California real estate purchase contract undergoes major revisions
Originally appeared in Bay Area News Group publications on December 12, 2014
“Change is such hard work”
– Billy Crystal
Reams of small-font paperwork can cause your eyes to water and brain to swell, yet you need to understand what you are signing. There is a new, ten-page, California Association of Realtors residential purchase agreement containing numerous changes that could make a difference in your next real estate transaction.
Change:
Buyers and sellers are to receive a separate form disclosing if their agent is representing more than one buyer or seller.
Explanation:
Representation and agency can be somewhat complicated; however, if your agent (salesperson) indicates he/she is personally writing an offer for one or more other buyers on the same property you wish to purchase, find another agent.
Some years ago, I had a listing that received 45 bids. One agent wrote offers for three different buyers. This is rare, but some, overly aggressive, licensees focus more on making sales than working in the best interests of their clients.
Change:
New language explains the risk of failing to include an appraisal and/or loan contingency.
Explanation:
In competition, many agents tell their buyers that appraisal/loan contingencies in the contract may negatively impact their chances of getting a house they want and recommend these clauses be excluded. If your contract is written this way, and you end up in a situation where you either do not get the loan you need or the loan amount is insufficient for you to buy, you may be prevented from buying, possibly losing your deposit and/or having personal liability to the seller.
Change:
Discussion of lender limits on credits to the buyer.
Explanation:
A credit is money from seller to buyer in escrow. This decreases the amount the buyer will have to bring in to complete the purchase and is often more advantageous to the buyer (without having a significant impact on the seller) than reducing the price. There are numerous nuances to handling credits. Doing it correctly requires knowledge and attention to detail on the agent’s part.
An example is a seller’s agreement to pay the buyer $20,000 for a newly discovered issue. One problem is that lenders have limits on the amount of credit they will allow. Unless the contract specifies otherwise, if $20,000 is more than that limit, the buyer will not get the full credit amount. This may be funds needed to close. The new contract alerts buyers to be aware of this.
Change:
Leased or liened items and systems.
Explanation:
This newly added paragraph advises the buyer to determine if there are any systems in the property leased or subject to a lien. Examples are leased security systems and solar systems. In some cases, there might be a 20-year lease at the beginning of its term. This could be something you do not want to inherit as a buyer. You may only agree to take on this liability if you receive compensation from the seller.
Change:
How the buyer’s deposit will be released upon cancellation of the contract.
Explanation:
Prior to new contract verbiage, the buyer had to wait until the seller signed his cancellation form releasing the buyer’s deposit(s). Some sellers have been less than timely in signing the form, causing the money to sit in escrow. This modified clause directs the escrow holder to promptly deliver to the seller the buyer’s demand for release of his deposit. Ten days after the seller’s receipt of this demand, if the seller has not objected, the escrow holder can disburse the deposit to the buyer.
Change:
Representative capacity.
Explanation:
At times, the buyer or seller may be functioning as a representative, e.g., a conservator, trustee, or attorney-in-fact. Agents should, but do not always, insist on written authority for this representation right away. The new contract now contains a paragraph requiring such documentation within three days of acceptance, the absence of which can delay or prevent a closing.
Change:
Non-refundable deposits.
Explanation:
Commercial transactions commonly have agreements for the buyer’s deposit to be non-refundable if the escrow does not close. Occasionally, a contract for a property containing one to four residential units will have one of these clauses. California courts do not honor non-refundable deposits in residential purchases. This is now discussed in the revised residential contract.
Change:
“Assigning” the contract.
Explanation:
A new paragraph addresses assignment, i.e., changing the parties who will be buying the property. Although seen infrequently in residential sales in our area, it can be disconcerting for a seller to suddenly find out that the buyer he originally negotiated with has changed to one or more strangers. This can get convoluted, but the clause makes clear that the original buyer is still responsible for his obligations in the contract.
Final thoughts
One of the key attributes to look for in an agent is expertise in the contract and related documents. As a current buyer or seller, be concerned if your agent has not taken the recent four-hour class on changes to the residential purchase agreement. How your contract is written and explained can be the difference between a successful sale or heartache for you.
Related Articles:
Poor Representation: Big Problem in Real Estate
Understanding Agency
Contingency-free Contracts Can Be Dangerous