Effective Legal Resolutions, Done Efficiently

How to Cancel a C.A.R Residential Purchase Agreement and Get Your Deposit Back

by | May 20, 2024 | Real Estate Law

Hi all, Bill here with a one-size-fits-all answer to a question I’ve been asked about two-dozen times so far this month (May 2024):

“My real estate agent convinced me to make an AS-IS offer on a home with NO CONTINGENCIES (in California).  Now we’re a week away from closing and I have discovered something about the house I don’t like.  I asked the Sellers to lower the price but they said no.  What are my rights?”

The short answer is:

You always have the right to cancel your purchase agreement and forfeit your earnest money deposit.  But if you want your deposit back, the only viable legal option is to trigger Seller’s duty to send “supplemental disclosures” and then threaten to cancel the deal during your three-day review window.

Here’s the long answer:

Most residences in California are purchased using standard pre-written California Association of Realtors (“CAR”) forms, and the most common one is the Residential Purchase Agreement (“RPA”).  Under California law and the contract terms of the RPA, the Seller owes you written disclosures containing what they know about the condition of the property (the “Transfer Disclosure Statement” and the “Seller Property Questionnaire”).  If the Seller doesn’t give you both of the required disclosures before you enter into the contract, and you enter into contract before seeing the disclosures, then whenever you do get the disclosures, you have three days to review them and, if you don’t like what’s in them, you can cancel the contract and get your deposit back.  Further, you get a new three-day right to cancel whenever the Seller sends supplemental disclosures:

(1) Statutory and Other Disclosures: If any disclosure specified in paragraphs 11A, B, C, or D, or subsequent or amended disclosure to those just specified, is Delivered to Buyer after the offer is Signed, Buyer shall have the right to terminate this Agreement within 3 Days after Delivery in person, or 5 Days after Delivery by deposit in the mail, or by an electronic record or email satisfying the Uniform Electronic Transactions Act (UETA), by giving written notice of rescission to Seller or Seller’s Authorized Agent. If Buyer does not rescind within this time period, Buyer has been deemed to have approved the disclosure and shall not have the right to cancel.

If the agents never sent the disclosures at all, you merely have to demand them. 

They have to give them to you or they’re in breach of both CA law and the contract itself.  Once you get them, you have three days to review them and cancel the contract.  During those three days, you can lean on your agent to negotiate a better deal for you in lieu of you cancelling the deal.*  But keep in mind, the seller does not have to renegotiate.  They can let you leave with your deposit.  Your only move is to play the “I will walk away from this deal” card, and if the seller calls your bluff you either have to walk away or close the deal.  You cannot force them to lower the price. 

*Note that paragraph 11.G says you get 5 days if the supplemental disclosures are electronically sent, but always assume they were personally hand-delivered to your agent, and keep in mind the days start counting when your agent gets the supplemental disclosures, not when you get the supplemental disclosures from your agent.  They’re called your “agent” because they legally count the same as you.  Anything your agent is told, the law considers that you know it.  Anything your agent receives, the law considers that you’ve received it.  If your agent doesn’t tell you something they should or doesn’t give you something they should, then your agent is the one who wronged you, not the Seller or the Seller’s agent.

If the agents already sent disclosures, then you need to figure out how to trigger their duty to send supplemental disclosures. 

Sellers have a contractual obligation to send Supplemental Disclosures when they “become aware of adverse conditions materially affecting the Property, or any material inaccuracy in disclosures, information or representations previously provided to Buyer,” with exceptions:

(4) In the event Seller or Seller’s Agent, prior to Close Of Escrow, becomes aware of adverse conditions materially affecting the Property, or any material inaccuracy in disclosures, information or representations previously provided to Buyer under this paragraph, Seller shall, in writing, promptly provide a subsequent or amended TDS, Seller Property Questionnaire or other document, in writing, covering those items. Any such document shall be deemed an amendment to the TDS or SPQ. However, a subsequent or amended disclosure shall not be required for conditions and material inaccuracies of which Buyer is otherwise aware, or which are discovered by Buyer or disclosed in reports or documents provided to or ordered and paid for by Buyer.

There are exceptions identified above, and there are some other exceptions implied as a matter of law, that are not adequately explained in the contract, so here they are in more expansive detail:

