Q: My client recently beat out 5 other buyers on an older home; agreeing to pay $100,000 over list price. We made it clear in the offer that she would be obtaining an 80% loan but all contingencies were waived. My client had reviewed all of the Seller’s disclosures and reports and knew there was significant deferred maintenance. Unfortunately, the lender’s appraiser determined that the Property is only worth the original list price because it is not in good condition. The lender will agree to lend but will only fund a loan that is 80% of the appraised value.
My client wants the Seller to reduce the purchase price or return her deposit and cancel the deal. The Seller refused both options. The Seller is adamant that my client must either come up with more money to secure the financing or forfeit her deposit. This seems terribly unfair to me since the Seller knew my client needed to obtain the financing specified in the contract. What should I tell my Buyer?
A. You need to tell the Buyer the truth: The standard Purchase Agreement forms do not obligate the Seller to reduce the sales price because of a low appraisal report and, with-Contingent-Free offers, there will be legal and financial consequences if the Buyer attempts to cancel. Therefore, the best thing that the Buyer can do is to consult with her own qualified California real estate attorney to see if there is a legitimate way to cancel and to secure the return of her deposit. One possibility is whether the Seller and Seller’s Agent fully completed the TDS. If your Buyer chooses to cancel and lose her deposit, you and your Broker should be prepared for the fact that the Buyer may attempt to blame you for the lost deposit.
I. LEGAL EFFECT OF WAIVING CONTINGENCIES
When there are more Buyers than available properties for sale, the inevitable result is multiple offers on most listings. When multiple Buyers are bidding up the price and are making Contingent-Free (or non-contingent) offers, then the ultimately successful offer has significantly limited that Buyer’s ability to safely cancel. If a Buyer has waived the Financing and Appraisal Contingencies, the Buyer cannot use the low appraisal and/or the lender’s decision regarding the loan as a means to safely cancel the Purchase Agreement and secure the return of her deposit.
If there is no Financing Contingency, then completing the loan terms in the Purchase Agreement is really for informational purposes only; that portion of the Purchase Agreement does not create a cancellation right.
As is explained in Paragraph 14F of the CAR Residential Purchase Agreement (“RPA”), removing or waiving contingencies means that:
“. . . Buyer shall conclusively be deemed to have: (i) completed all Buyer Investigations, and review of reports and other applicable information and disclosures pertaining to that contingency or cancellation right; (ii) elected to proceed with the transaction; and (iii) assumed all liability responsibility and expense for Repairs or corrections pertaining to that contingency or cancellation right, or the ability to obtain financing.”
Although not as clearly detailed in the PRDS and SFAR contract forms, the legal effect of removing or waiving contingencies when using those other contract forms is the same as in the CAR RPA.
Note: There is a significant difference between removing ALL contingencies and just removing the inspection, loan and appraisal contingencies. Standard purchase agreement forms have separate contingencies for approval of HOA documents, title matters and documents delivered by Sellers. If the Buyer is waiving ALL contingencies, then arguably NO contingencies remain in effect to protect the Buyer including these other “document review” contingencies even though the documents have not been delivered to the Buyer. See, for example, CAR Contingency Removal form (“CR”) for a list of Buyer contingencies.
II. IMPORTANCE OF COUNSELING THE BUYER
Because Contingent-Free Offers significantly impact the rights of a Buyer, it is of critical importance that Buyers receive proper counseling and advice before preparing the Offer. The Broker File needs to include proof that the Buyer understood the risks of waiving contingency rights and that the Buyer, not the Agent, made the ultimate decision on how to proceed.
All of the relevant information about the risks of making Non-Contingent or Contingent-Free Offers is contained in the Market Conditions Advisory (CAR MCA or PRDS AMC). Buyers’ Agents should review that form with Buyers (either in person or virtually). That Advisory is only effective as a risk management tool if the Buyer receives it before the Buyer makes any Offers.
Unfortunately, the Market Conditions Advisory is not bundled with the online Offers and therefore it is often provided to Buyers after they have an accepted contract. Delivery to the Buyer of the MCA or AMC after the contract is accepted is of little value to the Buyer and provides no protection for the Broker.
III. NEW RISK MANAGEMENT TOOL
Because there have been so many claims and lawsuits against Brokers and their Agents as a result of non-contingent offers, some Brokers have created their own Advisory on this topic. We have also created a new Buyer Advisory – Writing Offers in a Limited Inventory Market (a copy of which is attached). Using this Advisory with Buyers before writing Offers enables you to document that the Buyer has been properly warned of the risks of waiving contingencies and that the Buyers, not the Agents, are accepting the risks of their decisions.
PRACTICE TIPS:
- Always give your Buyers a Market Conditions Advisory form, preferably with the Agency Disclosure form before writing up any offers.
- Use the new Buyer Advisory – Writing Offers in a Limited Inventory Market (or your Broker’s form) to document that you have warned your clients of the risks of Contingent-Free Offers and that the Buyers are knowingly agreeing to accept the consequences of those risks.
