The Arbitration Clause in the Real Estate Contract: To Sign or Not To Sign?
Should you sign the arbitration clause in your real estate listing or sales contract? I can’t tell you. Seriously. As a real estate licensee in California, I am not supposed to guide people to initial or not initial for it because that would be giving legal advice. (Realtors and other real estate sales people are admonished not to provide, and are not qualified to give, either tax or legal advice.)
Arbitration is a choice that consumers have both when listing a home (between you and the brokerage/agent) and when selling a home (between you and the seller or buyer). In reality, nearly all people do initial for arbitration, though, so many people do not feel that they really do have a choice. When you sell or buy your home here in Silicon Valley, there’s a very high probablilty (perhaps a certainty) that the other principals in the transaction will opt for arbitration – at least if it’s a “regular sale”.
With arbitration, if there were a big problem (not “small claims court” material), the issue would first go to non-binding mediation. That is, you’d all have to sit around the table (so to speak) and talk it through and try to find a resolution on your own. If mediation fails, then it would go before an arbitrator whom both sides would agree on. Usually they are retired superior court judges or someone with a lot of real estate law experience. He or she would hear the case and decide. You only get one shot at it with arbitration, there’s no appeal if you’re unhappy with the decision.
With litigation you’re still supposed to do mediation first, but then if you go to trial and don’t like the decision rendered, you MAY be able to appeal it to a higher court if the system thinks you have a reasonable gripe about the decision. No guarantees, but the possibility exists.
The plus to arbitration is that it’s faster and cheaper. The plus to litigation is the right to continue to protest (appeal).
In my career, I have had some close calls with upset buyers/sellers (with each other, not me) that I thought would go down that path toward a big legal battle, but even in the worst case, the buyers and sellers agreed to a resolution without even requiring mediation.
Right now there’s only one type of seller in Santa Clara County that I’m seeing where they refuse to sign for arbitration: banks with bank owned properties or REOs (real estate owned by a bank). In fact, they have addenda which pretty much strip away Amost buyer rights that are normally woven into the purchase agreement (whether CAR contract or PRDS). The “icing on the cake” is that if you don’t like the transaction and want to be able to litigate a problem (they won’t allow arbitration), you must do it in the bank’s state!! Many of them are incorporated in Delaware or New York.
One more thing on arbitration, a story from my own experience. My mom passed away in 1996 and in 1997 I helped my dad to sell the house so he could downsize (they’d had a huge place on an acre and a half in Saratoga). She was a Realtor and he an attorney. Prior to his sale, my Dad used to tell me “your clients shouldn’t sign for arbitration, they can always choose to do it later” (that is, if the other side agrees to it, which truthfully they may not – that’s why we settle the issue when the contract is presented – I always reminded him that I could not give any advice on this point). But when he was selling, he initialled for arbitration before we even really discussed it. That surprised me and I asked him why the total 180 degree change. “Court is too expensive”, my father explained. I think that is why the overwhelming majority of buyers and sellers elect for arbitration: most perceive the court route as very, very expensive.
All of that said, it is a choice. If the other party (buyer or seller) and you cannot agree to this term (both incorporating the arbitration clause by initialling for it or both omitting it), you do not have a fully ratified contract. So that’s one of those “little things” that must also line up in order for there to be a sale.
What to do about arbitration? Read through the paragraphs on this clause carefully. Talk to a legal professional if you are unsure what any of it means or what the implications of it are for you in your purchase or sale here in the San Jose area. Your realty agent should be able to explain it to you, but cannot or should not tell you whether or not you should agree to arbitration in case of a dispute. That’s for you to decide, possibly with the help of a good lawyer.
Related post:
Why Good Realtors Refer Buyers and Sellers to Lawyers and Tax Professionals for Some Questions
Tags: arbitration, CAR, clause, contract, legal advice, litigation, PRDS, purchase, Realtor, san jose, silicon valley
March 29th, 2011 at 5:22 pm
Arbitration clauses are bad. I know from experience. Unfortunately when I bought my brand new home I didn’t realize how bad. Arbitration is exceedingly expensive. to file it cost $3,000 and that was for asking for a remedy of $299,000 (it goes up exponentially). A summary judgment read and rendered by the arbitrator was $12,500. To read documents such as a web page, $900. It costs and they require payment of $8,000 BEFORE you walk into the arbitration. You pay for the arbitrators hotel bills (if they travel), their mileage, their lunches, dinners and breakfasts and yes their time $400+ an hour. Arbitration is a good deal for big companies and a horrible deal for home owners. I almost went bankrupt fighting a bad builder. Why didn’t they do what they said they should do in their warranty? Because they have very deep pockets and can continue on knowing at one point the homeowner will have to give up.
Read the fine print and conduct your research. Do what is best for YOU and not the builder or the realtor.
March 31st, 2011 at 5:01 pm
Sounds like you had a really terrible experience, and I am so sorry to hear that’s been the case! I have never heard anything like that at all…. usually consumers prefer arbitration because it is supposed to be less expensive than litigation.
All of that said, when you buy a NEW home, from a builder, a lot of things are vastly different than with resale purchases. First of all, with resales, you’re not fighting a battle half way across the country, which can happen if you are battling a giant builder.
Just for the record, we Realtors do not and cannot advise people to sign (or not sign) arbitration. That is something a home buyer should discuss with his or her lawyer. If the client decides to sign for it, so do I. If the client doesn’t, I don’t. It’s their choice. My goal, of course, is to never need it one way or the other! So far, so good