  1. Sellers generally don’t have to disclose anything that’s in their own reports that were given to the Buyer before entering into the contract.
    • So if you have a Seller’s inspection report, a Seller’s termite report, or a Seller’s environmental hazards report, etc., then you need to check those to see if the property condition that you don’t like was already included in a report you received before entering the contract, because if it was, it isn’t new information triggering a duty to issue a Supplemental Disclosure.
    • Common items in this category are a past history of termites, a past history of roof leaks, a past history of plumbing leaks, and whether the house is in a wildfire zone or a flood plain.
  2. Sellers don’t have to disclose anything that’s in the public record.  This includes but is not limited to:
    • Zoning, property taxes, school districts, utilities service providers, historical districts, any other kind of special district, the fly-over area of a local airport.  Buyers are expected to do their own due diligence about public records, and theoretically, helping a Buyer with this kind of due diligence is part of their agent’s job and why they get a percentage of the deal, except no one ever knows to ask for their help with this.
  3. Sellers don’t have to disclose anything that you actually know or found out yourself. This includes conditions uncovered by:
    • Your own visual observations.
    • You agent’s visual observations.
    • Your own inspectors’ visual observations.
    • Your own inspectors’ reports.
  4. Seller’s don’t have to disclose anything that was readily observable by the Buyer if they had bothered to pay attention, such as:
    • Busy street traffic, inconvenient parking, neighborhood noise, airplane noise, dead trees, invasive plants, bad/loud neighbors during normal waking hours, or literally anything else that’s listed on the “Statewide Buyer and Seller Advisory” form.
  5. Some kinds of sellers are exempt from the disclosure requirements entirely.
    • This is most common when the property of a deceased person is being sold by their heir or substitute trustee, and that Seller never lived in the Property.
    • A similar situation comes up when the property has been a rental for a long time and the Seller simply does not know the answer to a question.

If the list above seems a little harsh, it is.  That’s because when you make a “NO CONTINGENCIES” offer, the presumption is that the Buyer did their tours, inspections, observations, reports, public records reviews, investigations and other due diligence before entering the contract.  If the Buyer received an initial disclosure package, including reports, they were supposed to ask questions about them before making a “NO CONTINGENCIES” offer.  So a Buyer does have to make sure the property condition being used to trigger supplemental disclosures is something that the Sellers legitimately forgot to disclose, or else it’s something that Buyer’s guys discovered but can’t investigate without the Seller’s historical knowledge or direct assistance.

So how do I specifically trigger the supplemental disclosures? 

Sellers and their agents do not want to send out supplemental disclosures, because they know the Buyer aren’t going to do anything good with them.  A Buyer has to make supplemental disclosures unavoidable by asking the Sellers difficult-to-answer yet important follow-up questions about conditions you could not have and did not know about before entering into the contract. 

Example: I recently got a call from someone whose inspector found signs of water damage in the basement that were not obvious before entering into the contract.  When confronted, the Sellers admitted there had been a pipe leak that they forgot to disclose, but claimed it was a long time ago, that it had been fixed, and never came back.  They refused to issue supplemental disclosures, because, in their agent’s words, it wasn’t a material-enough mistake to risk granting the Buyer a right to cancel.

I suggested that the caller ask follow-up questions.  Was this one leak, or several over time?  What caused the leak(s)?  How bad was/were the leak(s)?  How long was it before the leak(s) was/were discovered?  Was a remediation company hired to perform a dry out, or did Sellers do the dry out themselves?  What was the dry-out protocol, and was it followed to completion?  Did anyone do a mold test?  Did anyone do a moisture test to look for hidden water pooling elsewhere?  Can we open up your wall and look for ourselves?

These questions raise the profile of the dispute so the Sellers know that what they only thought of as minor leak was actually, potentially, a gigantic unknown risk to the Buyer justifying the demand for supplemental disclosures.  Most importantly, these are questions that only the Sellers can answer.  This was not information the Buyers could ever find out for themselves without the Sellers’ help.  And how do Sellers answer those questions?  Via supplemental disclosures.  And if they refuse, then they’re the ones in breach of the contract, and the Buyer can demand that Sellers cure the breach (by sending the supplemental disclosures) or else let the Buyer walk away from the deal with their deposit.

Keep in mind, the Seller is not helpless.

Buyers must not use this technique to manufacture an excuse to exit a deal just because they have cold feet, or because they are being greedy about a discount.  The Buyer should be negotiating for whatever the minimum amount of money is that will repair the displeasing condition, and only walking away if they can’t get that.  Because, each of these CAR RPA forms also has a mandatory mediation provision, and an arbitration provision, with a prevailing party attorney’s fee clause (i.e., the loser pays the winner’s legal bills).  Mediators and arbitrators can smell when someone is trying to use a flimsy excuse to get out of a deal, and it will come back to haunt that reluctant Buyer.  So don’t be greedy, and do make sure there’s a rational relationship between your negotiating position and the cost to repair the condition you are fighting about.

“AS-IS” deals are not what you think they are.

Buyer and Sellers call me and they think “As-is” is some kind of magic guarantee that the buyer won’t back out of the deal, and that all the reports and disclosures are unequivocally fine and must be accepted, that there can be no more investigations or inspections or due diligence, and that even if something horrible is discovered later, like a giant sinkhole opens up and swallows the garage, the deal must still move forward.  None of that is true. 

