One report shows that 14.9% of homes that went under contract in June fell through before closing. This failure rate is at its highest point since 2020. Could the trend in buyers backing out before closing be a sign that the seller’s market is ending and buyers are taking back their authority?
Rising Rates Shrink The Pool of Buyers
A 1% rise in interest rates decreases a buyer’s purchasing power by $45,000. Last year’s 2.5% rate is now 5.5%. The people who capped their search at $850,000 in 2021 compete in 2022 for the $700,000 homes taking the place of the folks who dropped into the $550,000 market.
Rising Rates Shrink The Pool of Sellers
What would it take to give up a 3.0% interest rate in exchange for a 6.0% rate? A remarkable steal? Don’t count on that happening. Home prices will decline when the supply of homes far exceeds the demand. Rising rates will take some buyers out of the market; if they own a house, the property they don’t offer for sale is one less home for an already stressed inventory of available homes.
Are Buyers Regaining Leverage or Taking Advantage of Opportunity?
Prices escalate, and contingencies vanish when buyers perceive they are competing with other uncommon buyers. The strategy of outbidding the crowd on price and renegotiating later when the competitors are gone is nothing new. Before we take the numbers as evidence that buyers have leverage, we need more information. Real estate transactions have built-in opportunities to renegotiate or walk away, varying by State. For example, Florida requires each purchase agreement to contain an inspection clause that lets the buyer terminate the offer without consequences. Wisconsin law allows buyers of condominiums the right to terminate the contract within days of the buyer’s receipt of condo disclosures.
The Unlikely Fight Over Earnest Money
You have a much easier time getting an accepted offer on equal or better terms with another buyer than you will have to collect any earnest money from the buyer who decides to walk. Earnest money is rarely enough to pay a lawyer and court fees to collect from the buyer who fails to close. Without enough money on the line, buyers and sellers are likelier to part ways with a cancellation and mutual release. In markets where buyers know the seller can turn to the next buyer, agreeing to terms to renegotiate or walk later has little or no consequence.
The Essential Solution
Accepting an offer to purchase requires home sellers to take a giant leap of faith. Given opportunities (contingencies) to walk away, some people withhold their commitment to close until just prior to the closing date. Sellers are not required to grant buyers the luxury of contingencies, and they can require that buyers put money down (even in addition to earnest money) to ensure the buyer has something to lose by failing to commit to close. As a service to our clients, we draw their attention to the “escape clauses” and show them how to make the buyer commit to close before accepting the offer. We can’t protect everyone from unscrupulous characters. But, we can show our clients where the contract is lacking and we can suggest ideas that might help a buyer decide to honor their commitment.