Most sellers begin the process of selling their home with a few common misconceptions. The usual ones revolve around condition and price; “someone will pay my asking price because they’ll fall in love with the home just as I did.” Or the, “I lived with it all these years (some problem discovered on the inspection), my buyer can too.” One of my favorites is the, “I need to get “X” amount out of my home, so we should price it with that in mind.” These are all typical seller positons that generally soften up when confronted with the reality of home selling. The one that is trickiest however, is the one after you’ve gone under contract, where the seller expects the buyer to perform and do the things the buyer is supposed to do, like get a loan approval and lift loan, appraisal and investigation contingencies.
Now I’m not talking about someone deliberately committing fraud, that’s a whole other can of worms, no I’m speaking to the process in California whereby the buyer has definitive timelines that they are contractually bound to adhere to. These timelines include, apply for a loan, do investigations and include lift any and all contingencies.
What does this mean lift contingencies anyway? The California Association of Realtors Residential Purchase Agreement (RPA) defaults to a 17 day time allowance for a buyer to do their due diligence, their investigations, which would typically include a physical inspection (which could also mean inspecting for mold, geological conditions, Radon testing, structural, roof etc.) It also includes things like verifying the insurability of the property, examination of HOA docs, and ensuring clear title to the property. Sometimes a buyer might even have a contingency on selling their current home, but this is a little different so I won’t be addressing this specifically today. The most critical contingency is on the buyer obtaining financing which includes having an appraisal done to validate the sales price. At the end of the buyer’s due diligence, the buyer is supposed to sign off on contingencies or cancel the transaction; Paragraph 14 b (3) “At the end of the time specified (or otherwise specified in this agreement) Buyer shall, Deliver to the Seller a removal of applicable contingency or cancelation of this agreement.” In other words, at the end of the default of 17 days (unless otherwise agreed to) the buyer either lifts or cancels. It is not until the buyer lifts all their contingencies that their deposit can be forfeited. A buyer has no money at risk until they lift all contingencies. In other words, the buyer can cancel escrow and get all their deposit back. Does the buyer need a valid reason to cancel? Technically, yes, but how can you ever prove otherwise? It’s really pretty impossible for a seller to try and prove the buyer isn’t cancelling for one of the allowable reasons as say opposed to, they just changed their mind.
So what happens when day 17 comes and goes and then day 18 and 19, and the buyer still has not lifted their contingencies as required under the terms of the agreement? What happens really depends on how strong the seller’s position is. Do they have a backup offer in place or is this the only buyer? Does the Realtor sense the buyer is stalling for reasons other than the loan or appraisal ie: they are still trying to assemble all the down payment monies? Are the buyer and their lender really moving forward or are they playing games, maybe hoping rates are going to drop? Is it even reasonable to expect a buyer and their lender can actually get financing in 17 days? You end up asking yourself, do I have a deal or don’t I? The answer to these questions will dictate the response from the seller.
Let’s say you have a back-up buyer. In that scenario, on day 15 the seller’s Realtor might send out a “Notice of Buyer to Perform,” NBP. This is required for a seller to cancel. Under the terms of the agreement, a seller cannot cancel until the allotted time frames have expired and a notice to perform was delivered to the buyer 48 hours prior to the unilateral cancellation by the seller. Huh…? A seller has to give 48 hour notice (unless otherwise previously agreed to) before they are allowed to cancel the transaction. If a seller decides they want to cancel but haven’t yet delivered the notice, a seller must add on the 48 hours before cancelation is possible. The buyer has to be given the opportunity to lift contingencies prior to cancellation. But what if you don’t have another buyer and you are reluctant to cancel your one and only buyer just because they are a little slow in getting loan approval?
This is the most common snag in the sale process; the buyer’s lender is late and without a back-up offer, you’re not going to blow out your buyer just because off a few days, but do you really have a deal? The reality is, many homes sale contingencies are not lifted on time. But what happens when a couple days turns into several, then into weeks, then what? This is when the remedy is the lesser of two evils. If I start to sense a real problem, I usually encourage the seller to send the Notice to Perform even if they do not intend on exercising the option to cancel right away. That’s correct, the seller can send the Notice to Perform without actually cancelling the transaction. This is a little like an old western movie where the sheriff pulls out his revolver and sets it on the bar. He’s letting everyone in the room know that if things get out of hand, he’s ready to shoot. But that doesn’t mean he has to shoot, only that he now is ready to should the need arise. Because the Notice to Perform must be delivered for the seller to cancel, it can be delivered at any time and so the 48 hour clock is ticking. It is in this situation that the seller’s has discretion to cancel.
Can’t a seller just cancel anytime? No, a seller can only cancel for buyer’s failure to perform, ie: lift contingencies. Yet the buyer can cancel at any time, even at the last minute. California courts have ruled that you can’t force a buyer to buy, but your can compel a seller to sell. Ya ‘Gotta love California. The lifting of contingencies is important because up until they are lifted, the buyer can cancel without any forfeiture of deposit. Once the contingencies are lifted however, their deposit is susceptible to forfeiture and the seller can cancel the buyer and keep the deposit.*
*Keeping a deposit is never as easy as it sounds. Why? Because a seller who has an open escrow, is still in escrow until it’s closed by mutual agreement (with the buyer) or the court of law or through arbitration. That means that the deposit can only be handed to the seller, and escrow closed, when the buyer agrees to allow this. “Wait a minute,” you say, “The buyer has to agree to let me keep their deposit and to cancel escrow, even after they wasted my time and defaulted?” Yes. So when they don’t agree what happens? A couple of things can happen, first you can negotiate to give them some of the deposit back while keeping the balance. More often than not this is the outcome. Second, you can continue to sell your home, but you’ll have to disclose to the new buyer there is an open escrow elsewhere and then when you accept an offer, open the new escrow with a new escrow company. Then eventually after mediation and arbitration with the original buyer, you win, and the arbiter awards you damages, you keep the deposit money and have closed escrow with the new buyer. So it’s not exactly as simple as cancelling your buyer for failure to perform and then just keep their deposit. By the way, the maximum allowable forfeiture? 3% of the purchase price, which is why almost every deposit in a California home purchase is 3%; that’s the maximum a seller could retain under the liquidated damages clause in the event of buyer default.
Knowing all this about default and attempts to keep deposit, what’s a seller to do when a buyer won’t lift their contingencies when they’re supposed to? Here is where it really comes down to your agent, their status in the real estate community and their interpretation of the situation. Emotional sellers at this point really need an agent who’s knowledgeable, one whom they trust and one who is hopefully familiar with the other agent. The agent is going to have to speak with the buyer’s agent and really assess this: Do you have a deal or not? For me, I am the hammer. I make the other agent stay on their client. I hammer them over and over and over, to get those contingencies lifted. I’ll send the notice to perform, even when we really don’t want to cancel. I’ve had agents yell at me because I’ve done this and I’ve told them, “We aren’t cancelling this minute but if your client doesn’t get their act together and release contingencies, we will.” It doesn’t always work and sometimes the delays are totally legitimate. Sometimes they are due to honest mistakes but sometimes they really are deals going off the tracks and it takes a hammer to get them to either “Putt or get off the green…”
It’s never easy when a deal starts falling apart, but more often than not a good set of agents can keep a deal moving forward and get you to the finish line, close the escrow, so that everyone can live happily ever after.