Backing out of a Real Estate Contract: Buyer’s Rights

Real estate contracts in most states are and have always been pro-buyer, especially here in California. Buyers usually have a contingency period, in which they can complete home inspections, get their loan approved and any other things that are important before contingencies must be removed and they risk losing their initial deposit. What most people don’t know is that a buyer needs to have a legitimate reason to cancel the contract, even during the contingency period.

The California Residential Purchase Contract (RPA) gives the buyer several “outs” that allow the buyer to cancel the contract without being penalized and losing the initial deposit.

1.  Loan contingency. This is one of the main reasons contracts cancel. The buyer’s lender uses the contingency period – standard is 17 days unless the agent wrote in a different number – to get the buyer’s loan approved. During this time period if the lender finds the buyer cannot qualify for a loan, the buyer can effectively cancel the contract.

2.  Appraisal contingency. Likewise, all loans rely on appraisals of the property involved. If the property does not appraise for the agreed purchase price the lender will not fund a loan. The buyer at this juncture can go to the seller and renegotiate the purchase price as per the appraisal. If the seller refuses to do so the buyer can cancel the contract. However, it is important to keep in mind that once a buyer hands the appraisal over to a seller, the seller is made aware of the appraised value of the property in respect to potential future buyers. If the seller’s property cannot appraise for the amount he desires, his only hope of getting that amount is to find an all cash buyer who does not mind paying more than appraised value – good luck with that one.

3.  Buyer’s right to accept the condition of and matters affecting the property. If during the contingency period the buyer discovers there are problems or issues with the property  that the buyer does not want to or cannot afford to deal with, the buyer has the option to cancel the contract. Some examples include where the buyer’s home inspector discovers a plumbing or electrical problem that will be costly or is dangerous, and the seller will not agree to take care of it;  a cracked slab, necessity for a new roof, additions not built to code, or if there is an easement on the property that could effect use and enjoyment of the property, or a myriad of other issues. The contract protects the buyer’s right to back out upon discovering issues that make the property less habitable or otherwise affect the condition.

4.  Breach of seller’s duties. If the seller does not provide certain documents to the buyer on time, such as property and statutory disclosures, it may be cause for cancellation of the contract. The buyer must wait until the expiration of the time period and then provide a written notice to perform to the seller. If the seller does not do so in the time period provided the buyer may cancel the contract. Time periods are specified in the contract.

The California Residential Purchase Contract is written with protection of the buyer as a high priority. No one wants to sell a home to a buyer who is unhappy about it (or, let me rephrase that – I certainly do not want to do that, and most agents feel similarly). Look at your contingency period as a time to gather all the information you will need, so that you understand any faults associated with the property.

Most sellers will work with buyers on repair requests, but keep in mind that ALL homes in California are sold as is – the seller has no obligation to make any repairs. Limit your requests to those items that are dangerous or alter the habitability or enjoyment of the property. Lastly, keep in mind that in short sale situations and most foreclosure cases, the lender will not agree to any requests for repairs.
Happy home hunting! Please let me know if you have any questions I can answer about the purchase contract or the purchase process. I will be happy to address them in a subsequent blog…just make your suggestions below.

 

 

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7 Responses to “Backing out of a Real Estate Contract: Buyer’s Rights”

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  7. Larry Hansen Says:

    I have a situation where buyer is considering cancelling the contract. Buyer has removed home and pest inspection contingency, and there is no loan or appraisal contingency, however there are some things in the HOA docs and seller disclosures that are of “concern”. Also, there is a bothersome neighbor and another neighbor with barking dogs. According to C.A.R.’s “17 days of Angst” (http:/www.car.org/newsstand/crem/past-issues/august2008/17daysofangest) they advise that buyer is not required to give a reason for cancelling, and advise not to do this. The article advises Buyer to just indicate on C.A.R.’s Cancellation of Contract (Form CC) that cancellation is “as otherwise permitted by paragraph 14 of the Agreement.” Would this not be the better approach (not giving a reason) in this situation rather than invite further conflict between buyer and seller? Thanks!

    Larry Hansen, CPA, e-Pro
    Calif Desert Realty
    Broker / Owner

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