Noncontingent Offers – What should Agents do?

Inventories of homes for sale are at an all time low, and although prices have dropped, it is still a seller’s market and buyers face stiff competition. For some time now, the practice followed by most agents is to have buyers submit “clean” offers; no contingencies for inspection, appraisal, or loans.  In fact, a common practice appears to involve submitting at CAR Contingency Removal (CR) Form, signed and dated the same day and time that the buyer submits the Residential Purchase Agreement (RPA).  This, despite the fact that the RPA itself contains a very specific warning that states:  “Removal or Waiver at time of offer is against Agent’s advice. See paragraph 8H.” Right below this, there is a box to check “CR Attached.”  What is an Agent to do?

Paragraph 8H is fairly clear about the decision to remove or waive contingencies at the time the offer is submitted.

H.  REMOVAL OR WAIVER OF CONTINGENCIES WITH OFFER: Buyer shall have no obligation to remove a contractual contingency unless Seller has provided all required documents, reports, disclosures, and information pertaining to that contingency. If Buyer does remove a contingency without first receiving all required information from Seller, Buyer is relinquishing any contractual rights that apply to that contingency. If Buyer removes or waives any contingencies without an adequate understanding of the Property's condition or Buyer's ability to purchase, Buyer is acting against the advice of Agent.  (Boldface emphasis in the original).

            Notably, the part that is not in boldface in paragraph 8H is important:  “Buyer is relinquishing any contractual rights that apply to that contingency.”  And for emphasis, paragraph 8H once again reminds the buyer that removing or waiving any contingencies “without an adequate understanding of the Property’s condition … is acting against the advice of Agent.”  What Advice does the Agent provide in this situation?  Presumably the Agent warns the buyer to read it carefully and explains that if there are any defects or problems that might have been disclosed by a reasonable inspection, the Buyer might be on the hook for the repairs, or possibly lose their deposit if escrow does not close.  But does the Agent actually “advise” the buyer NOT to waive or remove contingencies at the time of making the offer? I doubt it.  The CAR Form merely includes this as a presumption.

            For purposes of this discussion, we’re talking about the responsibilities of the Buyer’s real estate agent, and not a dual agency situation where the listing agent is also representing the buyer. That situation presents a similar dilemma, but for now, we’ll just focus on the buyer’s agent’s fiduciary duty to their client.  For starters, we look at the language in the CAR AVID form:

California law requires, with limited exceptions, that a real estate broker or salesperson (collectively, "Agent") conduct a reasonably competent and diligent visual inspection of reasonably and normally accessible areas of certain properties offered for sale and then disclose to the prospective purchaser material facts affecting the value or desirability of that property that the inspection reveals. The duty applies regardless of whom that Agent represents.  (Emphasis added).

            Next, we take a look at the specific language that the Court uses when advising the jury as to the standard of care that an agent owes to their client. This definition of fiduciary duty states as follows:

4107. Duty of Disclosure by Real Estate Broker to Client

As a fiduciary, a real estate broker must disclose to his or her client all material information that the broker knows or could reasonably obtain regarding the property or relating to the transaction. (Emphasis added).

               The use of terms “reasonably competent and diligent” and “reasonably and normally accessible” have traditionally been applied to protect agents from having to go to extraordinary lengths or measures to collect information, including crawling through dark attics and the crawlspaces, or trying to retrieve old permits, maps and similar information at city hall. Recognizing that real estate agents are not necessarily qualified to conduct structural, electrical or mechanical inspections of a house or property, the real estate industry now relies on third-party specialists to do this instead:  home inspections, roof inspections, pool inspections, foundation inspections, soil inspections, pest inspections, etc. In fact, these reports are now commonly obtained by the Seller and provided as part of the “disclosure documents” presented to any potential buyer.  Very often, the buyer will accept and rely on these documents, even though they were obtained and paid for by the seller.

            But what about permits and zoning information?  The CAR AVID form expressly states, in part, as follows:

California law does not require the Agent to inspect the following:

● Areas that are not reasonably and normally accessible

● Areas off site of the property

● Public records or permits

● Common areas of planned developments, condominiums, stock cooperatives [ ].

            How does an Agent reconcile the statement that “California law does not require the Agent to inspect” certain items, with the court’s definition of the agent’s Duty of Disclosure to include “all material information that the broker knows or could reasonably obtain…?”  The issue would appear to come down to whether or not this “material information” was readily and reasonably available, to the agent, to the buyer, and to the public generally. 

            Over the course of the past decade, many local municipalities have undertaken the effort to digitize records such as permits and other documents that pertain to real property. Many cities have web sites that allow any member of the public, including buyers and their agents, to simply search on a particular property by entering the street address. The information provided will often include copies of the permits, the zoning designation, whether or not the property is located within a flood zone, the school district, and so on, as well as the size of the lot, whether the property is on city water and sewer or septic, and so on. The buyer’s agent also will have ready access to the MLS history, and can readily tell whether the square footage, or the number of bedrooms or bathrooms in previous listings have changed over time. County records, available online from the Assessor or Tax Collector’s offices, can be easily accessed to determine the amount of property taxes and whether or not they have been paid.

            In other words, much of the critical information that a buyer would deem to be “material” can be “reasonably obtained” and therefore arguably falls within the scope of an agent’s fiduciary duty per Section 4107 of the California Civil Jury Instructions (CACI).  Moreover, as local jurisdictions are moving to digitize more and more of the property data through easily accessible Geographic Information Systems (GIS), it would appear that it would be UN-reasonable NOT to at least double-check the available data with the information provided by the seller in the disclosure package for possible discrepancies or errors, BEFORE submitting the offer, let alone removing or waiving the contingencies.

            There are many different situations involving disputes over disclosure issues that come up in mediation between buyers and sellers. It is common to hear buyers explain that they signed the contingency removal form the same date and time they signed the offer to purchase, in order to enhance their chances the offer would be accepted. In almost every instance, both the buyers, and their agents if the agents are participating in the mediation, will explain they relied on the disclosure documents provided by the sellers. But when asked if they conducted any independent investigation of the material facts prior to submitting the offer, the most common answer – from both the buyers and their agents – is “No.” 

            As the trend to digitize data about property becomes more and more prevalent and accessible, real estate brokers will need to recognize the risks of continuing to advise their agents to avoid going beyond the scope of information provided by the sellers in the TDS or SPQ forms, let alone taking any comfort by relying on these forms to the detriment of their clients. In a competitive seller’s market, it is understandable why agents would – deliberately or offhandedly – encourage their clients to remove or waive contingencies at the time the offer is submitted. But the ease of access and sheer volume of material data available to the public, let alone licensed real estate agents who should know what to look for, significantly modifies the older standard of what information is considered reasonably obtainable. This does not mean that agents are suddenly responsible for providing expert advice on what the zoning information means, or interpreting why there’s no record of a permit when the number of bedrooms or bathrooms has changed from previous MLS records, but they should, at a minimum, point these out to their clients and suggest that further investigation might be recommended before removing or waiving contingencies. 

            At that point, the warning that doing so would be against the advice of the Agent might be worth highlighting for the client to read.