Real Estate Tales from the Courtroom: The Sex Offender Next Door

 

In this case, the buyers filed a lawsuit against the sellers and the real estate broker, alleging fraud, negligent misrepresentation, breach of the duty of good faith and fair dealing, and breach of fiduciary duty after finding out their neighbor was a registered sex offender.  The buyers did not ask to rescind the purchase contract but demanded compensatory and punitive damages.

The Facts Alleged in the Case

The sellers purportedly decided to sell their Scottsdale home because a convicted sex offender lived next door. The broker acted as a disclosed dual agent in the transaction.  During negotiations, when the buyers asked the sellers why they were selling, the sellers said they wanted to move to be closer to friends.  Neither the sellers nor the broker disclosed to the buyer that the next-door neighbor was a sex offender. 

 Six months later, after having moved into the home, the buyers discovered that their neighbor was a “level-one” sex offender that was not listed on the Sex Offender Registry.  The buyers filed the lawsuit alleging that if they had known of the sex offender, they would not have purchased the house. 

The buyer argued that the sellers fraudulently misrepresented their true reason for wanting to move by telling the buyers they wanted to live closer to friends, when they actually wanted to move away from the sex offender next door.  The sellers argued that their alleged statement that they were moving to be near friends was (i) not a representation that there were no sex offenders living near the home; (ii) no prospective buyer would reasonably rely on a seller's representation about his or her reason for moving; (iii) the possible presence of a sex offender could not have been too important to the buyers because they never asked the sellers about the issue, and (iv) pursuant to A.R.S. § 32–2156 there is no liability for failing to disclose any fact or suspicion that there was a sex offender located in the vicinity of the home. 

 The Court Reviews the Arizona REALTORS® Forms

In deciding the case, the Court mentioned all the notices about sex offenders in the Arizona REALTORS® forms used in the transaction. 

The sellers provided the buyers with an Arizona REALTORS® Residential Seller's Property Disclosure Statement (SPDS).   Just above the buyers’ signature on the SPDS there is a notice: 

·         “Notice: Buyer acknowledges that by law, Sellers, Lessors and Brokers are not obligated to disclose that the Property is or has been ... located in the vicinity of a sex offender.”

The statement on the front of the SPDS titled “Residential Seller Advisory” states: 

·         Please note: By law, sellers are not obligated to disclose that the property is or has been (1) the site of a natural death, suicide, homicide ...... or (3) located in the vicinity of a sex offender. However, the law does not protect a seller who makes an intentional misrepresentation. For example, if you are asked whether there has been a death on the property and you know that there was such a death, you should not answer “no” or “I don't know”; instead you should either answer truthfully or respond that you are not legally required to answer the question.

The court also referenced the “Inspection Period” section of the Arizona REALTORS® Residential Resale Real Estate Purchase Contract that stated:   

·         “If the presence of sex offenders in the vicinity ... is a material matter to the Buyer, it must be investigated by the Buyer during the Inspection Period.” The contract allowed a 14–day inspection period and further provided that the buyers had “conducted all desired independent inspections and investigations and accept[ ] the Premises.”

And, another section of the contract that stated:

·         “Buyer warrants that Buyer is not relying on any verbal representations concerning the Premises except disclosed as follows: ____.”

The buyers initialed the word “None” handwritten in the space that followed.

The Court Addressed the Broker’s Dual Agency and Duty to Disclose

In addressing the claims against the broker, the court stated that the broker's fiduciary duty to disclose material information is not necessarily diminished in a dual-agency situation.  “When obtaining clients' consent to represent both parties in a transaction, a broker must deal fairly and in good faith with each of them”, and “disclose all material facts that the [broker] knows, has reason to know, or should know would reasonably affect the principal's judgment unless the principal has manifested that such facts are already known by the principal or that the principal does not wish to know them.”

