The paperwork fix

Just when it seemed impossible for additional paperwork to be required as part of purchasing or selling a home, the California Assn. of Realtors came up with a purchase agreement that requires even more paperwork during escrow.

The extra forms, however, are proving worth the effort for consumers. In the year the change has been in effect, the agreement has made it easier for both buyers and sellers to cancel an agreement and for buyers to recover deposits when a deal falls through.

The document, which officially replaced the association’s previous standard purchase agreement last January, is used in more than 90% of California’s residential real estate transactions.

Only San Francisco and some adjacent Bay Area cities routinely use a different form. The last major form change occurred in 2000, when the escrow instructions were incorporated into the purchase agreement.

Among those using the revised form to back out of a purchase in the early stages was Dr. Edward Young, a Sherman Oaks dermatologist and skin cancer specialist, who fell in love with a three-bedroom, three-bath, 2,600-square-foot vacation home in La Jolla in July. Entranced by what he called the home’s “old world type of charm” and livable floor plan, he made an offer, which was accepted by the seller.

But he had concerns that the home, built in the 1950s, might have substantial defects because of its age. When Young read home inspector Joseph Romeo’s 28-page report warning of numerous imperfections, including plumbing problems and potential mold issues, he exercised his right to back out.

“The cost of the inspection was well worth it. It was the best $330 investment I ever made because it kept me from making a $900,000 mistake,” Young said. Because he canceled the agreement within the 17-day inspection period provided by the revised purchase agreement, his $25,000 deposit was immediately returned.

The new contract made canceling easy, according to broker Danielle Krant of Coldwell Banker, Beverly Hills, who represented Young.

“If you decide you don’t want a house, you don’t need to give a reason. It can be [that] you don’t like the color of the paint all of a sudden,” Krant said. “With the old contract, you had to give a reason, and the seller had to be given an opportunity to make the repair, and if he did you were stuck in the contract.”

Young’s ability to end the transaction in the early stages and obtain a quick refund of his deposit is indicative of the new form’s influence on the escrow process.

Michelle Gutierrez, an escrow officer with Affirmative Escrow in Calabasas, has found that deals now tend to fall out earlier in the process, allowing the seller to quickly put the home back on the market. Buyers benefit too.

“Once a deal falls out, the buyer generally has his deposit returned within three days,” Gutierrez said. “Under the old agreement, anywhere from a couple of weeks to a month would pass before the deposit was returned, depending on the circumstances of the cancellation.”

With the old arrangement, buyers were required to make “reasonable” requests for repairs before they could cancel the agreement. Second thoughts or “buyer’s remorse” were typically not enough to terminate the contract.

Under the new agreement, the parties have up to 17 days to inspect the property and change their minds if they find something that is not to their liking, unless the parties mutually decide on a different timeframe.

Cecelia Waeschle, with Sotheby’s International Realty, Malibu, noted that many brokers believe the provision gives the buyer too much leeway. When a buyer backs out within the 17 days, there is the potential for a previously sought-after property to cool off.

“The property can get an underserved stigma because other people wonder why the people backed out,” she said.

Broker Natalie Janger of Dalton Brown & Long’s Beverly Hills office said she believes that the 17-day “look and see” provision permits buyers to quickly pick up a property and unload it if they change their minds.

“The best analogy is that it is like you are going into a great big crowded sale and you walk around holding a fabulous-looking sweater so that someone else won’t get it,” she said. “Meanwhile, you are still considering whether you really want it.”

Other changes to the purchase agreement also affect a property’s journey through escrow.

One important change is that all contingencies have to be removed “actively”; under the old form agreement contingencies were removed “passively.” Active removal means that parties must remove contingencies in writing.

This change is one of the reasons the paperwork in transactions has increased tremendously, according to Joe Diab, a broker with Prudential California Realty, John Aaroe Division, Woodland Hills.

“Now we have to get the contingency-related paperwork sent out and back. We probably have between five and 10 more pieces of paperwork that need to be processed,” Diab said. “It involves a lot more care by the agent involved. But all in all, it is a good thing for the consumer.”

Although the active removal of contingencies requires more paperwork, it has the advantage of preventing deposits from being stuck in escrow indefinitely and the potential to significantly reduce contingency-related litigation.

