The housing market has experienced extreme upheaval, in part due to the pandemic and the rising cost of living. Mortgage rates and the price of building supplies have both recently increased dramatically as well.
According to a recent Redfin report, the cancellation of new home transactions has also climbed. The Redfin report shows that almost 60,000 home sales fell all over the country. That was the highest number of cancellations since April 2020, when early Covid lockdowns froze the housing market.
According to Northern Colorado-based real estate agent Sean Gilliam, most sales fall through during the inspection period. In some other situations, a buyer must end a contract due to financial problems, which are frequently connected to the loss of a job or income earner in the household. However, he says several recent sales fell through because mortgage interest rates went up so quickly that the buyers couldn't afford the homes.
When To Cancel a Deal
Even though canceling is acceptable, there's a suitable time to cancel a transaction. Gilliam says that if both parties have signed the closing document and the cash paid, it is too late to back out. The lateness of a cancellation also depends on contingencies. These are requirements that the contract must satisfy for it to be binding.
According to Jennifer Spinelli, founder, and CEO of Watson Buys, the buyer might not be able to withdraw without incurring legal repercussions if there are no contingencies or if all contingencies have been satisfied. She gives the following example: “The buyer may have a stipulation that they must first sell their current property; if this contingency fails, the buyer is safe to back out.”
Otherwise, breaking the deal without a good reason could cost you money (losing your good faith deposit) besides the risk of getting sued.
According to Gilliam, it's also crucial to know that a seller may be able and ready to take care of some problems with a house, title work, and more. The contract might still conclude if the buyer and seller can come to an understanding. Gilliam adds that you can determine if you want to keep the contract in place based on your knowledge of the market trend.
“If the buyer is considering breaking a contract over a relatively minor issue, and the market is moving quickly, and home values are going up significantly, it may be a good idea to go through with the transaction and address the issue later, at a much lower cost than waiting for the “perfect” home to come along,” says Gilliam.
Before you cancel, Spinelli suggests that you follow these three steps:
- Ask a real estate agent for guidance on the best course of action and assistance with the procedure.
- To better understand your rights and obligations, review your contract. The law may require you to complete the transaction if you have signed a deal.
- If you're still confused about whether you can cancel your contract, talk to an attorney. They can provide you with the necessary legal counsel to keep you out of trouble.
Protect Yourself From the Risk of Backing Out
Here are a few steps home buyers can take to safely back out of a deal or avoid it entirely.
Do Your Due Diligence
If you're interested in a home, Gilliam suggests visiting it with your realtor to look for any problems that would make you want to pass. Doing a thorough inspection stops buyers from entering a contract only to cancel because of a fault on the property they missed.
Be Financially Ready
Make sure you have enough money for the purchase. To avoid unanticipated loan declines, it's also a good idea to be open and honest about your financial situation. In addition to the purchase price, carefully analyze additional costs to see what you can afford; expenses for maintenance, agent commission, and home association dues should all be considered in your budget.
Understanding several mortgage types and determining which one you are eligible for would be your next step. Finally, to narrow your house search to properties within your price range, try to secure a loan pre-approval. According to Spinelli, a pre-approval ensures you can get financing if the deal goes through.
Follow the Contract Guideline
Gilliam asserts that once there is a signed contract, buyers can protect themselves from the possibility of pulling out by ending it per the terms and deadlines of the agreement. He points out that buyers have a variety of legal ways to exit a contract, depending on the state in which they reside.
Home buyers will receive their earnest money back if they comply on time and in good faith. The seller would be entitled to the earnest money, however, if a buyer successfully terminated a transaction outside the boundaries outlined in the contract.
Include a Liquidated Damage Clause
A liquidated damage clause ensures that if someone breaks a contract, they must pay a certain fee. This guarantees that you will only lose your initial investment and won't risk being sued or paying additional legal costs.
Include Contingencies in the Contract
Make sure the ultimate payment depends on certain aspects of the house purchase. Then, you have more time and legal options to end your purchase agreement with these conditions. Typical contingencies to mention are inspection, appraisal, and financing. They protect you in the following ways:
- If you discover a problem with the property, a home inspection precludes you from completing the transaction.
- If you discover that the property isn't worth as much as the seller claims, an appraisal gives you the freedom to walk away.
- If you can't raise the money to buy the house, a financing contingency can help you cancel without consequences.
You have greater time leverage to withdraw without losing your deposit if you include longer inspection windows, financing contingencies, and approval timelines. Ultimately, before signing anything, Spinelli advises you to be comfortable with your decisions.
Home buyers have every right to sever various agreements and bonds as they proceed with the home-buying process. The costs or emotional suffering of being forced to own a home you don't desire much outweigh any fines or penalties for breaking the contract. You can make well-informed decisions that won't harm your finances or emotions with the correct home-buying partners to guide the buying process.
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This article was produced by Wealth of Geeks.
Featured Image Credit: Pexels.
Amaka Chukwuma is a freelance content writer with a BA in linguistics. As a result of her insatiable curiosity, she writes in various B2C and B2B niches. Her favorite subject matter, however, is in the financial, health, and technological niches. She has contributed to publications like ButtonwoodTree and FinanceBuzz in the past. In addition to ghostwriting for brands like Welovenocode, Noah and Zoey, and Ohcleo, amongst others. You can connect with her on Linkedin and Twitter.