These contracts are written to heavily reduce a buyer’s risks. For example, when a buyer makes an offer to purchase any kind of real estate, and a CAR purchase form is used, an initial good faith deposit accompanies the offer. The amount of the good faith deposit a buyer puts forth is based on the buyer’s and seller’s discretion. Upon acceptance by the seller of the buyer’s terms the good faith deposit, made payable or wired to an escrow company, and is held in escrow throughout the entire escrow process.
Even though the deposit gets ‘cashed’ the deposit is not at risk until such time as the buyer states in writing that he/she intends to fulfill the obligation of the purchase within a time frame specified by the buyer in the contract. It is at that time the buyer is then required to make their deposit ‘hard’, meaning, if the buyer backs out of the deal from that point on, whatever deposit amount was agreed upon, is the seller’s money.
What typically happens at the point when a buyer removes the contractual contingencies in writing, or by passive lack of response by the contingency removal date, not only does the initial deposit become the seller’s money, but the seller likely negotiated in the purchase agreement that the buyer, upon removal of the contingencies, had to increase their deposit to an amount that would make it painful for a buyer to walk away. For example, on residential real estate of up to four units (including single family residences), according to the CAR purchase contract, the maximum amount a seller can require a buyer to risk in a deposit is no greater than 3% of the purchase price.
However, and this is key, if a buyer, for any reason, decides not to purchase the property within the agreed upon time frame of the buyer’s due diligence, aka ‘contingency’ period, in almost all cases the buyer gets the good faith money returned upon cancellation of the escrow. Therefore, there is very little risk of a buyer’s deposit being lost if the buyer doesn’t like what he/she discovers during investigations of the property, or, if a buyer can’t get the desired funding, or if the property doesn’t appraise (if that contingency applies and was identified as a contingency in the contract), or a myriad of other reasons which are boiler plate contingencies pre-written into the purchase agreement.
As mentioned above, the standard language in a California purchase agreement provides several paragraphs of buyer contingencies, which are incumbent upon a buyer to investigate. California has a long list of ‘statutory’ disclosures a seller of California real estate must provide to a potential buyer. Even though we’re still a buyer beware state, buyers are provided with a boat-load of disclosures from the seller, the seller’s agent, the title company and companies’ who sole purpose is to provide buyers with Natural Hazard disclosures within the state and region of the property. Many California counties even have their own voluminous local disclosure document. In Napa County, where I practice real estate, the local disclosures include items such as the “Right to Farm”, which informs buyers that they are purchasing real estate in an agricultural area. It warns buyers of potential chemical spraying, tractors (delivering grapes) driving slowly on the sleeve of the interstate during crush, noise from frost protection wind fans in the vineyards, and many other very specific “hazards” of living in the Napa Valley.
Many sellers feel the disclosure requirements are overkill. When an agent sits down with a seller to guide them through the disclosure documentation it takes up to several hours to get them all completed. If that isn’t enough, the seller’s agent is also required to comb through the property’s interior and exterior and note items and issues that are apparent.
A third advantage provided to buyers who are contemplating a real estate purchase, and this may be applicable in other states, is Home Inspection firms are not allowed to bid on repairs or other problems they discover in their inspections. This arms distance provides an extra layer of objectivity to the results of those inspections.
Lastly, even if after all these safety nets are put into place on a buyer’s behalf, and a conflict arises during or after the process of a purchase, virtually by utilizing a California Association of Realtor’s purchase contract, the boiler plate language for resolving conflict requires that mediation be employed as the first method of resolution.
One common mistake buyers make, especially when time is of the essence on a particular opportunity, is they begin their due diligence process outside of escrow. I agree with this process to a degree when due diligence is required to determine an offering price range. For example, if a buyer is considering a purchase that would require adding a second bedroom, or putting in a pool to make the house work for the buyer’s needs, it makes sense to check with county allowances and restrictions before making an offer. However, many buyers want to know everything there is to know about a property before writing their offer, and these are the buyers with the most ‘woulda coulda shoulda’ stories.
I am not suggesting a buyer should go around willy-nilly writing offers on real estate just because they get a free ‘get out of contract’ card. What I want to make sure California buyers understand is that working with a Realtor to write an offer on their behalf provides the many safety nets available to virtually eliminate the risk of losing a deposit, and provides solid guidelines and protections throughout the process of investigating and buying real estate. This reminder to buyers is intended to be timely since it appears there is a burgeoning trend of buyers stepping up to the plate after a long stand off between them and sellers. News in the mainstream media of imminent interest rate hikes is furthering the progress of buyers who are circling but not yet acting on their intuitions.
Call your agent today and thoroughly go over the California Residential Purchase Agreement form with them in advance. Get comfortable with the language, the commitments and the process before writing an offer. This way, when ‘the one’ property presents itself you will not hesitate to make your move and take advantage of the opportunities in a rare Napa Valley (or any other) buyer’s market.