Stan Smith, manager of Dalton Brown & Long’s Beverly Hills office, estimated that contingency-related litigation has already been reduced between 60% and 70% industrywide under the new agreement.

The intent of changing contingency removal from passive to active is to protect the parties from unintended consequences, said June Barlow, vice president and general counsel for the Realtors association. “Because the new contract requires the parties to be proactive, contingency removal becomes a conscious decision. It causes more work, but having consumers make a conscious choice is a better practice.”

Marty Uniman used the active removal system to his advantage when he sold his 1,500-square-foot home in Van Nuys. Listed for $359,000, the house, which he had purchased in 1963, was sold for just $4,000 less.

When Uniman’s agent, Marsia Powers of Remax’s Grand Central Tarzana office, did not receive written notice from the buyer that the contingencies had been removed, she sent a form called a Notice to Buyer to Perform to the buyer’s agent. The buyer did not respond before the expiration of the notice. In the meantime another buyer, undeterred by the fact that the property was in escrow, made a full-price offer for the property.

Under the new contract, the buyer’s failure to give notice of the removal of all contingencies within the time prescribed by the notice to buyer form gave Uniman the legal right to cancel the agreement. Instead, Uniman and his agent made the original buyer an offer that he couldn’t refuse: Match the offer received by the new potential buyer or lose the house. Reluctantly, the buyer signed off on the outstanding contingencies and increased his original offer by $4,000.

So how long will these ground rules stay in place? The Realtors association doesn’t expect another major form change until at least 2010.

*

(BEGIN TEXT OF INFOBOX)

Updated rules for buyers and sellers

The vast majority of California’s real estate brokers have been using a revised version of the California Assn. of Realtors’ Residential Purchase Agreement for the last year. Here are some of the important changes that have taken place in the escrow process and the additional paperwork they involve:

Pest control: Under the old agreement, the responsibility for pest-control expenses varied depending upon local practice. In Southern California, most brokers went on the assumption that the seller was responsible for pest control. Where pest control problems proved severe, the seller was frequently burdened with thousands of dollars in unanticipated costs. Under the new agreement, pest control is treated like every other defect and is subject to negotiation depending on the results of the inspection. A seller who wants to commit to repair pest damage before inspection may do so on the Wood Destroying Pest Inspection and Allocation of Cost Addendum form.

Sale/purchase of another home: Where a buyer makes his offer contingent on the sale of another home, he must fill out an additional form titled Contingency for Sale or Purchase of Other Property. This addendum includes a provision for a seller who wishes to make the sale contingent on his purchasing a replacement property.

Active removal of contingencies: Under the old form, contingencies were removed “passively.” Under the passive removal system, if a contingency was not removed before a set period of time, the other party had the option of terminating the agreement. Passive removal often caused confusion because both parties would frequently continue to proceed as if the contract was still in effect. Frequently, the result was difficulty in obtaining a deposit refund, and lawsuits.

The new agreement provides for the “active” removal of contingencies. The expiration of the negotiated time period for removal is no longer sufficient to invalidate the contract. Now the party responsible for removing a contingency must give notice of the removal on the Receipt for Reports and Active Contingency Removal form. If this form is not received in a timely fashion, the party waiting for the removal of the contingency sends a Notice to Buyer to Perform or Notice to Seller to Perform. This notice unequivocally warns the recipient that failure to remove the contingency (or perform another task required by the purchase agreement) within 24 hours may result in the termination of the contract.

Examples of items on the form titled Notice to Buyer to Perform are the loan, appraisal and preliminary title report contingencies, as well as contractual requirements such as providing a deposit, down-payment verification and the return of statutory disclosure forms.

Uniformity of time periods: The old agreement was notorious for its varied time-period requirements. Nearly every contingency had its own timetable. In an effort to do away with the confusion caused by tracking numerous time periods, the new agreement provides just two time periods for the obligations of the parties to be completed: seven days and 17 days. (Of course, the parties retain the prerogative of negotiating alternative periods.)

Elimination of “repair requests”: Under the revised agreement, the buyer no longer has to make “reasonable” requests for repairs before canceling the agreement. Representatives of the California Assn. of Realtors explained that this new approach avoids problems in interpreting what is “reasonable” and puts an end to the practice frequently employed by reluctant buyers of formulating difficult repair requests simply to get out of the contract.

Wendy Jaffe can be reached at Wjaffewrite@aol.com.