 The court stated that with the clients' informed consent and in the absence of fraud, the duties a broker owes their clients may be limited by agreement. The court noted that both buyers and sellers agreed to the Arizona REALTORS® Consent to Limited Representation (“Consent”).  The court quoted portions of the Consent as follows:

 [Broker] represents both the Buyer and the Seller with limitations of the duties owed to the Buyer and the Seller, such as:

* * *

·         (2) There will be conflicts in the duties of loyalty, obedience, disclosure and confidentiality. Disclosure of confidential information may be made only with written authorization. This does not relieve [Broker] of any legal obligation to disclose all known facts which materially and adversely affect the consideration to be paid by any party to the transaction.

 3) Pursuant to A.R.S. § 32–2156, Sellers, Lessors and Broker/Licensee(s) are not obligated to disclose that the Subject Property is or has been ... located in the vicinity of a sex offender.

The Court’s Decision

·         Buyer v. Seller:  The court acknowledged that the seller made fair points regarding their statements about why they were moving, and the court did not say that as a matter of law, the alleged misrepresentation was material to the transaction or that the buyers reasonably relied on it.  “However, when one is asked a question that fairly calls for disclosure of a material fact, he or she commits fraud by concealing the truth or otherwise answering in a manner deliberately calculated to mislead.” Therefore, the court found that a jury must decide whether the sellers were liable to the buyers for common-law fraud.  The ultimate outcome of the buyers’ case against the seller on the common law fraud claim is unknown to this author.

 Buyer v. Broker:  The court stated that even assuming that A.R.S. § 32–2156 did not apply and the broker otherwise would have had a duty to the buyers to disclose the sex offender, the buyers expressly agreed that broker had no obligation to make that disclosure in the Arizona REALTORS® Consent to Limited Representation form. Therefore, the buyers’ claim against the broker was dismissed.

 Case Lessons:

·         If asked about suicides, murders, other felonies, or registered sex offenders in the vicinity of the home – you can decline to answer pursuant to A.R.S. § 32–2156, but you should not answer in a way that would be a lie or misleading.

 When acting as a dual agent, always use the Arizona REALTORS® Consent to Limited Representation form. 

                          Lerner V. DMB Realty, LLC., 234 Ariz. 397, 322 P.3d 909 (2014)

Michelle Lind is Of Counsel to the Arizona REALTORS® and the author of Arizona Real Estate: A Professional’s Guide to Law and Practice.  This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.  9/23/22

 

What the Heck is the “Standard of Care”?

 

You have likely heard the phrase “standard of care,” but what the heck is it?  Well, the term "standard of care" is a legal concept that is generally applied to the conduct of any professional, such as a doctor, a lawyer, or an engineer, and the legal concept of “standard of care” applies to real estate professionals as well. 

The Standard of Care Requires Reasonable Care

The standard of care requires that a real estate agent exercise the degree of care that a reasonable agent would exercise in the same or similar circumstances. Figuring out what is “reasonable” under the circumstances is generally the hard part. 

What constitutes reasonable care in a transaction varies depending on the situation. The specific conduct, disclosures, advice, and counsel required of an agent depend on the facts of each transaction, the knowledge and the experience of the client, the questions asked by the client, the nature of the property and the terms of sale. You are not required to be perfect, but you are required to act with reasonable care.

 Reasonable care may include:

·         Resisting any temptation to provide advice that is outside the area of expertise for a real estate licensee.

·         Recommending other professionals when necessary to perform inspections and investigations or to provide legal and tax advice.

·         Assisting your client in verifying information when you have reason to question the accuracy of the information being provided or when your client has questioned the information.

·         Disclosing all known material defects existing in the property. If you have to ask whether a fact must be disclosed, the answer is probably “yes.” 

·         Practicing within your area of expertise.

·         Understanding the purchase contract and related documents.

·         Complying with the ADRE Statutes and Commissioner’s Rules.  https://azre.gov/laws-rules-policy-statements-and-advisories

                                            

If you are unsure what is reasonable under the circumstances or how to handle a situation, always consult with your designated broker or manager for guidance. 

