How Often Do Contingent Offers Fall Through?
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Receiving an offer on your home kicks off an exciting part of the sales process. As a seller, you can start to prepare for the closing date and begin packing up your belongings. If a buyer has added contingencies to the offer, you can work with them to complete these requirements.
Contingencies are a natural part of home sales. They range from home inspections to financing requirements. An offer with contingencies is nothing to fear. According to the National Association of Realtors (NAR), only 5% of contracts were terminated before the sale, which means the vast majority of deals go through.
However, sometimes contingencies can delay or prevent deals from closing. Certain circumstances could prevent your buyers from moving forward, leaving you stranded as a seller. Use this guide to learn how often contingent offers fall through and what to do when they happen.
What Are Contingent Offers in Real Estate?
A contingent offer means the buyer is interested in purchasing the property as long as one or more requirements are met. For example, a buyer can say they would like the house contingent on the home inspection and appraisal. This means they want to see the results of these reports before they agree to close the deal.
Most offers come with at least one home sale contingency. For example, the NAR report mentioned above said only 20% of buyers waived the inspection contingency. This means 80% of buyers submitted offers contingent on the home inspection.
Most contingencies protect buyers and allow them to dictate the terms required to buy the house. However, they also create uncertainty for sellers. The homeowners have to wait for the various contingencies to clear before the buyer can proceed with the home sale. Some of these contingencies can take a few days (like a home inspection contingency) while others can take longer (like a mortgage contingency).
In a competitive seller’s market, buyers might waive contingencies to make their offers stand out. This creates certainty for the seller that the deal will go through, making the bid more desirable. However, in a buyer’s market, offers might have more contingencies that sellers need to accommodate.
A house stays in contingent status until all clauses and requirements are met.
Contingent vs. Pending Status
People often confuse contingent status with a pending home sale. When an offer is accepted but contingencies need to be met, the deal is contingent.
When all contingencies are met and both parties are waiting to close, the deal is pending.
For example, a home sale might be clear to close, but the closing date is still a week away. All parties are ready to move forward, but the appointment simply hasn’t happened yet.
Most contingent offers fall through before a deal reaches pending status. It’s less likely that new issues arise when both parties have already agreed to the terms of the sale. However, nothing is certain until the paperwork is signed. New problems or concerns can arise before the closing date.
Your real estate agent is an essential guide to understanding the difference between each status.
“A great Realtor sets realistic expectations, guides sellers through each stage, and, most critically, ensures the contract performs through closing,” says Somer Padilla at The Somerlyn Group in The Woodlands, Texas. “Without an agent, sellers may overlook the many ways a deal can fall apart. A skilled agent protects the client’s interests and navigates contingencies so the transaction makes it to the finish line.”
Common Types of Contingencies
One of the best ways to understand contingencies is to learn about the different clauses and additions you might find in the purchase agreement. Buyers can add multiple contingencies to their offers, and sellers can counter by accepting or rejecting certain clauses. Here are a few contingencies you might add to an offer or review in a bid.
- Financing Contingency: The buyer cannot close on the deal unless they can secure a home loan. This is often called a mortgage contingency.
- Inspection Contingency: The buyer can negotiate the deal or pull out of the agreement following the home inspection. For example, if the inspection discovers a mold infestation, the buyer might offer a reduced price for the property.
- Appraisal Contingency: The buyer can pull out if the appraisal doesn’t reach the offer price. Another option is for the buyer to negotiate a lower sale price.
- Home Sale Contingency: The current purchase is dependent on the sale of the buyer’s current home.
- Title Contingency: There needs to be a clear property ownership transfer in order for the buyer to close on the deal.
Most of these contingencies are common and expected by sellers. One that sticks out as less common is the home sale contingency. If a seller receives two bids, and one requires the buyer to sell their current home first, the seller might choose the other offer. They don’t know if closing on the other home will take a few weeks or several months.
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How Often Do Contingent Offers Fall Through?
Contingencies are a common part of the home-buying process. Most buyers will insist on a clean title, even if they waive the inspection and appraisal. Unless the contingencies are unreasonable, they usually aren’t enough to cause a home sale to fall through. Here’s what you need to know about handling a contingent offer.
National Failure Rates
According to NAR, only 5% of deals are canceled once an offer is accepted. If both parties agree to the contingencies in the bid, then they are likely to move forward with the home sale. Cancelations are likely related to the results of the home inspection or appraisal, or difficulty with the buyer’s home sale, instead of because of the contingencies themselves.
That said, there is also a chance that closing is delayed because the agreed-upon contingencies haven’t been met yet. NAR reports that 16% of home sales experienced delays before closing. These may occur because the seller doesn’t complete the agreed-upon repairs after an inspection or because the buyer needs more time to secure financing.
Knowing how often contingent offers fall through can give you confidence when negotiating with buyers and sellers. Everyone wants the deal to move forward. The goal is to establish the right terms and conditions to make everyone happy at the closing table.
Market Condition Impact
While it’s beneficial to stay on top of national trends, local markets can also impact whether or not contingent offers fall through. The inventory in your area and competition between buyers can sway the number of contingencies that come with bids.
In seller’s markets, a single house might receive multiple offers from potential buyers. To make their bids more competitive, some buyers might waive contingencies to make the sale process easier for sellers. If a buyer has too many contingencies in the purchase agreement or they are too complicated, the seller might pull out of the deal and accept another, less complicated offer.
However, in buyer’s markets, sellers have a harder time securing offers. They might be more excited about a bid, even if it comes with contingencies. Buyers can ask more of sellers because they know that they likely aren’t competing against other bids.
