Earnest money and clauses in California

6 Replies

Hello all. Hopefully a quick and easy question- I have a friend selling his home in California (he actually resides out of state). His California-based Redfin agent told him that it's normal to allow a potential buyer 10 to 15 days to back out of a contract without surrendering their earnest money. His house went under contract with the clause that would permit the buyer to change their mind. About 3 days later, as expected, that buyer backed out noting that the house was dated. I thought this was a questionable practice since any buyer with the funds to do so could make several offers on several houses and just wait until they actually got the home that they wanted under contract.

Is this normal practice? Has anyone seen anything like this? 

Any guidance would be much appreciated, thank you in advance

It's normal.  That's how the CAR (Californian Association of Realtors) contracts are written.  Happens all the time.  The 10 to 15 days is for buyer inspection.  The 3 days is generally for buyer to put the deposit into escrow.  Escape clauses can go all the way up to closing depending on how the form is completed.

The "10-15 days" is likely referring to contingencies for inspection and due diligence periods. During this period the buyer can walk for almost any reason with no risk of their EMD.

Standard CAR forms require 3 days for EMD to be in escrow, plus due diligence & inspections plus the contingencies below (obviously only one would be selected):

I. APPRAISAL CONTINGENCY AND REMOVAL: This Agreement is (or is NOT) contingent upon a written appraisal of the Property by a licensed or certified appraiser at no less than the purchase price. Buyer shall, as specified in paragraph 14B(3), in writing, remove the appraisal contingency or cancel this Agreement within 17 (or ) Days After Acceptance.

 J. LOAN TERMS:

(1) LOAN APPLICATIONS: Within 3 (or ) Days After Acceptance, Buyer shall Deliver to Seller a letter from Buyer's lender or loan broker stating that, based on a review of Buyer's written application and credit report, Buyer is prequalified or preapproved for any NEW loan specified in paragraph 3D. If any loan specified in paragraph 3D is an adjustable rate loan, the prequalification or preapproval letter shall be based on the qualifying rate, not the initial loan rate. ( Letter attached.) 

(2) LOAN CONTINGENCY: Buyer shall act diligently and in good faith to obtain the designated loan(s). Buyer's qualification for the loan(s) specified above is a contingency of this Agreement unless otherwise agreed in writing. If there is no appraisal contingency or the appraisal contingency has been waived or removed, then failure of the Property to appraise at the purchase price does not entitle Buyer to exercise the cancellation right pursuant to the loan contingency if Buyer is otherwise qualified for the specified loan. Buyer's contractual obligations regarding deposit, balance of down payment and closing costs are not contingencies of this Agreement. 

(3) LOAN CONTINGENCY REMOVAL: Within 21 (or ) Days After Acceptance, Buyer shall, as specified in paragraph 14, in writing, remove the loan contingency or cancel this Agreement. If there is an appraisal contingency, removal of the loan contingency shall not be deemed removal of the appraisal contingency. 

(4) NO LOAN CONTINGENCY: Obtaining any loan specified above is NOT a contingency of this Agreement. If Buyer does not obtain the loan and as a result does not purchase the Property, Seller may be entitled to Buyer's deposit or other legal remedies. 

@Michelle L Moore , there are six standard contingencies in the most common form purchase agreement used for California residential properties created by the California Association of Realtors.  As some have noted, yes, there is a contingency for the physical inspection of the property, but that contingency and cancellation must be exercised in good faith and cannot be exercised simply because one decides that the home is too dated.  In other words, you cannot rightfully exercise a contingency and cancel a contract for a visually obvious/open reason, such as thinking that the property now appears too dated.  However, if one discovered during a physical inspection that the home utilized dated electrical system like knob and tube wiring, one could cancel the contract.

The seller can negotiate a no-contingency purchase agreement, which could potentially enable the seller to keep the earnest money deposit if the buyer cancelled the escrow. 

@Bryan Zuetel

Paragraph 9B of the CAR residential purchase agreement says:

“Buyer has the right to inspect the Property and, as specified in paragraph 14B, based upon information discovered in those inspections: (i) cancel this Agreement; or (ii) request that Seller make Repairs or take other action.”

It would seem to me buyer could, in writing within the specified time, simply say “I hereby cancel this agreement based on information discovered in my inspections.” as provided in paragraph 9B of the purchase contract.

This is not enough to cancel and get deposit back?

Account Closed

If the cancellation is exercised in good faith under the C.A.R. purchase agreement physical inspection contingency, the cancellation reason provided must be a good faith reason that the buyer has discovered during the inspection period, not an open/obvious condition, such as old/dated carpet or windows.  Can a buyer make up a reason?  Yes, of course.