Market Conditions Advisory – Spring 2023
By David Hamerslough
May 10th, 2023
We are in the middle of the spring buying season, and from what I read and hear, the market is, for most buyers and sellers, a challenging one. Low inventory, an overall downward trend in prices since last year, rising interest rates, and other factors are sending mixed signals. As a result, buyers and sellers have different expectations of the market. Characterizing the market, in general, as either a seller’s or buyer’s market is also challenging. For properties that are priced appropriately, multiple offers still exist and support the suggestion that it is a seller’s market. For every such property, however, there may be others in the same neighborhood that sit on the market without getting any interest, prompting buyers to believe that the market is in their favor.
While the market may be challenging and difficult to read, one constant remains: claims are still being made by buyers and sellers. This article highlights some of the claims that I and other qualified California real estate attorneys have seen in recent months.
Claims By Buyers That They Have Paid More For The Property Than They Needed To
Historically, in a transitioning market, buyers make claims that they have overpaid because they were not advised that values were trending downward. While some buyers in this market have expressed concern about whether they are purchasing at a market peak, the claims resulting from this market focus on paying more for the property than was necessary due to statements allegedly made by buyers’ agents regarding the nature of any competition. Examples include statements that there were a specific number of competing offers or that it would be necessary to pay a specific price either to be competitive or to ensure that the buyer would be the successful purchaser. These statements are allegedly being made either prior to writing an offer or during counteroffers.
Evaluating these claims requires, among other things, a review of the communications (written and oral) that occurred between the buyer and their agent and between the buyer’s and seller’s agents. Written communications include emails, text messages, tweets, etc. All transactional documentation from competing buyers and their agents and from the seller and the listing agent can be important objective evidence to support such a claim. The timing of these communications can also be a factor, as can agency relationships, including any dual agency.
Demonstrating what was said and done with respect to such claims can be difficult when communications that allegedly occurred were not documented with enough precision or the timing of such communications is in doubt. These claims can turn on specific words and what advice, if any, was provided.
Some buyers making these claims allege that the statements made to them were fraudulent and motivated by greed. Some claims involve allegations against the seller, either based on direct involvement by the seller or based on vicarious liability due to agency relationships. Including the seller provides an opportunity for the recovery of attorneys’ fees, unlike a direct claim against a real estate licensee (which typically does not allow for the recovery of attorneys’ fees). Whether there is any insurance coverage for this type of claim, or whether a broker will defend an agent under their ICA and related documentation, are practical issues that arise in this type of claim.
Finally, in the event there is a fraud judgment, such an outcome would need to be reported to the Department of Real Estate, which in most circumstances will result in the loss of an agent’s real estate license.
Cancellations By Buyers
Buyers have cancelled contracts for the following reasons:
- Loss of gift money;
- Loss of employment;
- Indecision regarding whether they want to complete the purchase due to the condition of the property, the purchase price, the economy, etc.;
- Concern that the seller has not made a full and complete disclosure (a conclusion reached, unfortunately, after all disclosures were read and approved and contingencies, if any, were removed).
All of the foregoing have been impacted, in some circumstances, by the fact that the buyer wrote a non-contingent offer. When I ask a buyer why they wrote their offer on that basis, the typical response is that their agent told them they had to do so in order to be competitive or in order to ensure that they were the successful offeror. The issue is whether market conditions warranted a non-contingent offer. What I am seeing is that in many instances, market conditions did not warrant such an offer. I am also seeing a lack of documentation supporting the alleged need for such an offer other than the PRDS or C.A.R. Market Conditions Advisory (MCA). Often, the explanation that is given is based upon the number of disclosure packages that have been downloaded or what level of interest has been communicated by the listing agent (typically, orally and not confirmed in writing). Consider evaluating not only these issues but also other factors, including whether there are other listings in direct competition with the property, days on market for the property, any competition from other buyers, any price reductions, and whether there were prior transactions that went pending but then fell through and, if so, why that occurred.
While the risks of writing a non-contingent offer are discussed in the MCAs, writing an offer on that basis when it is not necessary is an entirely different issue. In addition, the consequences of gift money being withdrawn, the impact of a buyer losing a job or cancelling due to concerns about that occurring in the near future, or a buyer cancelling because of concerns over the completeness of a seller’s disclosures after those disclosures have been read and approved are risks that are not directly addressed in the MCAs. Disputes over what questions were raised by a buyer and responses provided by the agent can be minimized by memorializing those discussions, preserving the documents, and providing advice and counsel based upon actual market conditions.
If a buyer is going to cancel under any circumstances, they should read the PRDS Cancellation Advisory before doing so and consult with a qualified California real estate attorney. Communicating the desire to cancel and/or delivering a cancellation may jeopardize a buyer’s right to retain any deposit that has actually been paid and prevent that buyer from perhaps exercising a contractual, statutory, or common-law right to do so. Those buyers who have not paid the deposit need to consult with an attorney before taking any action.
Cancellations By Sellers
Sellers are cancelling for the following reasons: (1) they do not have an exit strategy, (2) they did not evaluate the tax consequences of the transaction, or (3) they experienced a change in circumstances (related to health or employment). Once again, the MCAs don’t specifically discuss these issues.
The best strategy for a seller is to evaluate these issues before listing the property. With regard to an exit strategy, market conditions may allow a seller to accept an offer subject to finding and/or closing on a suitable replacement property. Where market conditions do not give the seller this option, documenting this fact and advising the seller to investigate their exit strategy is even more important.
With regard to tax consequences, once again, documenting that a seller has been advised to evaluate these consequences and what, if anything, the seller did in that regard will help eliminate the issue as well as a claim by the seller that they were not advised to evaluate this issue. While industry forms advise buyers and sellers that real estate licensees do not give tax advice, the issue in these claims is not necessarily that any actual tax advice was given but, rather, that the potential issue was not identified for the seller in a timely manner. The seller’s investigation into their exit strategy or any tax consequences is best done prior to the listing being signed. The better practice is to confirm in writing before any offers are reviewed that the seller has done so and has satisfied themselves about any such issues.
When a seller experiences changed circumstances that cause them to want to cancel, they should review the PRDS Cancellation Advisory and consult with a qualified California real estate attorney to determine if they have any factual, legal, and/or equitable basis to cancel and how that can be accomplished.
Sellers Regretting Initialing Liquidated Damages
Several claims have come in recently because a buyer has cancelled and the resale of the property has resulted in a loss exceeding the amount of the deposit actually paid. Liquidated damages puts a cap on the damages that a seller can recover for a buyer’s breach of contract. The question is whether liquidated damages should have been initialed where that possibility exists. Determining where the market is and the relationship of an offer to market conditions is challenging. Nevertheless, liquidated damages is usually initialed without any discussion of the consequences of doing so or having any industry discussion of this issue separately initialed or pointed out by the listing agent.