HOW BROAD IS THE INVESTIGATION CONTINGENCY?

As you know, it is not that uncommon for a buyer to look for a way to get out of a contract they signed. Whether they simply got cold feet, or have some real issue (lost a job), a buyer needing to cancel the contract without an obvious reason for doing so is a regular occurrence. So, how is that cancellation accomplished? After all, both California law, and the specific language of the Residential Purchase Agreement (RPA) require that “[a]ny removal of contingencies or cancellation under this paragraph by either Buyer or Seller must be exercised in good faith …” (RPA, paragraph 14.) Obviously, if there is a title issue they can use the title contingency (assuming they still have it). The same is true for contingencies regarding the loan, appraisal and HOA documents. But what if the issue is less clear? Can the buyer use their investigation contingency for almost any reason, and if so, are they acting in good faith?

In order to answer that question, we need to look at paragraph 10 of the RPA, the clause defining the buyer’s investigation rights. In that clause, the buyer is told that their acceptance of the property’s condition is a contingency of the Agreement. They are told that they have the right to conduct inspections regarding a number of things, “including, but not limited to,..” lead based paint, termites, insurability and “any matter specified in the attached Buyer’s Inspection Advisory (CAR From BIA).” In other words, the clause creating the buyer’s right to an investigation contingency specifically says they should consider the matters identified in the BIA. Now, as you know, that Advisory is very broad, covering things from the general condition of the property to its size to earthquakes to its neighborhood. As importantly for our issue, at the end of paragraph 15 of the BIA, the Buyer is told to investigate the property for “personal needs, requirements and preferences of Buyer.” In other words, pursuant to the terms of the RPA, the Buyer’s investigation, and therefore contingency rights, should explicitly include the buyer’s personal needs and preferences. Obviously, this is a very broad investigation.

So, what does this mean? In my view, this means that as long as the buyer has their investigation contingency, they can legitimately cancel the transaction for almost any reason. Even if the seller does not agree, or thinks the issue is silly, the real question is whether the cause of cancellation could, in good faith, be called a buyer need, requirement or preference. Of course, almost anything can fall within this category, thereby giving the buyer a cancellation right.

There is, however, one important thing to remember. Even if we believe that your buyer has right to cancel his deal, the seller may disagree. Without going to court and getting the judge’s view on each party’s actions, there is no objectively right answer to whether the buyer has cancelled in good faith. As a result, an angry seller could refuse to sign cancellation instructions or refund the buyer’s deposit, even if we think he is wrong. We cannot put a gun to his head and make him do the right thing. So, when you sense the possibility of conflict, do not get too specific about why the buyer cancelled. On the cancellation form, just reference paragraph 14 (the generic contingency clause) rather than a particular contingency. If pressed, merely say the cancellation is based on the investigation. Again, that leaves your buyer with as many options as possible.

So if your buyer needs to cancel a deal, remember to use the investigation contingency if possible. It is the broadest cancellation right he has and therefore gives him more legitimate ways out of the deal. As always, if a question regarding this issue arises, please contact your manager and they will call the legal department if necessary.

POCKET LISTINGS: A GOOD PRACTICE WHEN DONE CORRECTLY

As we have discussed many times in the past, today’s market has brought out numerous questionable and frustrating practices. One of these, when not done correctly, is the pocket listing. In these cases, the property is not put in the MLS but is instead marketed through word of mouth or through informal marketing groups. Invariably, it seems, the property is sold to a buyer represented by the listing agent and our buyers feel cheated. So, has the listing agent done anything wrong in this scenario? The question, as usual, is not so simple to answer.

First, the easy part of this discussion relates to the MLS Rules. As you know, those Rules require that all listings be submitted to the MLS within 2 days of signature. In the pocket listing context, of course, we are not doing that. As a result, without more, we are violating the rules. The Rules do, however, provide an exception if the seller refuses to permit that the property be advertised in the MLS. In that case, you can keep the property out of the MLS if you get the seller to sign CAR form SEL, Seller Instruction to Exclude Listing from the Multiple Listing Service or Internet. By getting that written instruction, you are complying with the Rules and cannot be subject to a Board complaint.

The other, more difficult part of this equation is your fiduciary duty to the seller. As you know, as the seller’s fiduciary, it is our obligation to put the seller’s interests above our own. As a result, our desire to double end the deal, which often happens with a pocket listing, should be irrelevant to us. Instead, we should care only about doing what the seller wants. In most cases, that means getting the the highest possible price for their home by exposing it to the widest market possible. Of course, such exposure would only be helped by putting the property in the MLS. In some cases, however, that is not our seller’s top concern. Some sellers are more concerned about privacy and don’t want their house held open to the public at large. Some value confidentiality, and therefore want the marketing of their property limited. Others are concerned about theft, and don’t want pictures of their home on the internet or MLS. Of course, your seller has the right to decide what matters most to them. As a result, it is our job to make sure they consider all these issues and instruct us how to proceed.

As a result, the key in this situation, as in most others, is disclosure. In order to properly handle a pocket listing, you need to explain to your seller that by marketing the property this way, they are limiting its exposure and may therefore negatively impact its price. The SEL form explains this issue to some extent, so using it helps. But make sure to be real clear: A wider marketing campaign may get you more money. But it also may negatively impact your privacy, etc. Then your seller can decide and tell you what to do. More importantly, by having this discussion you have done your duty. It is really that simple. So don’t feel the need to go away from pocket listings. They are a fine practice as long as you handle them correctly. And when you do so, you can earn your full commission and have no worries about future problems.