The Battle of the Experts in Determining the Standard of Care

How does the judge, jury or arbitrator in a lawsuit determine what a "reasonable” real estate professional would do in the same or similar circumstances? That is where the experts come in.

The standard of care is generally established by expert testimony, unless the conduct required by the situation is within the common knowledge of a layperson. Therefore, a plaintiff buyer or seller that alleges that a defendant agent acted negligently usually must present the testimony of a qualified expert, in other words, another agent, that the defendant agent acted unreasonably and fell below the standard of care.

The defendant agent will generally do the same – present the testimony of another agent as an expert witness that will testify that the agent’s actions were reasonable under the circumstances and within the standard of care. 

The judge, jury or arbitrator will consider the testimony of each expert along with the rest of the evidence presented and make the determination of whether the agent complied with the standard of care.  If not, there are consequences. 

Consequences of Falling Below the Standard of Care

If an agent’s conduct falls below the standard of care, the agent is negligent. Once an agent’s negligence is established in a lawsuit, the agent will be held liable to the plaintiff buyer or seller for all damages (money) caused by the negligent conduct. Additionally, any judgment arising from such a case must be reported to the ADRE within ten days and the ADRE may impose regulatory sanctions as well.

Tips to Help You Practice Within the Standard of Care

The following is a list of tips to help you exercise reasonable care and practice within the standard of care.  

• Get to know your client and their concerns.                                                  

• Read and understand the purchase contract & related forms. 

• Educate your client on the process and documents.

• Avoid shortcuts, such as incorporating other documents into the contract or failing to write contingencies out completely.

• Handle all offers properly and promptly. 

• Practice only within your area of expertise, both in practice area and geographically.

• When in doubt, disclose – and do it in writing.                                             

• Assist your client with disclosures & due diligence. 

• Think before you speak - don’t speculate or guess. Identify the source of any information provided and direct your client to the source if possible.

• Verify information if you have reason to question the accuracy of information being provided in a transaction or if your client has questioned the accuracy of the information.

• Document the transaction - take contemporaneous notes and confirm important issues in writing.

• Communicate, communicate, communicate – answer your phone and promptly return calls to clients and the other agent.  Talking is almost always better than texting. 

 Don’t forget – you are a professional.  By complying with the standard of care, you not only reduce the potential of costly and time-consuming lawsuits, but also reduce the risk that your clients will encounter problems during or after the transaction.

Michelle Lind is Of Counsel to the Arizona REALTORS® and the author of Arizona Real Estate: A Professional’s Guide to Law and Practice.  This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.  9/7/22

Applying “Trust but Verify” in a Real Estate Transaction

 

“Trust but verify” is a Russian proverb made famous by former US President Ronald Reagan. In a typical real estate transaction, a great deal of information is exchanged.  When should a party “trust” and when should a party “verify”?   

The Arizona Department of Real Estate (ADRE) Commissioner’s Rule A.A.C R4-28-1101(I) requires that a real estate agent take reasonable steps to assist a client in verifying the accuracy of information relevant to the transaction.. The rule also requires reasonable care in obtaining information material to a client’s interests and relevant to the transaction and that an agent accurately communicates this information to the client.

 

The related ADRE Substantive Policy Statement (SPS) SPS 2005.13 clarifies the Commissioner’s Rule and states that an agent is expected to take reasonable steps to assist their client in verifying information when a reasonably prudent real estate professional has reason to question the accuracy of the information being provided, or where the client has questioned the accuracy of the information.   

 

Thus, the ADRE Commissioner’s Rule and SPS provide guidance on when a real estate agent should assist their client in verifying information.  For example, if the seller states that the roof is in excellent condition and only a roof inspector would have the expertise to determine otherwise, the broker should have no liability for merely passing along the seller’s representation.
 

