The California Association of Realtors (CAR) use a form of contract entitled, “Residential Purchase and Sale Agreement and Escrow Instructions,” which is a difficult document for the average home buyer and seller to understand. We’ll call it the Real Estate Purchase Agreement. Over the years the Residential Purchase and Sale Agreement has grown from a few to many pages and grown more complicated at the same time. Nonetheless, it is the standard contract in California for buying and selling a home because the vast majority of real estate sales agents in California are members of CAR, and all of them use it.
The basic structure of the Real Estate Purchase Agreement starts with the financial terms of the transaction, then moves to the mechanics of the transaction, and eventually comes to the time frames sellers and the buyers have to provide each other with information required by the Purchase Agreement, review the information, and approve it. The information includes the transfer disclosure statement, preliminary title report, natural hazard disclosure statement, and pest control certificate.
There is also a time frame for inspection of the home, within 17 days after acceptance, which means the date both parties have signed the Real Estate Purchase Agreement. Satisfactory inspection of the home is probably the number one concern of everybody involved, whether it is performed by the buyers themselves or by their professional home inspector. If the inspection discloses problems, the buyers may request the sellers to perform repairs, but the sellers are not obligated to do so. If they refuse, the buyers can either proceed or terminate the contract.
In lawyers' terminology, the buyers’ approval of the required information and the condition of the home are conditions of their obligation to purchase it. Residential real estate brokers and sales agents call them contingencies. The object of the various time frames in the Purchase Agreement is to get the buyers to notify the sellers in a little more than two weeks that all the contingencies have been satisfied. But because of the volume of the information required, difficulties in obtaining it quickly, problems scheduling inspections, and general human reluctance to hurry important decisions, that goal is seldom attained. In short, the supposed deadlines in the Agreement are not usually met.
This is significant for both sides. The way the Purchase Agreement is written, until the buyers notify the sellers that all contingencies have been satisfied, they are under no obligation to buy the home, and if they walk away (even at the last minute), without ever giving that notification, the sellers must return deposits being held in escrow. People in the commercial real estate business call this a free look.
Buyers and sellers are usually not aware of this. Most of them feel that when they sign the Real Estate Purchase Agreement they are signing a contract that is not supposed to be broken, and most sales agents are not eager to explain to them the true nature of the Purchase Agreement. Many of them don’t understand it themselves. If they do, they have no desire to rock the boat by talking about it, and - as a result - perhaps losing the sale and their commissions.
However, the Real Estate Purchase Agreement does provide a procedure available to both buyers and sellers to force the issue of whether or not all contingencies have been satisfied. The procedure utilizes another CAR Form called the Notice to Perform. When the seller fails to deliver something by its due date, perhaps the preliminary title report, the buyer may use the Notice to Perform to demand that the seller deliver it “within a reasonable time.” In that case, the buyer would send a Notice to Perform to the seller filled out to convey the following message: “If within 48 hours you don’t deliver the report to me, the deal is off, I will not buy your home, and I will want my deposit back.”
Conversely, when the buyer fails to notify the seller within the number of days required by the Notice to Perform that the home inspection contingency has been satisfied, the seller could send the buyer a Notice to Perform filled out to convey the following message: “If within 72 hours you don’t state explicitly that the home inspection contingency has been satisfied, the deal is off, I will not sell my home to you, and I will give your deposit back to you.”
From the Buyer’s Perspective, the Notice to Perform is a useful way to accomplish either of two objectives.
First, if the buyer wants the home badly and wants it as soon as possible (perhaps school is starting or his interest rate lock is going to expire while rates are rising), sending one or more Notices to Perform to the seller puts pressure on him to get moving.
Second, if the buyer becomes less sure that he wants the home and suspects something better is out there, while the seller is seriously behind schedule, a Notice to Perform from the buyer that the seller couldn’t meet would be a painless way for the buyer to get out of the deal. Of course, this gambit would be contrary to the interests of the buyer’s agent and broker, so they would probably not have told the buyer about the Notice to Perform in the first place, much less suggest its use.
From the Seller’s Perspective, the Notice to Perform is a useful way to get rid of an overly demanding buyer, with either of two objectives.
First, the seller may have decided he doesn’t really want to part with his home, so killing the deal might increase the odds that it won’t sell during the listing period. In this context the Notice to Perform has the distinct advantage of not violating the seller’s listing agreement, which undoubtedly provides the full commission is due if the seller voluntarily takes the home off the market while it is in effect.
Second, the seller may want to sell as quickly as possible, but foresees interminable and fruitless negotiations with the current buyer, so killing the deal and putting the house back on the market might increase the odds that a more motivated and less picky buyer will show up and buy it. Working on the assumption that having a bird in the hand is worth two in the bush, the seller’s broker and agent would probably not be too excited about this gambit either.
In sum, knowing that buyers have no obligation to buy until they notify sellers that all contingencies are satisfied, and being aware of the Notice to Perform and how to use it, can be advantageous to both buyers and sellers. Should you ever find yourself in a situation in which a judiciously given Notice to Perform would help you achieve your goals in the purchase or sale of a home, please contact our office for a consultation.