- Specify precisely WHICH contingencies are being removed. Using the Contingency Removal form and the waiver provision in ¶ 14.B(5) of the RPA (or the waiver mechanism in other contract forms) to remove specific contingencies will help avoid the Buyer accidentally removing more contingencies than the Buyer wanted.
- Consider following up with an e-mail to your Buyer writing an Offer without contingencies for inspections, appraisal and/or financing. Consider using the following sample language:
“This will confirm that that there may be multiple people competing with you to buy this Property. As we discussed, this Property may sell for a sum that is well over the listed price; it is ultimately up to you to decide what price to offer. Because most sellers tend to favor offers with few, if any, contingencies, you are choosing to proceed without [___e.g. any contingencies, or with the financing and appraisal contingencies ]. As we discussed, the Market Conditions Advisory [and/or the separate Broker Advisory -Writing Offers in a Limited Inventory Market] that you received, there are inherent legal and financial risks in eliminating contingencies. While I can advise you about general real estate issues, the decision to proceed with this type of offer must ultimately be made by you since you are the person who will need to determine if you can accept those risks.”
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
© Copyright Broker Risk Management 2021 03/12/21
FORM FOLLOWS:
BUYER ADVISORY
WRITING OFFERS IN A LIMITED INVENTORY MARKET
At various times, there may be a limited number of properties available for sale as compared to the number of potential buyers; this type of market can lead to multiple buyers bidding for the same properties (“Multiple Offers”). Multiple Offers may result in a property selling for an amount of money that is well in excess of the listed sales price and/or the comparable local sales in the area. This inflated sales price may make it difficult for Buyers to secure financing based upon the appraised value.
SALES PRICE: The ultimate decision of what price to offer on a property rests with you, the Buyer. There can be no guarantee that what you offer will be acceptable to the Seller and/or that the ultimate, agreed-upon sales price will represent fair market value as of the date of sale or at any time in the future. Only you can determine what you are willing to pay for a property in light of market conditions, your housing needs, your own financial resources and how you choose to calculate the value of the property you want to buy. In addition to price, you will need to decide what type of offer you are willing to make in recognition of market conditions; we therefore urge you to consider the following issues:
NON-CONTINGENT OFFERS: Standard real estate purchase agreement forms contain contingencies which are designed to protect the Buyers’ interests by enabling Buyers to make their purchase subject to the Buyers’ assessment of various factors such as property condition (including use and development) and appraised value. Agreeing to waive all Buyer contingencies (making a “Non-Contingent Offer”) creates financial risks for those Buyers who then decide not to close escrow based upon what they later discover about the property; and, without contract contingencies, the Buyer may be liable for the Seller’s damages and attorney fees.
INVESTIGATION CONTINGENCY: Regardless of whether you choose to have an investigation contingency, the Seller may agree to let you have professional inspections either before making an offer on the property or for a short period of time after contract acceptance. Whether or not you can inspect the property, you should carefully review any and all disclosures, records and reports supplied by the Seller and Agents or other sources, such as local governmental entities prior to making an offer. You should retain your own experts to thoroughly evaluate the condition of the Property. Waiving the investigation contingency may limit your rights to cancel the contract and/or recover your deposit if you discover adverse information about the property.
Even in a “Non-Contingent” Purchase Agreement, Sellers of residential property must disclose all known material facts regarding the value or desirability of the property. This is true regardless of which disclosure forms the Sellers are legally required to complete. If the Seller is obligated to fully complete and sign the Real Estate Transfer Disclosure Statement (“TDS”), you will have the right to rescind the transaction within five (5) days of delivery by mail or email, or within three (3) days of personal delivery of the TDS if the TDS is delivered after you make your offer. Buyers and Sellers cannot waive this statutory right.
FINANCING & APPRAISAL CONTINGENCIES: Although you may have obtained a pre-qualification or pre-approval letter from your lender, the lender may still not agree to fund the loan in the amount requested for a variety of reasons including, but not limited to, the lender’s appraiser determining that the fair market value is less than the agreed-upon purchase price. In any market, but especially when there is limited inventory, appraisal reports may contain an opinion of value that is less than the purchase price. Appraisals are based, in large part, on “comparable sales” in the area which may be less than current market prices. If that occurs, you may not be able to cancel without the protection of an appraisal contingency and/or you may have to put more of your own money into escrow to make up the difference between the requested loan and the loan approved by the lender. If you are waiving the financing and/or appraisal contingencies, but will be obtaining a loan to close the transaction, you could well be in default of the purchase agreement if you cannot close escrow without the specified loan.
[BROKERAGE NAME] recommends that you carefully assess your financial situation with your own financial advisor prior to determining whether to waive the financing and/or appraisal contingencies.
I/we understand, acknowledge and agree that waiving any or all contingencies in a residential purchase agreement is risky and that only I/we can determine if I/we can accept the risks outlined in this Advisory.
Date: _______________ _________________________ _________________________
Buyer Buyer