5 Common Reasons Why Real Estate Transactions Fall Through

A real estate transaction can feel like a daunting process. From mountains of paperwork, phone calls, approvals, and a list of contingencies, it can be a lot to take on. As a first-time buyer or seller, it is important to educate yourself on this process prior to writing an offer or listing your home. That little extra bit of homework could be the difference between getting a deal over the finish line and falling out of escrow.

In fact, almost 15% of real estate transactions fell apart in June of 2022, according to Redfin. Whether it be increasing interest rates, a lack of staging, working with the right agent, or not completing pre-inspections, home sales fall through due to a variety of reasons. But we don't want you to succumb to any of these circumstances, so in this article, we will cover five common reasons why real estate transactions fall through.

1. Loan is denied

As a buyer, it is important to understand the financial literacy of the home-buying process when applying for a loan. Whether it be an FHA loan requiring a 3.5% down payment or a traditional 20%, how you choose to structure your mortgage with your lender is a critical step. QuickenLoans notes that just under 10% of loans are denied during the underwriting process, with a couple of key factors contained in this decision including your debt-to-income ratio, credit history, proof of funds, and bankruptcy history. Outstanding college debt or months of unpaid credit balances can also have a real consequence on your ability to get approved for a loan.

Furthermore, be mindful of reserves necessary for closing costs, as well as monthly expenses. These decisions can influence your loan approval ability and can often be the first hurdle preventing you from purchasing a house. It would be a shame to get through a successful inspection and clean appraisal only to have a loan get denied.

2. Bad inspections and expectations

Ah, inspections — everyone's least favorite part of the home-buying process! Unfortunately, this is often where a lot of real estate sales fall apart. Whether it be a major foundation issue, a roof replacement, or significant mold concerns, sometimes these types of inspection issues outweigh the good and are worth leaving the deal, as noted by House Grail. And other times, the seller will not budge on accommodating even the smallest repair request, like fixing a leaky faucet. One mistake buyers often make is not having their agent speak with the listing expert to gauge any further information on the property.

Often, the listing agent will have a list of disclosures readily available to interested clients to offer an updated condition on the property. Disclosures often include recent home updates, outstanding structural or functional issues, as well as the renovation history of the house. By not looking at these materials in advance, buyers will find themselves shocked at discoveries made in inspections and likely back out from purchasing.

3. Appraisal goes south

The appraisal is a key contingency that can make or break a deal. As property price increases are beginning to stagnate, we can expect appraisals to become more of a deciding factor in the house purchase process in the near future. Home appraisals are affected by a variety of factors, including recently sold properties in the area, square footage, configuration, and general aesthetics, as noted by Money Tips.

If the appraisal comes in under the purchase price, the buyer has the option to counter the existing offer and request a reduction of the price of the home. The seller can either cut out the property's purchase price or ask that the acquirer makes up the difference between the listed price and the appraised value. This discrepancy is usually what knocks the deal out of escrow. Depending on the home's inventory, desirability, and its respective area, the buyer may or may not go through with making up the difference.

4. Buyer's remorse

Early in the escrow process, prior to the lifting of any contingencies, there is a small window in which a lot of purchasers will back out of the contract fearing that they've made the wrong decision, cannot actually comfortably afford the property, or think that they can find an even better residence that they want to pursue instead. So yes, buyer's remorse is a real phenomenon, especially for first-time purchasers. In fact, Bankrate found that over 60% of homebuyers in 2022 have experienced this sense of regret for a variety of reasons.

A real estate transaction is likely the biggest financial transaction of your life and the biggest asset you'll probably purchase, so why would you start signing contracts without taking some inventory on your own? Regardless of your connection with a realtor, by not going to open houses or conducting anecdotal market research, a newer acquirer will often write an offer on a property with little to no context as to how this home fits into the greater market, their budget, and other criteria.

5. Geographic and lifestyle inconveniences

A buyer can find the perfect house with the perfect pool, the perfect natural light with the perfect sized bedrooms but upon further inspection of the local area, unfulfilled lifestyles and desires beyond the details of the property can lead a client to back out. Especially when it comes to single-family houses, Better notes that over half of acquirers with school-aged children consider viable residences based on school zoning. That makes up a tremendous amount of homebuyers!

Public schools, walkability, safety, access to local restaurants, and proximity to other family members and friends — these are all lifestyle factors that weigh heavily into a person's decision to purchase a home. In addition, buyers may initially get emotionally swept away by the aesthetics of a listed property. However, upon further reflection, some will look for reasons to exit the deal and focus on things outside the house that don't meet their needs and wants.