General Overview: The vast majority of residential real estate transactions in California involve real estate brokers. Usually, the buyer and seller are represented by separate brokers, although not always the case. California allows the same broker to represent both parties to a transaction; this is called dual representation. All brokers go through extensive training and education and then must be licensed by the California Department of Real Estate before they can begin representing clients in real estate transactions.
Broker services are generally negotiating the purchase price by preparing offers and counteroffers between the buyer and the seller; and then the deal is memorialized with a purchase and sale agreement. Once the deal is consummated (the purchase and sale agreement is signed by both buyer and seller, the broker engages an escrow agent to deal on the terms set forth in the purchase and sale agreement, which is usually a California Association of Realtor’s Agreement (“Purchase Agreement”) . The escrow agent then prepares joint escrow instructions for the closing.
Seller: As a seller, the first step is to list the property by entering into a listing agreement with the broker. The broker lists the property, typically on the Multiple Listing Service, to expose and market the listing to other agents and the general public. In return for marketing the property, the broker is paid a broker commission (a percentage of the sales price) after the deal closes escrow. The listing agreement protects the brokers right to collect this broker commission during the listing period, and, among other things, may entitle the broker to collect a broker commission on a subsequent deal where the broker was the procuring cause.
Disclosure: One of the most important elements of listing the property is to accurately disclose all material defects that you are aware of. More, a seller is bound by statute to disclose any facts materially affecting the value or desirability of the property when such facts are not known to the buyer or not within the reasonable diligence of an investigating buyer. Simply stating the property is sold “AS IS” does not immunize a seller that is aware of various facts but instead intentionally or negligently fails to disclose them. This means that the seller must disclose property conditions, and update the disclosures during the escrow period, that would be important for a buyer know. These disclosures should include any prior inspections, engineering reports, or repairs. The seller’s broker must make a reasonable visual inspection and disclose what they know or have discovered about a property, but is only required to make a competent visual inspection.
Buyer: The Purchase Agreement will provide the buyer with a specified time review the seller and broker disclosures and time to inspect and investigate the property. This is known as the “due diligence” period. Typically buyers will hire a property inspection company to conduct a property inspection and prepare a report on the condition of the property. Roof and pest control professionals should also be retained to provide opinions with detailed reports identifying any areas of concern.
Depending on the outcome of these reports, the buyer may wish to renegotiate the transaction terms or cancel the deal so long as this is accomplished prior to expiration of the due diligence period. The Purchase Agreement provides for contingencies. Contingencies are terms and conditions that unless met or removed based on terms in the Purchase Agreement, will result in a cancellation of the deal. For example, if the buyer elects not to proceed with the deal based on the findings in the investigations and reports generated based on a contingency, then written notice may be given to the seller that the buyer is canceling the transaction. If the cancellation is properly based on an agreed contingency, then it is likely that the buyer will have the initial deposit returned and either party will have no liability or obligation under the Purchase Agreement.
Disputes: Many times, a buyer or seller will cancel the deal. Depending on whether the cancellation is allowed under the Purchase Agreement is where disputes typically arise. If the Purchase Agreement is used, it will contain a provision stating that the prevailing party in a court case, arbitration, or other proceeding between the buyer and the seller “arising out of this Agreement” shall be entitled to reasonable attorney’s fees and costs.
However, prior to litigating a dispute in court, the Purchase Agreement requires the buyer and seller, and sometimes the broker, to mediate, then arbitrate any disputes arising out of the Purchase Agreement. (Note, the mediation and arbitration provision in the Purchase Agreement is voluntary.)
The mediation process is a proceeding usually conducted by a neutral mediator to try to negotiate an informal resolution without having to resort to court or arbitration. Note, if the buyer or seller refuse to mediate or arbitrate after agreeing to do so pursuant to the Purchase Agreement, the refusing party will be precluded from obtaining attorney’s fees under the fees provision discussed above, though there are some exceptions to this caveat
Should efforts to resolve the dispute fail in mediation, and the arbitration clause is initialed in the Purchase Agreement, the parties will then be required to proceed to arbitrate their dispute rather than proceed in court. This is a process where a retired judge, without a jury, will hear the matter and render his or her decision upon the equities, not necessarily the law.
Buyer Default: To avoid the harshness of litigation, the Purchase Agreement provides for a liquidated damages provision that may be jointly agreed on by buyer and seller. Thus, if the buyer defaults in completing its obligations under the agreement, the seller may retain as its sole damages, the buyer’s earnest money deposit, which is typically 3% of the purchase price.
Seller Default: If the seller defaults under the Purchase Agreement, the buyer may want to sue for specific performance and record a notice of pendency of action, also known as a ‘lis pendens’. The lis pendens clouds the record title giving notice to the general public that a lawsuit is pending, thus discouraging new buyers from negotiating a purchase of the property until after the litigation or arbitration is resolved.