Standing Out in the California Market
California’s scorching housing market can be a battleground for buyers, and when facing multiple offers, sellers often prioritize speed and certainty. This is where non-contingent offers come into play. But are they the solution you need, or a recipe for disaster? Here at Brewer Offord & Pedersen LLP, our team of dedicated staff and attorneys have seen it all, and whether you are considering making your first non-contingent offer or dealing with a non-contingent offer dispute, we are ready and waiting to provide our advice, experience, and expertise to help you navigate through these otherwise stressful situations. In this article, we will delve deeper into the world of non-contingent offers in the California real estate landscape, exploring the potential benefits and significant risks involved.
In a traditional real estate transaction, contingencies act as a safety net for the buyer. These might include contingencies for securing financing approval, confirming property value with an appraisal, or completing a satisfactory home inspection, to name a few. While these contingencies may add additional time to the overall process, they provide buyers with a way to cancel the transaction without penalty (i.e., losing their earnest money deposit). Non-contingent offers are a buyer’s way of telling the seller that they are willing to waive their otherwise legal right to cancel the transaction without penalty, with minimal exceptions. While non-contingent offers are not unheard of in other parts of the country, California’s hot housing market and competitive nature make them a more frequent consideration for buyers here in order to remain competitive.
Sellers have developed a soft spot for non-contingent offers, particularly in Silicon Valley and the Bay Area, and for good reason. They signal a serious and committed buyer, streamlining the closing process and reducing the risk of the deal falling apart at the last minute. For better or worse, this can be the deciding factor for sellers in a competitive market where multiple offers are on the table.
Buyer Beware: The Fate of Your Earnest Money Deposit in a Non-Contingent Offer
While the benefits for sellers are clear, non-contingent offers come with significant risks for buyers. Without a financing contingency, you could find yourself being required to fund the transaction even if your loan application does not go through. Skipping a home inspection can lead to structural issues and surprises with the home after the purchase is finalized that were otherwise unknown to both the buyer and seller and could have been discovered by a home inspector. Without an appraisal contingency, you might have to scramble to adjust your offer or convince the seller to lower the purchase price, potentially putting the buyer’s loan at risk, resulting in the inability to fund the transaction. In any such event, when you make a non-contingent offer, you are ultimately putting your ability to close escrow, as well as your earnest money deposit at risk.
Limited Exceptions to Non-Contingent Transactions
Not all hope is lost however – buyers do have some limited ways to back out without penalty, but they must be aware of the timeline and deadlines associated with the minimal exceptions. Should delivery of any of the disclosures or amended disclosures occur after execution of an offer or of a purchase agreement, the buyer has three to five days after delivery to terminate the offer or agreement by delivering a cancellation. This exception is complex but can prove useful even in non-contingent transactions. Civil Code Section 1102.3 provides more information and context on this exception.
The Drafting of the Transaction Documents is Extremely Important
In California, the fate of a buyer’s earnest money deposit in a non-contingent offer depends on the specific wording of the purchase agreement and the reason for the buyer’s withdrawal, but in most cases, if a buyer backs out of a non-contingent offer without a legitimate reason outlined in the contract, the seller will attempt to keep the earnest money deposit as “liquidated damages”. This compensates the seller for the time and resources invested in taking the property off the market and considering the buyer’s offer.
However, liquidated damages are generally not favored by California courts and a buyer can challenge the amount of liquidated damages to recover some or all of their earnest money deposit. In such a case, the deposited funds will be held in escrow until the property is sold (if at all) to a subsequent buyer. It is important to note that the seller has a legal obligation to mitigate their damages and resale the property as best as reasonably possible. The first buyer can monitor the seller’s efforts to resale the property for 6 months post-cancellation in an attempt to recover some or all of their deposit. If the property is sold for the same or higher price than you offered, you have a good chance of recovering some or all of your deposit. However, if the home sells for less than your original offer, the seller could recover the deposit as compensation for the difference in the sale price. Our firm negotiates resolutions to deposit disputes on a daily basis and can assist if you are in this type of situation.
Making Non-Contingent Offers Work
If you are considering making a non-contingent offer, there are some safeguards you can employ to mitigate the risks. First, ensure your financial footing is sound by securing a strong pre-approval for a loan to help avoid financing troubles. Next, even with a non-contingent offer, consider getting a thorough home inspection so you can be fully informed before closing escrow. You can also do your research on the market in your particular area ahead of time, reviewing recent sales to help give you the confidence to waive an appraisal contingency. Of course, if you still are unsure whether you should make a non-contingent offer, it doesn’t hurt to consult with a real estate attorney. We can explain the risks in detail, help guide you through the process, and help you craft a strong offer so you can remain competitive in an extremely competitive market.
Weighing the Risks and Rewards: Key Takeaways
Non-contingent offers can be a gamble, but in a competitive market, they can help your offer rise above the rest. However, remember:
- Seek professional guidance. Understand the risks and potential consequences before making a non-contingent offer. It is vital to work closely with your real estate agent and attorney to understand the nuances of your specific transaction.
- Be financially prepared. Ensure you have the resources to make a non-contingent offer confidently. Unexpected situations can arise in any transaction, and when you make a non-contingent offer, you are putting your deposit at risk.
Winning the California housing game takes strategy and resourcefulness. Non-contingent offers can be a powerful tool but use them wisely! By doing your research, carefully considering the risks and rewards, and by seeking professional guidance, you can enter the California housing market with your best foot forward.