“As-is” merely means the Seller agrees not to let the condition of the house deteriorate between when they signed the contract and when escrow closes.  Contrast, if the Buyer wants to condition their purchase of the property on the Seller making some kind of improvement before closing – such as to resolve a code violation, or to remove a dead tree, or to evict the tenants – those are not “As-is” deals.  (Note, the way the paperwork generally shakes out is that the box on the RPA for “As-is” usually stays checked, because agents will never willingly uncheck that box, that would be contrary to their training; the additional work/improvements are usually described in a separate contract addendum, which is fine.  But legally it’s not considered an “As-is” deal anymore.)

Don’t feel too bad even if you lose your deposit.

People don’t know (because they don’t read the fine print), but your (Buyer’s) earnest money deposit is essentially a liquidated damage and an exclusive monetary remedy for the Seller.  What that means to normal non-lawyer people is, walking away from a deposit is not always a bad thing because the Seller cannot come back after you for even more later.  If you were going to pay $1M for a house, then you probably paid a $30k deposit (i.e., 3%).  If you cancel the deal for no reason at all and walk away from your deposit, that $30k is all the Seller can ever get from you.  If the Seller’s next best offer is only for $900k, they cannot go after you for $100k more they were going to make from your deal.  They have your $30k, and that’s all they’re ever going to get from you for that.  So if you do end up losing your deposit because you walked away voluntarily, yes that stinks, but at least you can sleep soundly knowing that Seller can’t sue you for even more money later.* 

*(Note that you could breach the contract in some other, more nefarious way, like by having entered into it for the wrongful purpose of locking up the property for a month or two to stop someone else from getting it, without actually intending to close on it yourself.  Something like that would be fraud or intentional interference with prospective economic advantage, and your deposit won’t cover something that.)

Ultimately, your agent is to blame for this mess.

Agents make more money by closing more deals, faster.  Buyers agents especially have zero financial incentive to get you, the buyer, a better price, because (1) negotiating makes it take longer to get your deal done, (2) negotiating takes their time away from closing more deals for other clients, and (3) negotiating reduces the number used to calculate their commission.  Every question you ask, every negotiation they do for you, every tour, every showing, every open house, even every phone call is essentially reducing their measurable success as an agent. (Contrast, lawyers are exactly the opposite, the more work we do for your issue the more money we make.)

The “NO CONTINGENCIES” deals are a leftover legacy from when every house was on the market for not more than three days and there were overseas buyers with briefcases full of cash waiting to snatch up anything near Silicon Valley because they didn’t trust their own currencies/banks/governments and were told California real estate was a safe investment.

What are these contingencies the Buyers are passing up at their agents’ suggestion?  By agreeing not to have an appraisal contingency, the Buyer is saying “I bet my deposit that I can qualify for a loan large enough to buy this house.”  By agreeing not to have a loan contingency, the Buyer is saying “I bet my deposit that I can get a loan on terms I’m willing to accept before or at closing.”  By agreeing not to have an inspection contingency, the Buyer is saying “I love this house so much that I am willing to pay full price based on what I already know about it, and I won’t back out later just because I found something I didn’t like.” By agreeing not to have a sale contingency, the Buyer is saying “I bet my deposit that the sale of my current house is going to close on or before this deal is supposed to close.”  Those are, respectfully, bad bets.

A Buyer’s agent will say that “NO CONTINGENCIES” makes your offer “more competitive.”  It certainly does – obviously a Seller wants the Buyer to take all the risk of their side of the deal going sideways.  But if that’s the first/only offer, then why does being competitive matter?  And, if an offer does need to be sweetened, a price increase is both more appealing to the Seller and it means you’re not risking your own cash deposit.  Risk the bank’s money payable over 30 years, not your own cash.  If you put $30k of your own cash down, why would you gamble that on a four-way parlay instead of just borrowing a little bit more money to make the offer higher? 

The market is much, much less competitive than it was when this “NO CONTINGENCIES” practice became normal.  So why are “NO CONTINGENCIES” offers still a thing, if they’re merely an artifact of a bygone market condition?  Because the agents benefit from making deals its psychologically harder for a Buyer to back out of.  We all know the “sunk cost fallacy” from economics/consumer psychology.  When deals close smoothly (i.e., without contingencies), agents get to make more deals, faster.  The quicker they hit their commission splits at the brokerage, the quicker they trigger their profit-sharing bonuses, the quicker Buyer’s agents get promoted to Seller-side work, and the quicker the Seller’s agents get to move up to selling even more expensive houses.

So next time a real estate agent tells you to make a “NO CONTINGENCIES” offer because it’s “more competitive,” tell them “No, I want my appraisal, loan, sale and inspection contingencies, go get them for me.  Raise the offer price if you have to.”  Don’t put your own cash at risk just to make your agent’s job slightly easier.

Hope all that helps.

– Bill (and Oreo Sunshine)