However, if the seller states the roof is new and in excellent condition, but the agent has reason to believe that the roof is old and in a state of disrepair, evidenced by broken shingles and obvious water leaks, the agent should point out these circumstances to the buyer and recommend that the buyer obtain a professional roof inspection to verify the roof condition.

 

Similarly, if the buyer questions the accuracy of the seller’s representations or other information provided during the transaction, the same rule applies: the agent should assist the buyer in obtaining independent verification.  In other words, if the buyer asks about the roof’s condition, the agent should advise the buyer to have the roof inspected by a roofing expert to verify its condition.

Further, a listing agent can “trust” information provided by the seller, absent a “red flag” indicating the information is inaccurate.  The court made this clear in Aranki v. RKP Investments, Inc.,194 Ariz. 206, 979 P.2d 534 (App. 1999) when it held that the listing agent was not liable to the buyers for passing along information from the seller without proof that the listing broker knew or should have known that the information might be false. The listing broker had no duty to the buyer to verify the information provided by the seller because there was no indication that the information might be inaccurate.   

 

In conclusion, “trust” - but verify if there is any question or doubt.  You can “trust” information provided in a transaction if there are no “red flags,” but you must assist your client to “verify” information if you have any reason to doubt its accuracy or if the client has questions about the information.  In addition to referring the buyer to other professionals to verify information, provide the buyer with the resources such as the Buyer Advisory, so that the buyer can take an active role in the verification of information provided about the property being purchased.

 

 

Michelle Lind is Of Counsel to the Arizona REALTORS® and the author of Arizona Real Estate: A Professional’s Guide to Law and Practice.  This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.  8/25/22

 

Real Estate Tales from the Courtroom: The Designated Broker’s Initials

Does the Designated Broker’s Failure to Initial the Listing Agreement Prevent a Commission Claim?

The sellers owned a house in Chandler and signed a listing agreement with the listing agent to sell the house. When the house sold, the sellers refused to pay the $89,700.00 commission because the listing agent’s broker did not review and initial the listing agreement within ten business days as required by statute ARS 32-2151.01.G.   As might be expected, the agent filed a lawsuit against the sellers for the unpaid commission.    

As discussed in the article about the case of Young v. Rose, a court ruled that a real estate agent who does not sign a buyer’s broker employment or listing agreement may not sue to collect a commission under that agreement due to ARS 32-2151.02.  

However, this case addresses a different issue: whether an agent can sue to collect a commission under a listing agreement signed by the agent, but not initialed by the designated broker within ten business days after it was signed by the parties.  The court in this case decided that the agent was entitled to pursue the claim. 

The court stated that a designated broker's failure to initial the listing agreement within ten business days of the parties signing it as required by subsection ARS 32-2151.01.G “poses no impediment to a civil action for unpaid commissions.”  The statute requires a “licensed employing broker” to keep certain records and to exercise specified controls over the broker's trust fund account.  But the statute does not address an agent’s right to recover a commission. 

Of course, the Arizona Department of Real Estate (ADRE) may sanction a broker who fails to initial the listing agreement within ten days as required by statute.  But ARS 32-2151.01.G has a different purpose than ARS 32-2151.02. The statute requiring the broker’s initials (ARS 32-2151.01.G) is regulatory in nature and exposes the broker to sanctions by ADRE, but the statute does not affect the validity and enforceability of the listing agreement itself.

Therefore, the Court found that a designated broker’s failure to initial a listing agreement within ten business days of the parties signing it as required by statute posed no barrier to the agent’s lawsuit for the unpaid commissions. As a result, the listing agent was entitled to her commission under the listing agreement.

CK Family Irrevocable v. My Home, et al., 249 Ariz. 506

 

Michelle Lind is Of Counsel to the Arizona REALTORS® and the author of Arizona Real Estate: A Professional’s Guide to Law and Practice.  This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.  8/2/22

Real Estate Tales from the Courtroom: The Buyers’ Broker’s Signature

 

The buyers signed the Buyer-Broker Employment Agreement.  Did the buyer’s agent?

