Help Sellers Regain Confidence After a Buyer Backs Out

Your client accepted an offer, and closing is approaching. But then, the buyer wants to cancel the sale contract. What do you and your seller do next?
Woman tearing up a paper contract

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Buyer’s remorse is kicking in as home prices and borrowing costs soar, with more purchasers bailing on their sales contracts after their offer is accepted. Sixteen percent of signed deals fell through in July, the highest share since the onset of the COVID-19 pandemic in March and April 2020, according to Redfin. That’s irking sellers who thought they had their homes sold only to find themselves having to relist weeks—or even days—before closing.

Some areas of the country are seeing a larger uptick in canceled contracts than others, including these cities, which saw a cancelation rate of 25% or more over the summer:

  • Jacksonville, Fla.
  • Las Vegas
  • Lakeland, Fla.
  • New Orleans
  • San Antonio

When home buyers back out of the transaction at the last minute, sellers may worry about the stigma that could put on their property. And as contingencies reemerge in a slowing housing market, canceled sales are increasingly likely, says Liz Perez Barletta, an attorney at Boston-based Ligris, a real estate law firm. She adds that she’s seen an uptick in inquiries about canceled contracts from home buyers and their agents.

“Because of the last two or three years of [market] craziness, home sellers may feel like this is new,” Perez Barletta says about the wave of canceled contracts. “But the ability to get an offer accepted with contingencies is typically pretty standard in a balanced market.” When buyers have a contingency around, say, a home inspection, they have justification to back out of the deal if something goes wrong.

Barletta suggests that sellers maintain tight closing timelines in their sales contracts to help keep the transaction on track or avoid a long lapse in case a buyer cancels the sale.

Why Buyers Are Backing Out

While millennials are the strongest homebuying force in the market right now, more than half say they’ve backed out of a sale contract this year—the highest of any other age group, according to a recent study from Cinch Home Services. They mostly cite unfavorable home inspection results and difficulty securing financing as their reasons for canceling a sale, according to the survey.

Canceled contract chart

But other factors also may be giving buyers cold feet, including fears of a looming recession, a slowdown in the housing market and higher mortgage rates. “You hope everyone is acting fairly” when they back out, Barletta says. “As long as there is an offer with a contingency, a buyer can get out of the contract. If there is an inspection contingency and an inspection was completed and an issue was advised to the seller, they can terminate for that reason. Of course, you don’t know their true intention. It could be that they found a property they like better. But you can’t monitor or gauge for that, unfortunately.”

In most states, there is a due diligence period in the purchase contract that allows buyers to get inspections and appraisals, finalize their loan approval, and back out if concerns are found, says Glenn Brunker, president of Ally Home. Buyers who have an appraisal contingency may cite an appraisal coming in lower than the agreed purchase price as a reason to back out.

Occasionally, buyers may back out over items not in a contract, such as a job loss, death or medical emergency. “An unexpected crisis in their life may have made them rethink their decision,” says Deanne Rymarowicz, associate counsel at the National Association of REALTORS®. “It’s not contracted for, but then something happens out of the blue. In that case, it’s best for buyers to make a compassionate request to a seller to try to negotiate a cancelation.”

Buyers are backing out of new-home contracts, too, with homebuilder cancelation rates doubling since April, according to John Burns Real Estate Consulting. In July, nearly 18% of builder contracts fell through. Some buyers signed contracts six months prior, when mortgage rates were about half what they are now. New-home buyers may have to forfeit their deposit or funds for property upgrades to get out of a builder’s contract. Barletta says it’s important for real estate pros to encourage their buyers to carefully review the cancelation penalty for canceling a new-home contract.

What Sellers Can Do

When home sellers agree to an offer with a contingency, they must be aware that “they’re accepting an offer with the ability of a buyer to terminate,” Barletta says.

In the ultracompetitive market earlier this year, sellers favored offers without contingencies. But as the market slows, sellers may have to adjust their expectations. Still, they can place limits on buyers when it comes to justifying backing out of a deal. For example, sellers can limit the terms of a home inspection contingency, allowing buyers to cancel the contract only in cases where major structural issues are found or a certain dollar amount for repairs is surpassed.

With the financing contingency, Barletta says sellers can be mindful of timelines. “They don’t want to find themselves in a situation where they are packing their lives away and ready to go, and then a week before closing, the buyer terminates because of financing,” Barletta says. “It’s better to try to negotiate an earlier time or an extended closing to avoid that.” But keep in mind that financing approval takes time, so a 10-day turnaround may not be practical, she adds.

Barletta says tighter timelines may mean requiring the home inspection to be completed in three days instead of the typical seven to 10 days. “That way, if the property is inspected and the buyer cancels, the seller won’t have to put their home back on the market two weeks or more out,” she says.

How About That Earnest Money?

Sellers shouldn’t assume they get to keep the earnest money if a buyer backs out, even for reasons not dictated in the contract. Earnest money is the deposit a buyer gives to a seller to show good faith when making an offer. But whether those fees are refundable differs by state law and depends on what’s outlined in the contract. “It’s not an automatic thing,” Barletta says. “If the buyer backs out because they suddenly don’t like the carpet anymore and they’re terminating the contract, the seller doesn’t automatically get those funds.” Both parties usually have to sign off on the return of funds, and most don’t want to take disputes to court.

REALTORS® have a duty under Article 13 of the Code of Ethics to not make recommendations on legal issues to their clients, Rymarowicz says. “So, if the other side cancels the contract—and maybe it’s a cancelation after due diligence—the REALTOR® should advise their client to seek legal counsel so they know the ups and downs of cancelation and the possible penalty,” Rymarowicz says.