Bob Hunt, a Director of the California Association of Realtors® (CAR) wrote an article that appeared on many of the real estate news sites today concerning changes that are afoot in CAR to modify their residential Purchase Agreement. It is often the case the CAR changes may reflect a trend that will slowly be adopted by state real estate associations across the county, at least in part. Some of the changes may not be needed in other parts of the country and some reflect the need for CAR (and likely other associations) to make changes to reflect changes in associated parts of the industry, like the mortgage industry.
The first change has to do with the fairly common practice of buyers asking the seller for concessions - give-backs on the agreed upon sale price which the buyer hopes to use to cover things like closing costs, pro-rated taxes and the cost of insurance. Apparently in California there could a difference between what the buyer and seller agree to (sometimes called Contractual Credits) and what the lender will allow (sometimes called the Lender allowable Credit) that was not required to be reported to the lender. I’m not sure that I understand how that could happen, since the lender (at least here in Michigan) always gets a full PA packet with all concessions listed.
So the new rules in California will state that the Contractual Credit must be disclosed to the lender and that if it is greater than the Lender Allowable Credit, it will be automatically reduced to the Lender Allowance Credit limit. Further, if there is not a separate written agreement that all parties have signed (one would suppose that this would be an Addendum to the PA) the sale price shall stand as originally written, i.e. no automatic price reduction will occur. That seems reasonable and is in line with local practices anyway. The buyers may end up having to bring more to the closing table is an overly generous Contractual Credit was been written into the contract.
The second change deals with parties to a transaction who are representing some legal entity (maybe an investment group or LLC) instead of acting as an individual. California will require a special addendum to be filed within three days of the deal being agreed upon that provides legal evidence of the right of that party to represent the entity. Failure to do so will give the seller the right to cancel the deal. This is normally handled by the Title Companies locally, but the “within three days” timeline is probably a good idea. You don’t want to find out weeks after you’ve taken the house off the market that the person who represented himself as the “buyer” really didn’t have the authority to make the offer. I’ve not heard o fthat happening around here, but I supposed that it could.
The third CAR recommendation for change to the PA is one that might find more immediate traction across the country at least to drive some wording changes to PAs. It involves decoupling the automatic tie-in between appraisal results from the contingency in the PA concerning the ability of the buyer to get a mortgage. Basically it is saying that if there are not specific words in the Purchase Agreement that state that the sale is “contingent upon the property appraising at the sale price”; then the fact that it might not appraise and th4 lender might be unwilling to lend more than the appraised value is not sufficient reason the normal clause that states that the buyer can withdraw from the sale if the lender turns him down for the loan. The nuance here is that the buyer, if otherwise qualified for the mortgage, could make up the difference between the agreed upon price and the loan value that the lender is willing to back. So, we’ll likely see more phrases added to PA’s that are similar to the FHA Addendum that states clearly the property must appraise at the sale price.
The fourth items might be fairly California specific for now, but could become more important nationwide as alternative energy sources become more common. In general it focuses upon long-term obligations (things like leases or infrastructure assessments) for items that are essential parts of the property, such as solar power or heating systems that might be leased over an extended period. Basically, this change will make the buyers ability to assume the lease a contingency on the PA.
The fifth change is pure California and concerns what is apparently a big CYA section which they are calling the Scope of Duty section. It defines in excruciating legal detail what the brokers are responsible for doing and not doing as a part of the sale. Californian must be an interesting place to do business.
The last proposed change is again more important in California than here and concerns removing the termite inspection from their PA as something for which payment by the buyer or seller must be negotiated in the PA. The main place where pest inspections show up locally is in PA’s with FHA or VA Mortgage Addendums and they are not required in either.
So they’ve covered changes to seller concessions, buyer authority, appraisal shortfalls, long-term leases and termite inspections while also making sure to cover themselves with lots of liability disclaimers. California must be an interesting place to live and buy real estate.
Out of all of that we may eventually see the trickle down of a few minor changes to either or local PA forms or our practices. Life in California is always amusing to watch from afar, as is life in New York; but, there is little real “news” in the changes that CAR is going through that are likely to have much impact here in Michigan.
