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.

I love to read Kenneth Harney columns. He is one of my favorite writers on the real estate market, and always poses poignant questions as he delves deep into real estate-related issues (some that the average journalist won’t tackle). Today he had a new column out discussing the “case of the walking homebuyers.” Apparently the numbers show that large numbers of signed real estate contracts cancelled last month across the country. Why is this, and will it continue?

One of the reasons cited for contracts falling a part is the good old economy. Uncertainty about what is going on with the deficit, unemployment and the housing market may be causing many folks to rethink home purchases. Ironically enough now is the time to buy a home if you are in the position to do so, as prices are low, rates are low, inventory is ripe for negotiations and it is a buyer’s market. Call it a Catch-22, but the savvy buyers (like investors, who have no emotions in the game) are purchasing some great deals.

Short sales are also cited as one of the culprits for purchase contract cancellations. As you are aware, these sales can be long processes and often buyers decide not to wait the process through. I even had one cancel after the lender had approved the short sale, because the lender decided to sell the property at auction…but this is a rare case. For the most part though, my short sales have not had a problem closing (only the annoying time burdens). Most short sale buyers, if counseled correctly by their agents, will understand going into the process that it could be timely.

Lender issues are another potential roadblock with purchase contract cancellations. Often buyers have a hard time obtaining funding for a loan, and this process has become even more difficult due to the possibility of loan limits reductions (see my previous blogs on this topic). For the most part, if buyers are pre-approved and the agents follow up with the lenders on this prior to writing an offer, and then during the contingency period, the majority of the loans go through. The key is communication with the mortgage broker/bank representative, so that they get all the paperwork needed from the buyer(s).

Appraisal issues are also pointed out in the article. Appraisers have been known to blow a sale here and there by valuing properties too low. As Mr. Harney pointed out, if an appraisal comes in too low the buyers may opt to back out if the price is not reduced. But for the most part I have not personally had any appraiser issues (only one a few years back, and he was right on – so the sellers had to reduce the price for my buyer and, although they were unhappy, they would have had to do so for other buyers as well). Oftentimes though the appraisals can be the subject of errors, which can be remedied should the buyer and seller take their agents’ advice and submit an appeal.

No matter what forces may compel buyers to abstain from home purchases, if you are in the position to buy, are qualified, and are working with an agent who is both smart and savvy, there really is no better time. I know I say this often, but that is because it is the truth. If you need more proof just look at all the investors out there buying right now…that says a lot.

Many people who purchase real estate have little understanding of the way the law effects your purchase, yet it is important to learn because your purchase is a legal transaction.

In California, according to the Statute of Frauds all contracts for the sale of real property must be in writing to be legally enforceable. When you sign your name to a contract it is assumed that you have read and understood the language therein, and you are bound by that language. While there are exceptions to the Statute unfortunately naivety is not one of them; the point is to read and understand the entire contract.

Unlike other states where an attorney represents buyers and sellers in real estate transactions, we have to be more vigilant here. If you do not understand something you need to consult with your Realtor. If he or she cannot explain it to you then they need to involve their broker or speak with your attorney. But the bottom line is that you need to understand what you are signing.

What can make a real estate contract voidable (able to be canceled by either party), void (rendered nonexistent) or unenforceable (allowing for a legal remedy)? Without going into elaborate detail here are the exceptions that may enable the contract to fall under one of these categories:. 1. Age/minor–you must be over the age of 18 or have a legal guardian who can sign in your capacity. 2. Insanity–if it can be proven that the signer was not of sound mind when s/he signed the contract. 3. Misrepresentation–if a party can prove that they signed the contract as a result of the misrepresentation of the other party. There are two types of misrepresentation so you need to speak with your attorney to apply specific facts and to see what types of remedies may be available. 4. Fraud. If you entered into a contract because of fraud on behalf of the other party the contract could be void or voidable, with legal remedies available.

Fraud has become a buzz word lately due to the numerous lawsuits filed by homeowners against lenders in foreclosure cases. If you are purchasing a lender-owned property please consult with your Realtor and make certain that the lender acquired the home legally. Title companies are stepping up to make it more difficult to get these properties insured, so that will make it easier on the buyers because clean title cannot pass if the lender acquired title to the property in a fraudulent manner. Keep in mind that it also may make title insurance policies a lot more expensive with regard to these types of properties.

The bottom line is to make sure you understand the contract you are signing, and make sure to have your Realtor do some extra investigating in cases of lender-owned properties.