home in a trust — with these folks, we simply open a pre-escrow and get a copy of their trust to the title company so they can scrub it for issues before we go to market. This process confirms how the seller’s name is to appear on the contract, and we let buyer agents have this information upfront so that offers are written correctly.
Frequently, however, we deal with successor trustees after the owner(s) has died. In these cases, it is important to have the title company scrub these trusts to ensure we are dealing with the correct person(s) and that they do indeed have the authority to sell. We have seen other listing agents have their deals canceled because, once in escrow, it was determined that they did not have the correct documentation or there was some other issue with the trustee(s).
Wills are not always straightforward. We have all watched movies or shows where a ‘new’ will suddenly ‘appears.’ It is best to check with the attorney who wrote the existing will to ensure everything is in order. Additionally, we send copies of the will to the title company for them to scrub as well.
No Realtor should list a home that has a deceased seller (even if another of the sellers is still alive) before checking to ensure there is a trust or a will. In the absence of both, and in some cases even though there is a will, the home will need to go through probate. Additionally, no buyer’s agent should write on a property with a decedent until they have verified that the seller (trustee or otherwise) actually has the authority to sell. Failure to verify can result in a failure to close. Many buyers will not be willing to stay in escrow and wait once they discover the home has to go through probate with all of its intricacies and extended timeframes.
Imagine paying to market a property, getting it into contract and then discovering it has a clouded title that cannot be conveyed. We have seen homes with loans that have been paid off but not properly recorded, wrong persons on the title (ie: divorces where one party was not correctly removed or persons who are now deceased), failure to recognize that a homeowner died intestate and the property needs to go through probate and more. We recommend that listing agents get a full preliminary title report BEFORE the home goes to market to ensure there are no surprises.
Homeowners have been known to do all kinds of “upgrades” without the requisite building permits. While some minor items can potentially be overlooked, actual additions, garage conversions, significant structural modifications and a host of other more serious modifications without permits can cause serious problems for the new owner.
Local building departments have the authority (varies from locale-to-locale) to red-tag properties and ask that any upgrades either be removed or go through an investigative process to obtain the correct permits and confirm that everything was done to code. Once a buyer purchases a home, they are now on the hook for any corrections that might be insisted upon by local building authorities.
If a buyer’s investigations reveal illegal work and/or additions, that might be enough to scuttle the transaction. The best way to avoid this is to disclose everything up front and then work with a buyer who is willing to absorb the risk.
In our area, CC&Rs (Covenants, Conditions and Restrictions) exist for most neighborhoods. While some of the common items found therein deal with fences, prohibited livestock, acceptable exterior renovations, potential business uses and so on, some communities built in the 1930s and 1940s have discriminatory language limiting occupants to Caucasians.
Rather than attempt to change offending language in any local CC&Rs, current practice is to include a disclosure stating that any such language contained within violates our nation’s fair housing laws and is overridden by current non-discriminatory laws.
Some buyers from minority groups, upon discovering the offending language in the CC&Rs, conclude that they do not wish to live in an area with a history such as this and consequently abandon the transaction. As stated numerous times above, this can be avoided if all CC&Rs are made available to all buyers prior to them writing any offers.
Many properties have Home Owner Associations (HOAs) which come with a comprehensive set of documents, including a financial package, rules and regulations, incorporation documentation and board meeting minutes. While all of the documents are important, potential buyers need to see the financials to ensure the HOA is in good standing, the rules and regulations to understand what is and is not permitted and the board meeting minutes, which will include any conversations regarding rule changes and any impending assessments.
Many sellers balk at the idea of providing these documents upfront because of the cost involved. Unfortunately, I have seen transactions canceled when the buyers, getting the HOA package a week or so into the transaction, realize their dog will not be allowed, barbecues will not be tolerated on balconies, there is an impending assessment that will cost them thousands and so on.
9. Disclosure issues
As mentioned in No. 7 above, disclosure laws vary from state to state. It is incumbent that the seller follows local rules to fully disclose to the level required. In our state, the rule is Disclose, Disclose, Disclose. Failure to properly disclose anything can result in a canceled transaction or, worst case, a lawsuit.
Another item to mention here: although some states do not require a death on the property to be disclosed, this is a non-starter for some buyers and could lead to immediate cancellation if they get the news from a neighbor, etc. Even if not required, it is frequently best to be upfront with any details that might ruin a transaction down the road.
10. Natural Disasters
Earthquakes, tornados, hurricanes, seasonal flooding, wildfires … the list of potential natural hazards is long and can be severe. In many cases, a natural disaster will end a transaction because the property in question is damaged or, in some cases, is no longer there.
In our region, we are compelled by state laws to provide a Natural Hazards Disclosure which details proximity to earthquake fault zones, potential liquefaction, areas of potential flooding, distance to manmade dams, wildfire zones, asbestos outcroppings, leaking underground storage tanks and on and on. Rather than having a buyer discover hazards during escrow and cancel, we recommend providing the required documentation upfront.
11. Seller issues
While this article has so far dealt with reasons a buyer might cancel, sellers often have some culpability as well. These include:
Failure to negotiate in good faith
Some sellers, tired with losses in property value or just fed up with the process overall, dig in their heels and refuse to negotiate in good faith. Unless the buyer is desperate to get the house at any cost, they may choose to walk if the buyer fails to cooperate.
Failure to completely disclose
If a buyer senses the seller may be withholding critical information, they may choose to go looking for another seller who will be more forthright.
Failure to be honest
If you have been in the business for a decent amount of time, you will have encountered sellers who are not honest. They will either fudge the facts, misstate key information or, as mentioned in item b. above, fail to adequately disclose. Buyers who encounter falsehoods have every right to cancel. An even more important question would be why any listing agent would choose to work with a seller that is clearly dishonest.
Failure to complete required repairs
There are two categories here:
- Repairs not done. I have encountered some sellers who, even though they have signed a request for repairs, do not make good on their promise to have the work done by close of escrow.
- Repairs not done correctly. While the agreed-upon repairs might be completed by close of escrow, they may have been done in a substandard manner that is unacceptable to the buyers.
Truth is, there are no new issues listed here. What this is, however, is a list of issues that can be used as a checklist by listing agents to prepare their sellers so as to lessen the likelihood that the buyers will cancel. Although there are some buyers who will find a way out regardless of what a seller does, the better prepared a seller is, the higher the likelihood they will remain in escrow until the close.
While fully aware that practices differ from region to region, we recommend that sellers provide a comprehensive disclosure and report package to all potential buyers prior to receiving a contract that highlights as much information as possible so that buyers can make informed decisions. This approach removes as many potential reasons for a cancellation as possible.
Once a property goes into contract and issues are discovered, the seller is in a negative position and must either adjust the price, provide credits or deal with a cancellation that, in a declining market, could adversely affect the property’s prospects. Better to effectively prepare in advance than backpedal and deal with potential deal-breaking issues once in escrow.
Carl Medford is CEO of The Medford Team.