Here in the San Francisco Bay Area, two types of purchase and sale contracts for real estate are the most commonly seen–the C.A.R. form from the California Association of Realtors and the PRDS form from the Silicon Valley Association of Realtors.
Both of them have an arbitration provision in the residential purchase contracts that the buyer and seller can voluntarily agree to.
That’s right, the arbitration is optional and the parties do NOT have to agree to arbitration.
Before enumerating the pros and cons of arbitration, it is important to understand what arbitration is. Arbitration is agreeing to use a private judge to decide your dispute should one arise. The arbitrator may be a retired judge from the bench, or a seasoned attorney with relevant area expertise. The result is binding, and with no right of appeal even if the arbitrator wrongly applies the law (which does happen on occasion).
Arbitration has some advantages, but can have more disadvantages depending on the type of dispute that arises over your house. Suppose you are the buyer and you discover the house has a massive water damage problem that was not disclosed. Even worse, your agent told you to accept the old home inspection report instead of buying a new one. Now you have a claim against both people but you MUST arbitrate with the seller and sue the Realtor in court. Yes, you’ll be funding two lawsuits.
Why isn’t the Realtor required to join the arbitration? Because they are not a party to your contract. Of course, the Realtor is also usually the one that tells you that you must initial the arbitration provision and it will cost you less. That is false as it will only cost you less if you don’t sue the Realtor.
Unfortunately, this failure to disclose scenario happens often and as a result, the safer course of action would be to reject the arbitration provision.
The advantage in arbitration is that it can be cheaper than court litigation since the arbitrator will often reduce the volume of discovery and law and motion disputes that can arise. To enjoy that benefit, in the event you do have a dispute later with the seller, you can always agree to opt into arbitration if no other parties are involved.