Over an 18–month period the buyers and buyer’s agent entered into three Buyer–Broker Employment Agreements for a property with a desired purchase price of under four million dollars.

After the third Buyer-Broker Employment Agreement expired, the buyer’s agent sent an e-mail message to the buyer regarding four properties and asked the buyers to sign a new Buyer–Broker Employment Agreement.  The buyers signed the Agreement and sent it back to the buyer’s agent, who responded “thank you” with an email that ended with an electronic business card consisting of her name, business address, e-mail address, telephone numbers, website address, and photograph.

During the term of this forth Buyer–Broker Employment Agreement, the buyers purchased a home using another real estate agent and paid that agent a commission. The buyer’s agent sued the buyers for the commission set forth in the Buyer-Broker Employment Agreement.

The buyers argued there was no enforceable agreement because neither the buyer’s agent nor the agent’s broker had signed the Buyer-Broker Employment Agreement, as required by A.R.S. 32-2151.02(a)(4) . The buyer’s agent argued that A.R.S. §32–2151.02 is an Arizona Department of real Estate “regulatory statute” that did not bar this civil cause of action for the commission and that the buyers’ signatures on the Buyer-Broker Employment Agreement satisfied the Statute of Frauds. A.R.S. 44-101.

The buyer’s agent also claimed she had in fact signed the Buyer-Broker Employment Agreement by virtue of the thank you e-mail, which was “intended to be [her] signature and acceptance of the contract” pursuant to the Arizona Electronic Transactions Act. See A.R.S. 44-7001-7052.

The Court stated that the buyer’s agent was required to sign the Buyer-Broker Employment Agreement for it to be enforceable.  Further litigation ensued regarding whether the buyer’s agent’s electronic thank you email qualified as her signature. 

The ultimate outcome of the case is unknown to this author, but the lesson is clear.  To avoid this type of costly and time-consuming litigation, make sure and obtain all necessary signatures on all documents – including your own. 

Young v. Rose, 230 Ariz. 433

Michelle Lind is Of Counsel to the Arizona REALTORS® and the author of Arizona Real Estate: A Professional’s Guide to Law and Practice.  This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.  7/28/22

The Risky Facts of Real Estate Life – Pre and Post Possession Agreements

 Buyers and sellers who want to enter into pre-possession and post possession agreements are a risky fact of real estate life.  There are times when a buyer wants to move into the property before close of escrow (pre-possession) or the seller wants to stay in the property following close of escrow (post possession).  

 

The first thing that a real estate agent absolutely needs to know and follow is their broker’s policy on these types of agreements.  Also, be aware that the Arizona Department of Real Estate Commissioner’s Rule requires that a salesperson or broker recommend “that the client seek appropriate counsel from insurance, legal, tax, and accounting professionals regarding the risks of pre-possession or post possession of a property” – and this recommendation should be done in writing. 

 

So why are these agreements risky?  They are risky because in both pre and post possession agreements, the people occupying the property are not the owners, which sounds a lot like a rental.  If the Arizona Residential Landlord Tenant Act applies (and there is a strong argument that it does) there are statutory rights and obligations applicable to these agreements.  As a result, the risk of a dispute increases, especially if all the parties’ rights and obligations are not addressed in a well-drafted written agreement. 

 

Post Possession by the Seller

Because the obligations in the purchase contract are fulfilled at close of escrow, the obligations to repair and maintain the property are no longer the seller’s responsibility; they are the buyer’s responsibility – but the seller is still occupying the property.  Therefore, post possession issues include:

 

·         Who is responsible for repairs?

·         What if there is a fire, monsoon or other damage?  Do the parties have the appropriate insurance policies (homeowners’/rental) in place and whose insurance policy will cover any damage? 

