Pay Attention to New Contract
Originally appeared in Hills Publications, November 22, 2002
As is periodically the case, the California Association of Realtors (CAR) purchase contract has been revised once again. There are new, separate agreements for single family residential and income properties.
Although most buyers and sellers leave the details to their agent, it is beneficial if you have a sense of the latest contract.
Substantiating funds. The buyer is now required to provide the seller with written verification of the availability of his down payment and closing costs. This could include a letter from the buyer’s lender, or bank/money market statements. A note from the buyer simply saying he has the necessary resources will not suffice.
If some or all of the funds are coming from others (relatives, friends), prudent sellers will insist on a contingency that they be deposited into the buyer’s account soon after the escrow begins.
For most buyers, confirming funds will not be difficult as their lender’s pre-approval process would have already verified them. Those who make an offer without loan pre-approval, however, will most likely have a harder time getting their contract accepted.
Ways to back out. Buyers usually have contingencies for financing and inspections, or others, such as the close of escrow of another property. A contingency is a condition that must be fulfilled in order for the contract to proceed. If the buyer is not satisfied with inspections, or cannot obtain the loan within the contingency time frame, he may cancel the contract and request a refund of his deposit.
Despite the buyer’s duty to act in good faith, principals to a contract should be clear that buyers have great latitude in rescinding. The buyer must not only be willing to accept the property’s condition, but “any other matter affecting the property.”
Thus, noisy neighbors, illegal activity in the area, concern about a shared driveway or a larger than expected expense to modify the dwelling, are only a few of the myriad reasons a buyer may have for choosing not to continue. According to several local legal experts, this latest contract version makes it even easier than previous ones for a buyer to cancel. Needless to say, if a buyer is going to withdraw, it is preferable to do so early in the escrow, thereby minimizing damage to the Seller.
Notice to perform. The revised addendums are extremely useful in reminding both the buyer and seller of their obligations.
The buyer may give a “Notice to Seller to Perform.” For example, this would prompt the seller to provide copies of inspection reports in his possession or condominium disclosures. If the paperwork is not received by the buyer in the specified number of days, he has the right to cancel.
The seller may present the buyer with a “Notice to Buyer to Perform.” This would be for contingencies that have not been removed or documents not acknowledged on time. In addition, it could be used for a buyer’s failure to make and/or verify an initial or increased deposit. Generally speaking, the buyer has 24 hours after receipt of this notice to take the requested action or the seller can nullify the contract.
These notices to perform, although addressed to the principals, are normally designed to remind dilatory agents to take care of business.
Statutory disclosures.
There are numerous statutory disclosures the buyer must receive from the seller in a timely manner. These include disclosures for Lead-Based Paint, Natural Hazards, Smoke Detectors and Hot Water Heater bracing, along with a Real Estate Transfer Disclosure Statement.
A solid contract. Once the buyer has waived all contingencies and acknowledged all disclosures and reports, he is obligated to close the escrow or, otherwise, be responsible for possible damages to the seller. An opportunity to take a job and earn twice as much in another state or last-minute problems in the buyers’ relationship are not legitimate reasons to rescind the contract at this stage.
Sellers need to be able to rely on a buyer’s promise to perform. This is why, when representing sellers, I suggest they ask for a substantial deposit so that the buyer has a strong financial incentive to close the escrow.
Final Thoughts
It is your real estate professional who should be guiding you through the contract process. The best salespeople are much more than just order-takers. One of the biggest mistakes buyers and sellers make is that they do not understand how much choosing the wrong agent could cost them.
Not all Realtors are experienced or expert in this highly technical aspect of the business. Select one who can explain how he will use the purchase contract to protect your best interests.
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