The DirtLaw Blog

"Should I Initial the Arbitration Provision?"

Here in the San Francisco Bay Area, two types of purchase and sale contracts for real estate are the most commonly seen--the C.A.R. form from the California Association of Realtors and the PRDS form from the Silicon Valley Association of Realtors.

Both of them have an arbitration provision in the residential purchase contracts that the buyer and seller can voluntarily agree to.

That's right, the arbitration is optional and the parties do NOT have to agree to arbitration. 

Before enumerating the pros and cons of arbitration, it is important to understand what arbitration is.  Arbitration is agreeing to use a private judge to decide your dispute should one arise. The arbitrator may be a retired judge from the bench, or a seasoned attorney with relevant area expertise.  The result is binding, and with no right of appeal even if the arbitrator wrongly applies the law (which does happen on occasion).

Arbitration has some advantages, but can have more disadvantages depending on the type of dispute that arises over your house.  Suppose you are the buyer and you discover the house has a massive water damage problem that was not disclosed.  Even worse, your agent told you to accept the old home inspection report instead of buying a new one.  Now you have a claim against both people but you MUST arbitrate with the seller and sue the Realtor in court.  Yes, you'll be funding two lawsuits. 

Why isn't the Realtor required to join the arbitration? Because they are not a party to your contract.  Of course, the Realtor is also usually the one that tells you that you must initial the arbitration provision and it will cost you less.  That is false as it will only cost you less if you don't sue the Realtor.

Unfortunately, this failure to disclose scenario happens often and as a result, the safer course of action would be to reject the arbitration provision.

The advantage in arbitration is that it can be cheaper than court litigation since the arbitrator will often reduce the volume of discovery and law and motion disputes that can arise.  To enjoy that benefit, in the event you do have a dispute later with the seller, you can always agree to opt into arbitration if no other parties are involved.

California Real Estate Litigation - The "Bad House" Case

Sometimes when lawyers talk amongst themselves, they will refer to certain real estate cases as "bad house" cases.  What they are talking about is a dispute between buyer and seller over the FAILURE TO DISCLOSE material defects in the home.

These are perhaps the most common disputes in residential real estate.  The Transfer Disclosure Statement is mandated by California Civil Code Section 1102, and listing agent will have their seller clients complete the TDS form along with a Supplemental TDS.  The Supplemental disclosure form is not required by law, but considered a "catch all" for things not covered in the TDS. 

The Realtor should be walking through the TDS with the seller.  When in doubt, the general guideline is is to disclose anything the seller thinks is material.  Unfortunately, some agents are not meeting their highest standard of care and practicing a type of "drive by" listing where they simply drop off the forms, and then instruct their clients to fill them out and fax them back.

We once had bad house case where the seller had left many boxes blank on both the TDS and the Supplemental (seller should have checked off yes or no)--all of the blank boxes related to problems with the home.  Her agent obviously did not review the TDS for completion and passed it on to all prospective buyers.

The buyers' agent also missed the fact that the TDS had many blanks.  What happened?  The buyers ended up with a house that had standing water (we're talking ponds and lakes here!) under the house in the summer time, when the heat came on, it blew in mildew smells throughout the home and all kinds of water and mold related problems.  The purchasers of this "lakehouse" ended up spending over $100k to drain, ventilate and remediate the home. 

As you can imagine, this matter went to litigation.  Were the Realtors involved? You betcha.  Did the Realtors point fingers? Yes.  At each other, at their own clients and at the home inspector.  What did the home inspector say?  Well, this guy was paid $300 to walk around the house for an hour--he could hardly remember the house. 

In a similar case we had with standing water under the house, the inspector was told by the seller's agent that the sprinklers had been on earlier (also a summer sale) so that was why there was water under the house.

Lessons to take away?  Sellers--disclose, disclose, disclose.  Buyers--get a good referral to a Realtor who will exercise a high degree of professionalism and skill because they know their business is built on repeat referrals.  I've already blogged about home inspectors, and an established local Realtor will have good contacts and should be able to find a qualified professional for you to work with.  Buyers--you can't abdicate your own duty to visually inspect the property either so don't be afraid to get your clothes dirty and ask questions during the inspection.

Real Estate Home Inspectors

Did you know that Home Inspectors are not regulated in any way by the State of California?  Many home inspectors will tout their credentials and indicate that they are "Certified."  The question is, by whom? 

The only certification available is through a self-regulated body, such as the California Real Estate Inspection Association (CREIA).  This organization provides education and testing and issues designations such as "CCI" or "MCI" (Master Certification).  There is also the American Society of  Home Inspectors (ASHI) as well.

What does this mean to a prospective home buyer?  Well, it means that your home inspector may be no more qualified to evaluate your foundation than your Starbucks barrista (or that your barrista may be MORE qualified). 

Often, as a prospective buyer, you are handed a set of inspection reports that the seller's listing agent had prepared by their own inspector.  The buyer should consider getting their own independent report.  To get the most out of an indepedent inspection, you should ideally look for someone with actual engineering credentials or someone with home building experience for that 2nd opinion.  It may cost more, but if it saves you $30k of termite work or $100k of mold/mildew remediation, you've come out ahead.

If not, you may find yourself in a situation later where you have a crumbling foundation, and you bring suit against the seller for failure to disclose.  Invariably, the seller will point the finger at the home inspection reports to say that you (the buyer) had an independent inspection to tell you everything about the home.  This circles back you learning things about your home that your home inspector missed. 

So You Want to Buy a House...

