Q: We are in a short-sale contract on a house. Our financial and inspection contingencies expired 10 days ago but we have not received the "Notice to Buyer to Perform" from the bank.
We have just found out that the house title is not clean because of HOA dues, so the loan is still pending. Also, per the inspection report, we have "Section I" items. Can we back out even if the deadline expired? We put down $22,000 earnest money. –Suzana, California
A: Caveat: I can answer this question based only on the California Association of Realtors’ Residential Purchase Agreement (RPA-CA) — not under any addenda you may have drafted and or signed with the seller or the seller’s bank.
The good news is that under the RPA-CA, you very likely do still have the ability to back out and get your deposit money back. Under this form, you, the buyer, retain your contingencies until you exercise or remove them, either of which actions would require you to sign another document (a Cancellation form or Contingency Removal form).
If you haven’t done either, you very likely still have those contingencies available to exercise (exercising your contingencies means bailing from the deal and canceling the contract).
Even if the seller did issue you a notice to perform, your options would be to perform, by removing your contingencies, to exercise your contingencies and cancel the contract, or to allow the notice time period to lapse, allowing the seller to cancel the contract.
In a situation where the buyer has not removed contingencies, under both California’s Notice to Perform form and Cancellation form, the seller refunds the buyer’s earnest money deposit.
But the bigger issue I see here is this question: Why do you want to back out of the transaction in the first place? Is it because of the title issue?
If so, be aware that the back homeowner’s association dues (and any other clouds on title, for that matter) are not going to get paid in a short sale until closing, at which time the seller’s bank will allow the escrow company to pay the HOA and any other lienholders out of the proceeds of the sale.
If you’re obtaining a mortgage to buy the property, and/or if you’re obtaining a policy of title insurance, your title insurer and escrow provider will work to ensure that title is clear at closing.
And just so you’re clear on the logistics of this, clearing title will occur at closing — it won’t happen unless and until all liens have been paid and removed from the property.
Now, onto the Section I items. California Wood Destroying Pest Inspection reports are divided into two sections, with Section I items indicating active infestation or areas where there is existing damage.
Section II items are thought to be conditions conducive to wood damage — things that, if not repaired, may eventually create a problem. As a result, Section I items were traditionally thought of as requiring immediate attention and repair, while Section II items were seen as recommendations for upgrades.
Section I items used to be handled by sellers, as a matter of course, while Section II items were taken on by buyers.
The reality of today’s real estate market — especially in the San Francisco Bay Area, where you’re located, and particularly in short-sale situations, is that sellers generally sell their homes in as-is condition.
The reports are for your information and may inform your negotiations or renegotiations with the seller regarding the price and terms on which you’re willing to buy the property. However, all Section I items are certainly not created equal, and the urgency and immediacy of a necessary termite fumigation is much greater than, for example, a fence, deck or even a windowsill that has spots of dry rot.
Are the Section I items more expensive or extensive than you’re willing or able to take on? The fact that Section I items exist, in and of itself, is not necessarily a strong reason to kill the deal. Frankly, most Bay Area homes have some Section I items, and in the large majority of transactions the buyer takes these items on to repair them following closing.
On the other hand, if you are looking for a reason to back out of the transaction, know that you don’t actually need to have Section I items in order to back out on your inspection contingency — you simply need to have found enough about the property with which you’re dissatisfied to the extent that you no longer want the place.
Be aware that if you’re backing out on this contingency, the seller might very well attempt to engage you in a renegotiation of price or terms, based on the pest report or whatever other condition problems the property already has. It’s up to you whether to engage in this or not.
However, assuming you already have the bank’s approval of the short-sale price and terms (as is generally the case in California before buyers start the inspection and contingency process), know that a new price and terms would require a resubmission to and approval of the revised contract from the bank — which may or may not be forthcoming.