Moses Kagan on Real Estate

What happens if you refuse to remove contingencies

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When you go into contract to buy a piece of property, you typically get a contingency period during which you have the right (and obligation!) to perform a thorough investigation of the condition of the property and title thereto.

Usually, the stuff you’ll find is tolerable and you can negotiate a price reduction from the seller to account for the fact that you’re going to have to spend money after closing to fix whatever is wrong.

Occasionally, you’ll find something truly awful, something that causes you not to want to buy the property. Or, you demand a price reduction and the seller simply refuses to budge. What happens next?

Well, you can let the contingency period expire. Under the standard CA purchase agreement that most buyers use, the contingency period doesn’t really end automatically. If buyer hasn’t actively removed contingencies when the deadline passes, the deal effectively goes into a sort of dormancy until seller issues what’s called a “notice to perform”.

A “notice to perform” is a notice sent by seller in writing to buyer that buyer needs to either remove contingencies or cancel the deal. Under the standard agreement, buyer typically has up to 48 hrs. after receiving the notice to decide what to do. If, after that period, buyer has not acted to remove contingencies, seller can unilaterally cancel the agreement.

The other possibile action, as buyer, is for you to actively cancel the agreement. You send escrow a notice saying that you don’t approve of the property’s condition and that you therefore intend to cancel the deal. (Pro tip: Always include a specific reason, something like “We disapprove the condition of the foundation.”) Escrow will draw up cancellation instructions which you will sign and return.

But there’s still one major roadblock to getting your deposit money back from escrow: seller needs to sign the cancellation instructions as well. If he doesn’t, escrow can’t release the deposit back to you, because escrow is only authorized to act upon instructions to which both parties agree.

Ultimately, if seller refuses to sign, you need to go to mediation and, if you still can’t work it out, arbitration, to get your money back. This is a major, major pain in the neck and totally unfair. But real estate is a big boys’ game, and sometimes you need to take some chances.

(In my opinion, the standard contract ought to be re-written so that escrow is instructed from the beginning that, so long as buyer follows the proper procedure to cancel within the specified contingency period, escrow automatically refunds the deposit with no further action required from seller. This is the only way to totally prevent an unscrupulous seller from holding buyer’s funds hostage.)

N.B.: I’m not a lawyer and this is not legal advice. Consult a lawyer before signing contracts.


Written by mjkagan

04/10/2012 at 6:55 am

Posted in Buying

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