I recently spoke with a friend about house purchasing.  She indicated that despite many offers and many months of searching, she and her husband had not had any luck purchasing a house.  When I asked who her agent was, she replied, "Oh, we don't need one."

Despite being a highly intelligent individual, my friend failed to understand the simple correlation between her lack of a real estate salesperson and her failure to bid successfully on a house.  Again, the proliferation of online information has led people to believe they should do everything on their own.

While I blogged earlier about the certain situations when a homeowner could do a FizzBo (For Sale By Owner) and employ an attorney to prepare the disclosures, rather than a listing agent, it is the exception rather than the rule.

My friend fundamentally misunderstood the role of the buyer's agent.  It's true that a buyer does not enter into any contract with the agent, but lack of a written agreement does imply lack of contribution to a successful purchase.

New buyers assume that they can see all the listings they want through the online Multiple Listing Service.  This fails to take into account the other things the buyer needs to know other than the address and listing price.  Let's start with the the basics of payment.  A listing agent may have an exclusive listing agreement with the seller wherein the seller agrees to a 5 or 6% commission.  However, that commission is usually shared in some way with the selling agent (or less confusingly, the buyer's agent).

My friend was probably operating under the theory that by not having an agent, she was somehow saving the seller money and could offer a lower price.

However, when you are a buyer without an agent, the listing agent does not to share the commission.  This also means that the seller experiences no break in the price so there is no price incentive for the seller to take your lower offer.

While you the buyer decide on what amount to offer, the agent has experience as to whether or not "underlisting" is occuring.  That means if the comparables in the area have been going for 20% over asking (yes, very common in the Cupertino or Los Altos school district!), then your agent can give you a ballpark of what range your offer should be in.

In addition to payment and price, the agent should offer their expertise in what may be typical or atypical about the transaction terms.  They are required also to do a diligent visual inspection of the property too to note visible defects of their walkthrough.

Are their drawbacks to using a Realtor?  Yes, often buyers feel pressured by the time constraints of a deal and sometimes experience the suspicion that their agent "only cares about their commission."  This may be true of some agents, but certainly does not bode well for their future referrals.  Avoid this situation by word of mouth referrals and learning about the agent's longetivy in the profession and what community ties your agent has.  Those who have been in the business for a longtime have not succeeded by neglecting their clients and using scare tactics to close a deal.

What if you are in contract on a house and you feel that your agent has abandoned you?  Do not hesitate to seek the legal assistance.  The standardized purchase forms such as the California Association of Realtors (CAR) or the PRDS ones used on the peninsula are riddled with strict timelines.  Failure to observe one can cause trouble.  Waiving contingencies before you've had a chance to satisfy yourself of all your concerns is another problem. 

What should your agent NOT be doing?  Well, the most common problems we are seeing is a variation of a financing scam.  Your agent should NOT be leading you down a rosy of path of how you can do a series of zero-down, totally financed deals and flip the properties for a quick and tidy profit.  Real estate attorneys are hearing increasing horror stories of agents who convince their clients to buy multiple houses that are over-priced and and financed with unreliable appraisals.  Later, the homeowner realizes that each house is worth anywhere from $100k to $200k less that the purchase price.  The buyer is now stuck servicing loans that are far more than they can afford and that they would have to pay money out of pocket in order to sell the homes.

Short sales aside, financing scams are the one key thing to watch out for.  Working with reputable brokers and doing a reality check is important.  You as the buyer cannot substitute anyone else's judgment for your own so when a deal sounds too good to be true, it probably is.

Listing With a Broker to Sell Your Home

These days, the media is filled with reports of people using eBay or craigslist to sell their own home. Apparently, the marketing exposure generated from those sites may match the power of the Multiple Listing Service in a hot market.  After all, why give away 6% to a listing broker when you can do it yourself.  If your home is worth $600,000, you've saved $36k. Right? 

Well, yes and no. 

Do you know what you are statutorily mandated to provide as a seller?  The Transfer Disclosure Statement (TDS) is a crucial document that can come back to haunt sellers in a "bad house case."  What if you prepare your own advertising and make a misstatement about a material element of the home, such as the square footage or age and condition of the roof?  The theory behind working with a real estate professional is that they can walk through the disclosure process with the seller to ensure that when the house is sold, the buyer has acknowledged all the idiosyncrasies of the home and accepted them as part of the transaction.  They do this by engaging home inspectors, termite inspectors, and conducting their own visual inspection of the home.  If you list your home with an agent from a large reputable brokerage, they likely have had internal training sessions from their in-house counsel about appropriate advertising to buyers.

That is not to say that a seller must have a listing agent.

In some cases a FSBO ("for sale by owner") is genuinely appropriate.  For example if you have a known buyer, such as a relative or friend and you two have already settled on the selling price.  However, if either you or the buyer has more knowledge of real estate transactions, you are working with an inequality of bargaining power.  However, if the seller and buyer have an established relationship, then there is less likely to be a "buyer's remorse" situation where the buyer feels that the seller failed to reveal a material defect of the home. 

Even with a FSBO, it's wise to engage professionals for some part of the transaction, such as an escrow holder.  In addition to title insurance, they pro-rate the property taxes, obtain the payoff statement from the lender and can handle the withholding tax.

In addition to using an escrow holder, the seller should consider engaging a real estate attorney to prepare the purchase agreement, the TDS, the As-Is Addendum and all the various disclosure forms as well as usher the transaction through to completition.  Again the purpose of working with other professionals is to ensure that once the property is sold, that it stays sold.