More DC-area homebuyers are backing out. Bad for the seller, but a second chance for a buyer
One in eight home sales in the D.C. region that went under contract in January was canceled. Nationwide, 14% of contracts fell through, the highest rate of cancellations for a January since at least 2017.
A canceled contract is not good for the seller, regardless of the reason.
“People know that good homes sell early on,” said Daryl Fairweather, chief economist at Redfin. “If they see that a home is sitting on the market, the buyer will get nervous that somebody saw something wrong with the home, and that’s why it’s not selling.”
One reason for elevated cancellations could be inspection contingencies that are becoming more common, a contract stipulation that was almost unheard-of during the highly competitive pandemic-era home buying days.
“If you have an inspection contingency, and there is something that you find out about the home that wasn’t initially disclosed, then you can back out for that reason,” Fairweather said. “You can also ask for credits from the buyer to make you whole for this new information.”
There are other contract contingencies buyers can write into contracts that gives them an early out on the purchase, but a buyer can walk away for no reason covered by a contingency. An uncertain economic outlook, a job loss or other change in their situation since initially signing the contract, or final financing terms that give buyers regret are among more common reasons.
Those reasons do not get the buyer who cancels off the hook. But the penalty for walking away without a contractually-covered reason isn’t that painful. All they lose is the money they deposited when they signed the contract, and that isn’t as much right now.
“Buyers have more power now in the market because of all the extra inventory.,” Fairweather said. “That means that buyers can put down less earnest money, And if you have a low earnest money amount, then you have a lower penalty for walking away.”
An earnest payment deposit can be as little as $1,000 or so, and that is not much concession for a seller who has to relist the property, and explain why a sale fell through.
The elevated share of home sales that are falling through can be good for buyers, especially those who lost out on a home they fell in love with to another offer.
Most will move on to another home. But it can pay off to keep an eye on that home between the time it contracted to another buyer and when the sale actually closes.
“If it is a home that they really want, they should stay in touch. And find out when that inspection contingency clause ends, because that is when sellers are going to be getting credit requests (from the buyer),” Fairweather said. “Then you can come in and say, ‘Hey I’ll offer the same offer as before and I am not going to ask for any of these concessions.'”