When you buy or sell a house, it can be very exciting, whether you’re becoming a homeowner for the first time, upgrading to a new neighborhood, or selling a home to start an adventure elsewhere. Sometimes, however, things do not go as planned.
There’s a paragraph in the standard purchase agreement from the California Association of Realtors that allows a buyer to include an arbitration agreement as part of the offer. The agreement basically states that if the buyer and seller have a disagreement that will likely amount to more than a small-claims-court-sized settlement, then both parties agree to binding arbitration.
Arbitration is an alternative to taking someone to court. It’s a dispute resolution process whereby both parties agree to an arbitrator who acts like a judge, listening to arguments from both sides, reviewing the evidence, and “awarding” one side or the other. Usually, arbitrators are attorneys or retired judges, but sometimes a real estate expert can fill the role. The upsides of arbitration are that it is typically cheaper and faster than litigation. The downside is that it is often binding, whether the arbitrator makes a bad decision or not. If there’s mistake is in your favor, that’s great; but if you’re on the losing end, you’re stuck with it.
While this may give you pause, arbitration is often a faster, less expensive alternative to litigation. Here’s how it works.
A typical arbitration starts with selecting an arbitrator. Both sides must agree to the arbitrator, preventing one side from insisting that their brother-in-law, who happens to be a lawyer, preside over the case, for example. Since most people don’t go into arbitration too often, they contact a private arbitration service to fine a qualified person.
Once the arbitrator is selected, the buyer and seller submit formal written statements before the hearing, outlining their positions on the dispute. Both sides then prepare for the hearing, which to the untrained eye seems exactly like a court trial. Both parties submit evidence, call and cross-examine witnesses, and make arguments to the arbitrator. They can also depose witnesses and gather written evidence and documents.
After the arbitrator considers all the evidence and testimony, they announce their decision (usually several days after the hearing ends). This whole process can take months, which may sound like a long time until you realize that if it were litigated in the courts, the same case could take years.
The types of disputes requiring arbitration include things like breach of contract, misrepresentation and/or fraud. The arbitration agreement most often used in Mendocino County excludes certain matters from arbitration, including those within the jurisdiction of small claims, probate or bankruptcy court.
Be aware that if a dispute includes the actions of a third party (someone other than the buyer and seller), arbitration usually isn’t worthwhile because the third party isn’t bound by the arbitrator’s decision. For example, if a dispute involves an inspector, insurer, or appraiser, unless they agree to arbitration, they can simply refuse to comply with the arbitrator’s findings.
Even if the buyer and seller did not agree to arbitration in their original purchase agreement, they can still opt to go that route in the event of a dispute. The bottom line is this: there are pros and cons to arbitration, and the best way to know if it is a good choice for you is to ask your attorney. Talk to your attorney for advice; advice WILL change based on the facts of the case.
If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.