• Will a security deposit be required in case the seller damages anything in the property? If so, how much?  (The amount of a security deposit in a rental is limited to 1.5 times the amount of one month’s rent).

And other matters to be addressed are:

• How much is payment/rent? Will the payment/rent be prorated?

• Who pays the utility bills? Will the utilities be transferred into the buyers’ name?

• Who will occupy the property? Are pets allowed? Is smoking permitted?

 

Information about these and other issues are discussed in the Post Possession Agreement Checklist here:  https://www.aaronline.com/wp-content/uploads/2015/12/Post-possession-checklist-11-19-15.pdf

 

Pre-possession by the Buyer

Typically, the seller is responsible for any damage to the property prior to close of escrow.  However, in the event a buyer prepossesses the property, the buyer is now responsible. 

The same issues as discussed above regarding post possession agreements apply to pre-possessions.  But there are additional pre-possession risks, such as: 

 

• What if there are buyer contingencies that have not been met prior to the buyer’s pre-possession? Have the parties decided to waive the contingencies or are they still in place allowing the buyer to cancel the purchase contract if a contingency fails?

• What if the buyer moves in and begins to remodel the property, then thereafter either cannot or will not close escrow? 
• If the sale is not completed, when does the buyer have to move out? What happens if the buyer refuses to move out?

 

Information about these and other issues are discussed in the Pre-Possession Agreement Checklist here:  https://www.aaronline.com/wp-content/uploads/2015/12/Pre-possession-checklist-11-19-15.pdf

 

A written agreement and decision of which type of agreement is appropriate should be addressed regardless of whether a pre or post possession is for 3 days or 30 days or more. The Arizona REALTORS® has some additional resources to assist:

 

·         A sample Arizona REALTORS® Residential Lease Agreement at:  https://www.aaronline.com/wp-content/uploads/2022/02/04/Residential_Lease_Agreement_October_201-9-SAMPLE.pdf 

·         A sample Post Possession Agreement (not an Arizona REALTORS® form) at:  https://www.aaronline.com/wp-content/uploads/2021/05/03/Post-Possession-Agreement-SAMPLE.pdf

·         A sample Pre-Possession Agreement (not an Arizona REALTORS® form) at:  https://www.aaronline.com/wp-content/uploads/2021/05/03/Pre-Possession-SAMPLE.pdf

 

Due to the risk and liability involved with pre-possession and post possession of a property, the best practice is for the parties to not enter into such an agreement. However, if the parties insist, the real estate agent should consult with their broker and advise the parties in writing to seek appropriate counsel from insurance, legal, tax, and accounting professionals regarding the risks.

 

 

Michelle Lind is Of Counsel to the Arizona REALTORS® and the author of Arizona Real Estate: A Professional’s Guide to Law and Practice.  This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel. 

Representing a Buyer in a New Home Subdivision

 

Representing a buyer who is purchasing a home in a new home subdivision involves different considerations than representing a buyer in a resale home transaction.  A new home purchase transaction is generally much different than a resale transaction, but the role of a buyer’s agent is just as important. 

 

Ensure that the Buyer Understands that You Should Accompany Them to Their First Visit to any Model Home or New Home Sales Office

Generally, a buyer’s agent must accompany the buyer on their first visit to a new home subdivision and register to be eligible to receive a commission. As a buyer’s agent, if you do not accompany the buyer on the first visit to any property, including a model home, new home/lot or “open house” the builder, seller or seller’s broker may refuse to compensate you.  Consider using the Arizona REALTORS® Buyer-Broker Exclusive Employment Agreement, which confirms the buyer’s agreement not to make a first new home visit without you.  https://www.aaronline.com/wp-content/uploads/2021/01/12/Buyer-Broker-Exclusive-Agreement-BBEEA-SAMPLE-FEB-2021-1.pdf

 

The Buyer Should Always Read the Public Report Before Signing the Purchase Contract