Either the buyer or the seller can walk away from the deal because contingencies aren’t met. The party most likely to walk away depends on the local market conditions.
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Why Contingent Offers Fall Through
It’s easier to understand how often contingent offers fall through in real estate by looking at why they fall through. Oftentimes, one party walks away when they cannot fulfill the terms of the agreement, or they do not want to.
Here are a few reasons why a buyer or seller might walk away.
Financing Falls Apart
This is one of the most common reasons why a real estate deal falls through. Someone might start the home-buying process thinking they have the finances to purchase a home, only to realize it is not possible. Here are a few reasons why a buyer can’t get financing:
- They didn’t get pre-approved for the loan and made an offer outside of their price range.
- There were major life changes, like a divorce or a lost job, that affected the buyer’s financial situation.
- Sudden expenses, like an emergency room visit, changed their financial situation.
- The lender did not approve the loan due to the inspection or appraisal report.
- The loan was considered too risky for the mortgage lender.
The financing contingency usually means the buyer gets their earnest money back, and the seller relists the home on the market. Without this contingency, the seller would keep the earnest money deposit.
There isn’t a lot that sellers can do if the deal falls through due to financing. They are mostly affected if the issues are related to the appraisal or inspection.
Inspection Discoveries
A contingent offer can fall through if there are unexpected discoveries during the home inspection. For example, the buyer could find foundation problems, roof leaks, or extensive mold and water damage that exceeds the buyer’s tolerance or budget.
Usually, in the days after an inspection, both the buyer and the seller negotiate repairs. The buyer might ask for certain problems to be fixed or request a price drop on the sale price. The seller might counter, depending on what they are willing to do or pay for. If both parties can’t reach a deal, the sale will fall through.
This is why hiring an experienced real estate agent is so important. They can review the inspection report and recommend what needs to be addressed, and offer suggestions on what is reasonable to ask the seller to repair or pay for.
Appraisal Shortfalls
The appraisal in real estate determines the fair market value of the home from an objective third party. The appraiser looks at factors like other home sales, the condition of the home, and amenities that come with it. If the appraisal is too far below the listing price, the lender might deny the loan, or the buyer might walk away from the deal. The appraisal contingency means the buyer will get their money back.
Buyers don’t have to walk away if the appraisal comes in low. They can negotiate a lower sale price with the seller. If both parties can reach a deal, there’s no reason for the buyers to use their appraisal contingency. These negotiations are more common in rapidly changing real estate markets where home values fluctuate.
Home Sale Contingency Complications
If the buyer is selling their current home while making offers on the next one, they might add a home sale contingency to their bids. This means a seller can accept their offer, but they cannot close until the buyer sells their house. This can be a risky contingent offer because the seller has to trust that the buyer can sell their home within a reasonable timeframe. If the buyer’s home doesn’t sell, it creates a snowball effect where the seller can’t close and move to their next house, either.
The seller may decide to add a kick-out clause to the purchase agreement if they accept an offer with a sale contingency. This means they will continue to market their home to other buyers who might not submit bids with real estate contingencies. If another buyer comes around who’s ready to close, the kick-out clause ends the current agreement.
Buyers have to decide if they are comfortable moving forward with a kick-out clause in the same way the seller has to decide if they are ready to take on the risk of the home sale contingency.
>>AGENT ANSWERS: What does contingency mean?
Buyer’s Remorse or Life Changes
Sometimes, the reason the buyer pulls out has nothing to do with a contingent offer. They might end the real estate transaction because they found a different house that is their dream home, because they aren’t ready to make a purchase, or because they experienced life changes like a breakup or lay-off. The uncertainty of the deal is an unfortunate part of selling real estate.
If this occurs, the seller can contact other buyers to accept backup offers or start marketing the property again. They need to accept that the original deal is over.
Should You Accept a Contingent Offer?
It’s understandable if you are on the fence about accepting a contingent offer. However, there are other factors to review that can help you decide how risky the offer is and whether or not you should accept it. Here are a few indicators that determine how strong a buyer’s offer is.
- The buyer’s financial qualifications: It’s not uncommon to ask for proof of funds along with the offer. This gives you an idea of a buyer’s financial stability and likelihood of securing a loan.
- Contingency terms and deadlines: The buyer should provide details for each contingency, including how long they expect it to take. This shows the buyer is serious.
- Earnest money amount: Buyers tend to put down more earnest money when they are serious about the deal. Look for a larger deposit.
- Buyer’s agent experience level: You want to make sure you and your agent are working with trusted professionals.
There are also ways to reduce risk in the home sale. Your agent should require pre-approval letters from reputable lenders before accepting any bids. They can also continue to market the property to other buyers and showcase its contingent status. This is perfectly fine as long as the buyer agrees to a kick-out clause.
Additionally, as a seller, you can ask for shorter contingency periods. This means the buyer has less time before they lose their earnest money and the house goes back on the market. Shorter contingency periods mean sellers can find new buyers sooner, preventing major delays in the moving process.
Everything is a negotiation in real estate. While you can push for these protections, buyers might counter with offers without them. Each party will work together until they are ready to move forward, or else they will walk away.
Contingencies Are a Normal Part of Real Estate
You will likely receive offers with contingencies when you list your home for sale. Even a simple title contingency can make buyers feel safer and protect everyone involved in the deal. If you are worried about real estate contingencies, hire an experienced agent to review the contracts and help you make sound decisions. An experienced agent will understand real estate contracts and write them in a way that protects you as the seller.
Turn to FastExpert to find real estate agents in your area. You can review the profiles of trusted Realtors and hire the best ones for your needs. FastExpert makes it easy to find trusted agents that support the home sale process. Try FastExpert today and approach the real estate transaction with confidence.
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