BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
The following are questions and answers arising out of the webinar offered by Broker Risk Management on August 4 and 11, 2025, entitled “Back to Basics – Contracts.”
QUESTIONS REGARDING POWERS OF ATTORNEY:
QUESTION NO. 1: Does a power of attorney have to be specific to a real estate transaction?
ANSWER: Yes. A power of attorney (POA) has to include the specific legal right being granted to the “attorney in fact” (AIF), the person being authorized to act on the principal’s behalf. POAs can be limited or broad. An effective POA regarding real estate transactions must be specific and include the right to handle the real estate.
QUESTION NO. 2: How do I determine if a POA applies to the real property at issue?
ANSWER: Send the POA to the title company and request that the title company review the power of attorney. Because the title company is insuring the title, the title company will ensure that the POA gives AIF sufficient authority to list and sell the property.
QUESTION NO. 3: Is a POA effective if the capacity of the person signing is questionable?
ANSWER: Generally, no. A person signing a POA must have mental capacity at the time of signing to be effective. If the POA was executed after the person signing the POA lost capacity then, in all cases, it will be ineffective or invalid. If a person who signed the POA is now incapacitated and a POA is being used in a real estate transaction, an evaluation of the mental capacity of the signer at the time when the POA was executed needs to be undertaken. This will likely be recommended by the title company and require a signed statement from an attending physician regarding the signer’s mental capacity on the date of the signing of the POA.
QUESTIONS REGARDING CONTRACTS:
QUESTION NO. 4: Can you address how an escalation clause affects a contract?
ANSWER: An escalation provision or a “sharp offer” refers to an offer or counter offer where a buyer offers to purchase the property for an amount higher than the next highest offer. For example, a buyer issues an offer stating, “Buyer offers $5,000 over the next highest offer.” Arguably, those offers are not enforceable as they may be considered illusory and may not meet the Statute of Frauds. The concern is that there is no specific number or amount being offered, and therefore, it may be impossible to enforce that contract. In addition, there are risks to the buyer as the buyer does not know how much the next highest offer is or the terms of that potential agreement. For example, somebody else could offer $100,000 more than the list price. A buyer with an escalation clause could be offering an additional $105,000 without knowing it. Such an offer could lead to complications such as the buyer’s ability to qualify for a loan, whether the buyer has the resources to purchase the property, whether the property appraises at the higher sales price, etc. Broker Risk Management discourages the writing of escalation clauses for these reasons.
QUESTION NO. 5: Is a Letter of Intent to purchase real property enforceable?
ANSWER: Generally, not. Most Letters of Intent (LOI) are not binding and simply outline the terms pursuant to which a buyer is willing to purchase a property; and LOIs typically contain a statement confirming that the LOI is not binding. Sellers and Buyers should be advised to consult with a qualified California real estate attorney with any questions as to the potential enforceability of the LOI. If the seller agrees, a formal purchase and sale agreement can be drafted.
QUESTION NO. 6: What if a buyer signs an expired contract? Is there an enforceable agreement?
ANSWER: Technically, contracts for the sale of real property do not expire. But offers and counter offers DO expire. For example, if a buyer signs an expired seller counter offer, there is no valid agreement. To have a valid contract, the seller will need to sign an acknowledgement accepting the buyer’s offer. A buyer signing an expired counter offer is in essence, extending a new offer to the seller in accordance with the terms of the counter offer, which the seller can accept or reject.
Be aware that all CAR counter offer forms contain essentially the following language, which is taken from the CAR SCO form:
- LATE ACCEPTANCE: If the date of Buyer’s signature in paragraph 5 is after the expiration specified in paragraph 2A, Buyer’s acceptance is only binding if Seller agrees to the late acceptance by signing below and delivering a copy before 5:00 PM on the third Day after the date this Seller Counter Offer is signed in paragraph 5.
QUESTION NO. 7: How can a contract written on a napkin be valid absent consideration?
ANSWER: As long as the terms written on a napkin meet the Statute of Frauds (i.e., all material terms), it is enforceable. The consideration for the seller is agreement to deliver to the buyer the title to the real property, and the consideration for the buyer is agreement to pay seller the agreed-upon purchase price. This is true whether the contract requires the buyer to make an initial deposit into escrow or whether the buyer actually makes such a deposit. Failure of the buyer to make a deposit required by the contract is simply a default by the buyer, giving the seller a right to cancel.
QUESTION NO. 8: If a buyer is signing a Residential Purchase Agreement through DocuSign, should I make the arbitration clause initial optional?
ANSWER: Yes. Many attorneys discourage the execution of arbitration provisions. You should discuss with your client whether they wish to arbitrate or not. If your client has questions, provide your client with the California Association of Realtors’ Q&A “Arbitration for the Consumer.”
QUESTION NO. 9: What are the risks associated with writing contracts for rent-to-own?
ANSWER: A rent-to-own contract generally includes a lease, option, and Residential Purchase Agreement. These are complicated transactions and challenging to write. Agents should always involve their manager before drafting these contracts.
QUESTION NO. 10: Can two sellers use the same email address for DocuSigning?
ANSWER: That practice is strongly discouraged. It is imperative that different sellers sign from different email accounts. Otherwise, there is a possibility that one seller can sign for the other, constituting fraud.
QUESTION NO. 11: If a buyer is waiving their loan contingency, are they required to fill out the interest rate on the contract?
ANSWER: No. If a buyer does not have a loan contingency, they are not required to disclose to the seller the type of financing they are obtaining unless the seller requests the information. However, if the buyer does not specify the maximum interest rate and/or loan points that are acceptable to buyer, then buyer must accept any loan commitment for the specified loan amount regardless of interest rate or loan points being charged. So, in the absence of these limitations, if the best loan commitment that buyer receives is at a much higher interest rate or points, buyer must accept that loan or be in default on the contract. It is recommended the buyer agents discuss with their buyer how they wish to proceed in completing this portion of the purchase agreement.
QUESTION NO. 12: If a buyer cannot get approved for a loan because the interest rate set forth in the Residential Purchase Agreement is too high, can they cancel?
ANSWER: They can cancel if they have a loan contingency which specifies a maximum loan interest rate. However, if they are able to obtain a loan at an interest rate which is at or below their maximum specified, they are required to act in good faith and obtain that loan.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is an attorney-client privileged communication 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 LLP. 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 practice