New sales contract: protection or peril for you?
Originally appeared in Bay Area News Group publications on June 18, 2010
Would you read every word in the new, tightly printed, eight-page California Association of Realtor’s (C.A.R) residential contract? Probably not.
This contract, used by most real estate agents, has recently undergone its most extensive revision in the past eight years. Changes to this standard real estate purchase agreement can have a significant impact on the quality of your representation in a home sale transaction.
Some licensees have familiarized themselves with the additions and deletions; others may be clueless. To avoid potentially serious mistakes, make sure your real estate representative is in the know about these modifications.
“Good faith”
There is specific language that says, “Any removal of contingencies or cancellation…by either buyer or seller must be exercised in good faith and in writing.” It puts both parties on notice. In my opinion, this added language may assist those who acted in good faith when they seek damages from those who did not. Having reviewed numerous cases as a Northern California real estate expert witness, it is often obvious that at least one of the parties to the transaction did not act in good faith.
As an example, suppose you are a seller who is having trouble keeping up with your mortgage payments. You list your property for an attractive price and receive multiple offers. Unbeknownst to you, the offer you choose was only one of several written simultaneously on different houses by the same buyer, but this fact was never disclosed to you. A week after ratification, the buyer receives an accepted offer, at a lower price, on one of the others. He then cancels your contract based on his “disapproval” of inspections.
Is this good faith? Of course not, but variations of this scenario have been occurring daily for over two years. This additional language may cause some buyers and their agents to reconsider committing an unethical practice.
Initial deposit
Buyers customarily include an initial deposit with their offer. A contract addition now gives the buyer the option to do an electronic funds transfer (EFT). If “EFT” is checked, you, as a seller, may not know if the buyer actually made the deposit until at least three business days after acceptance.
This could be important in a multiple offer situation. Verifying a deposit is usually the first milestone in identifying a legitimate purchaser. In this scenario, some listing agents will suggest that their seller counter and have the buyer give the seller a copy of a check made out to the title company.
Loan contingency
A powerful, new clause has been added: “Buyer shall act diligently and in good faith to obtain the designated loan(s). Obtaining the loans specified above is a contingency of this agreement unless otherwise agreed in writing. Buyer’s contractual obligations to obtain and provide deposit, balance of down payment and closing costs are not contingencies of this agreement.”
An example of why this was needed is the situation where the buyer does not have all necessary funds to close the escrow and fails to disclose this to the seller. He may need to sell or close escrow on another property, may need to borrow money from friends and/or family, or to sell stock holdings that have recently lost substantial value.
Another illustration is the buyer who, in order to get his offer accepted in competition, indicates he will apply for financing with 20% down. After his bid is accepted, he proceeds to process a loan with 10% down. Considering that agents often advise their sellers to accept the “strongest,” not necessarily the highest, offer, sellers commonly take a lower price from the purchaser perceived as most likely to close escrow, i.e., the one with the highest down payment.
I recently heard of a court case where the seller took a lower offer from a buyer who was not truthful about the amount of his down payment, and then successfully sued the buyer for failing to disclose this crucial fact.
Failure of seller to deliver required item
Sellers have an obligation to provide certain documents mandated by law. They also must make sure to give the buyer any and all information that might be considered a “material fact.” This is defined as something so important it could influence the buyer’s decision to buy or not, and/or how much to pay.
The new contract specifies that if the seller delivers any required item to the buyer late, that buyer has additional time to decide to cancel or remove the applicable contingency. Given that the default time period in the contract is seven days for this, sellers and their agents may not realize how failing to provide timely “reports, disclosures and information” could delay or end the escrow.
Removing contingencies, closing escrow
Under definitions, previously implicit, now explicit, is: “Days means calendar days. However, after acceptance, the last day for performance of any act required by this agreement (including close of escrow) shall not include any Saturday, Sunday or legal holiday and shall instead be the next day.”
The implication of this clause is that contingency removal dates and close of escrow may be longer than the agent(s) think. Based on experience, I predict this change will be overlooked by many in the business, to their client’s chagrin.
Final Thoughts
The items mentioned above represent just a few of a long list of changes. As a buyer or seller, you are not expected to be an expert in purchase contracts. Clients believe this will be adequately handled by their agent. To avoid unanticipated problems, make sure your Realtor is knowledgeable and facile with real estate contracts, especially the new one.
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