Real estate closings generally take weeks or longer to complete. In some cases, sellers may have listed their property weeks before they received a reasonable offer. They then have to wait many more weeks while the property undergoes inspections and the buyer finalizes the terms of their mortgage.
Once sellers accept an offer, they may view the transaction as a done deal. After all, they have a firm commitment from the buyer agreeing to pay a certain price for the property. Unfortunately, the transaction is not complete until the buyer actually signs the documents and the seller receives the funds.
Occasionally, buyers get cold feet or face challenges that force them to cancel the closing. Do sellers need to worry about buyers backing out of a real estate transaction at the last minute?
Buyers need a reason to cancel the closing
Sellers often need the capital secured through a real estate transaction to move forward with their plans. They need the funds from a mortgage lender to purchase their new home or complete other important transactions. They may end up incurring significant expenses if buyers retract their offer and refuse to move forward with the closing.
As such, buyers typically deposit earnest money when making an offer to protect sellers against the inconvenience of a sudden cancellation. Earnest money is usually at least 1% of the purchase price for the property. The agents involved in the transaction usually hold those funds in escrow to ensure proper application of the funds.
Most of the time, earnest money contributes toward a buyer’s down payment. However, if they cancel the transaction, then the seller can theoretically retain some or all of their earnest money. Buyers may seek to protect themselves from the loss of earnest money by adding contingencies to their offers.
Contingencies are clauses that allow for a penalty-free closing cancellation in specific scenarios. Financing, appraisal and inspection contingencies are common. If the buyer can’t obtain a mortgage, if the appraisal comes in low or if the inspection turns up significant issues with the property, then the buyer may be able to cancel the closing without losing their earnest money.
Sellers can protect themselves by choosing offers with limited contingencies, making clear disclosures about property conditions and ensuring that offers either align with the fair market value for a property or do not require an appraisal because there is no mortgage involved.
Understanding what issues might complicate a real estate closing can help sellers prepare for what can be a stressful and frustrating process. If a buyer cancels a closing, sellers may be able to recoup some of their losses.