Attached for your reference are two items: a CAR article and Q&A on this subject. If you have any additional questions, please contact your manager, who will get the Legal Department involved if necessary. Thanks.

REMOVING THE LOAN CONTINGENCY: ARE YOU AND YOUR BUYER SAFE?

As we have discussed numerous times, in today’s market, buyers are writing offers or handling transactions in ways that are tailored to please their seller.? For example, offers are being written with shortened contingencies or no contingencies at all.? Further, once in escrow, buyers are removing contingencies more quickly because they fear a cancellation.? Unfortunately, and as we know, while those actions are often necessary, they also carry risks.? As a result, ? when making the decision to remove a contingency, either in the offer or in escrow, our clients need to be careful how they proceed. ?

Further, while all contingencies? are important, some carry more risks than others.? For example, with regard to the loan contingency, our buyers are often faced with decision of whether to remove it on day 17 or earlier, even if they are not totally comfortable doing so.? In some cases, the buyer will refuse to remove the loan until they get a writing saying their application is approved, no matter what the risks are.? So, what is our involvement in this process and, more importantly, what should we be telling our buyers when they ask for advice?

First, and most importantly, we need to be clear with our buyers that, no matter what their lender or loan broker said, no loan approval is totally safe until the loan funds and escrow closes.? As you know, all loan approvals have conditions to them, often including the risk of a review appraisal.? ? In short, no matter what assurance you think you have, removing a loan contingency always has some risk.? Before the loan funds, we can never tell a buyer that they are 100% safe and that there are no risks that the loan will be turned down. Obviously, these risks normally do not occur, but they exist.? So, when asked we can never give a buyer total comfort.? We need to explain the risks that exist, letting them know that if they remove the contingency and the loan is denied, their deposit could be lost.? We also need to recommend that they talk to their loan representative and try to get as much comfort as possible.? Then, and only then, should they decide whether to remove the contingency.

Additionally, however, you also need to make sure your buyer understands the risks on the other side of the transaction.? After all, if the contingency is not removed, the seller may give a Notice to Perform and cancel the agreement.? Especially in a seller’s market like today, it is easier for the seller to find another buyer and they are therefore more willing to cancel and move on.? As a result, no matter how much comfort a buyer has about the loan, they risk losing the property if they refuse to remove the contingency.

As a result, when representing a buyer and being asked about this contingency, identify the risks and let the buyer make the choice.? Remember, our job is to provide information, not decide what our client is going to do.? So, give the buyer both sides and let them decide.? By doing these things, we protect ourselves and give the client all the information they need to protect their own interests too.

As always, please contact your manager with any questions you may have and they will contact the Legal Department if necessary.

HOW DO YOU HANDLE AN UNREPRESENTED BUYER?

I have received a number of calls recently about deals where the buyer comes in unrepresented, and wants to go through the transaction without their own broker. They typically do this to save money, thinking that they will be able to have the selling side commission credited back to them. With that in mind, there are a number of things that I want you to be aware of.

1. ? ? First, please understand that you have no obligation to discount or credit part of your commission to an unrepresented buyer. As you know, you have a listing agreement with the seller which says that you will be paid 6%. The only agreement you have to share that commission is through the MLS, with a cooperating broker. As a result, if the buyer is unrepresented, there is no cooperating broker and you have no obligation to share your commission with anyone. Instead, you can keep the whole thing. In truth, even if a buyer is “representing himself,” you will end up doing significantly more work so keeping the entire commission is justified.

2. ? ? Next, if you are involved in a deal of this nature, you need to make sure your paperwork is correct. As you know, without an agent helping them, the buyer will invariably look to you for assistance. As a result, to get the deal closed, and help your seller, you may need to do more for and with the buyer than is normal. So, to counteract any claim that this extra work created an agency, your documents need to be very clear that you only represent the seller. That starts, of course, with paragraph 2C of the RPA. In that section, make sure you put our name in the “Listing Agent” line only and check the box that says “the Seller exclusively.” With regard to the “Selling Agent” line, you should either leave it blank or put lines through it. Of course, you should never put our name in the “Selling Agent” line or check any box that says we represent the buyer or both the buyer and seller.

3. ? ? Next, please make sure your buyer signs the Buyer Non-Agency Agreement (CAR Form BNA). When completing that form, make sure not to check the box in paragraph 1D where you would identify another broker (since there isn’t one). Furthermore, be sure to check the second box in paragraph 3 which starts as follows: “Buyer is not at this time represented by a real estate licensee.” This form, in paragraph 2, makes it clear that the “Listing Broker does NOT represent Buyer and Listing Broker will NOT be Buyer’s Agent..” As a result, it makes it much more difficult for the buyer to claim differently later on in the deal.

4. ? ? Finally, be very careful what you do to help the buyer. You cannot give them advice. If they ask for any, remind them that you don’t represent them and recommend that they get a broker or talk to their attorney. You should also avoid giving them forms. First, to do so would be a violation of CAR’s copyright of those documents. They are for the use of CAR members only. Also, by telling them what forms to use, you are walking closer to that line of representation. So, do as little as possible while still trying to help get your seller’s deal closed.

As always, please contact your manager with any questions you may have and they will get the Legal Department involved if necessary.