A subdivider (anyone who offers six or more lots for sale in a subdivision) must give a prospective new home buyer a copy of the Public Report and an opportunity to read and review it before the prospective buyer signs a contract to purchase a home in the subdivision. A.R.S. §32-2183(A).   Encourage your buyer client to read the Public Report thoroughly before signing a purchase contract because the report contains important information, such as:

• disclosure of conditions or provisions that may limit the use or occupancy of the home;
• homeowners association information;
• whether the subdivision is subject to any known flooding or drainage problems;
• existing and proposed adjacent land use, including any unusual safety factors and uses that may cause a nuisance or adversely affect homeowners;
• street and road maintenance;
• available utilities;
• any environmental factors;
• whether any portion of the subdivision is located in territory in the vicinity of a military or public airport;
• locations and availability of schools, shopping facilities, public transportation, medical facilities, ambulance service, and police service.

 

The purpose of the law requiring a Public Report for subdivided lands “is to insure that consumers who purchase lots in residential developments are provided with adequate streets, utilities, drainage, and generally pleasant, healthy and livable surroundings.” Alaface v. National Investment Co., 181 Ariz. 586, 596, 892 P.2d 1375, 1385 (App. 1994).

 

The Buyer Should Always Read the CC&Rs and Other Homeowners Association Rules Before Signing the Purchase Contract

Most new homes are in a homeowner’s association. Covenants, Conditions and Restrictions (CC&Rs) generally empower a homeowner’s association to control certain aspects of home’s use. The CC&Rs may be very strict, especially those addressing landscaping, RV parking, and play equipment. It is essential that the buyer review and agree to these restrictions prior to entering a contract; afterwards is generally too late. In addition to the CC&Rs, a homeowner’s association may be governed by articles of incorporation, bylaws, rules and regulations, and often architectural control standards, which should also be reviewed.

 

The Buyer Should Always Read the Purchase Contract Before Signing

Each new home seller/builder/subdivider generally has its own purchase contract, so there is no “standard” contract as there is in the resale market. And these new home purchase contracts are generally much different than the Arizona REALTORS® Resale contract. Therefore, buyers must read the purchase contract carefully before signing and be advised to keep the following questions in mind: 

 

• Who will hold the earnest money and other advance deposits? If possible, all earnest money and other advance deposits should be held by the escrow company.  If the deposits are held by the seller, the buyer may have a difficult time recovering those funds in the event the seller fails to perform.

 

• Does the contract contain a financing contingency for the benefit of the buyer?  Unless the buyer plans to pay cash, the contract should contain a financing contingency stating that the contract is contingent upon the buyer qualifying for a loan. If the buyer is unable to qualify for a loan to buy the home, the buyer should be entitled to a return of the earnest money. Some new home contracts provide only that the seller has the right to cancel the contract if the buyer fails to qualify for a loan, which does not protect the buyer.

 

• If the home is still under construction, when will the home be completed? The seller should be asked to include a realistic estimate as to when construction will be completed in the contract. A realistic completion date is important so that the quality of the construction will not be compromised by a contractor who is rushing to complete the home. If the completion date is critical, the buyer may be able to negotiate a contract provision in which the seller agrees to pay a certain dollar amount to the buyer per day for late completion.

 

• What are the buyer’s remedies if there is a problem? The remedies for problems are likely specifically set forth in the contract. The contract may require that any disputes be resolved by binding arbitration, which may eliminate the right to a trial by judge or jury and the right to appeal.   

 

Remember, educate the buyer about the importance of a buyer’s agent when purchasing a new home to guide them through the process and advocate on their behalf.  And, remind the buyer that the subdivision sales agent represents the seller and, as nice as they may be, is looking out for the seller’s best interests – not the buyer’s. 

 

Michelle Lind is Of Counsel to the Arizona REALTORS® and the author of Arizona Real Estate: A Professional’s Guide to Law and Practice.  This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.