Sunday, January 15, 2017

Buyer Must Give a Reason for Cancelling Purchase Contract

A new Purchase Contract will be used for home sales in Arizona, effective February 1. While I am not sure the new "as is" condition is for the best (see next post), I do like the requirement that buyers give a reason for cancelling a contract. If the buyer does not give a written reason for cancelling the contract, he will forfeit his earnest money to the seller.

When a buyer gets a house under contract, he has what many agents call a 10 day "free look". The buyer can hire home inspectors, and investigate anything he wants, including building permits, flood plain status, sewer connection, zoning compliance, nearby development plans, schools, etc. This is called due diligence.

Currently, if the due diligence produces something that is unacceptable to the buyer, he can cancel the contract during the inspection period without explanation and get his earnest money back.

If fairness to the seller, the buyer should not be making shot gun offers on several houses without disclosing this to the seller. The buyer should not decide that he can't afford the house or he'd rather buy a different house. He should make a serious, good faith offer, and should only cancel the contract if he learns something new during the inspection period.

Sometimes one of my buyers is interested in a house that was under contract with a different buyer, but the first buyer cancelled the contract and the deal fell through (DFT). Sometimes the DFT was due to something unrelated to the property and my buyer's interest in it. The most common reason for a DFT is the first buyer couldn't get financing. However, if the DFT occurred because of a material fact, like a structural crack or lack of building permits, having that information will affect whether my buyer wants the house, what he should pay, and whether he can get financing.

Unfortunately, when I call a listing agent to ask why the previous sale DFTed, the agent often says he doesn't know; the buyer just flaked out. Now that the buyer is required to give a reason for cancelling, the listing agent can't claim they don't know what happened.

By the way, the seller and listing agent are required by state law and the Realtor Code of Ethics to disclose any material fact that they learn from a buyer's due diligence.

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