Mediation and arbitration are dispute resolution terms included in the California Association of Realtors‘ purchase contracts. They are optional clauses. Read more about what mediation and arbitration is on the CAR website.
The Meat of the Matter
Almost all real estate transactions that I complete, which I am blessed to say there are many of, include mediation and arbitration. That means that both buyer and seller have agreed, in the event of a dispute, to first attempt professional mediation to solve the issue, and if that did not solve the issue, they agree to have their cases heard by an arbiter rather than going through the court/judicial process. Mediation and arbitration is usually significantly less expensive and shorter of a process than going through the complete judicial process (this not always being the case, but often — according to the California Association of Realtors).
The Red Flag
When an offer is presented on a real estate listing and either the buyer or seller refuses to initial mediation and arbitration — which is their right, there is usually a reason why that side feels they would be better of not agreeing to mediate and arbitrate. The biggest reason that I have found, in my experience: The person not signing mediation and arbitration is an attorney or is already working with an attorney or has a family member that is an attorney. Why does that matter? What is wrong with legal protection? Nothing, but the point is: The side agreeing to mediation and arbitration should realize that the other side has the ease of access and what I deem to be a major legal advantage: Already having legal counsel and potentially legal counsel for free (themselves) or at a discount (family). That is: If the other side is an attorney, they have a major upper hand in being able to begin & carry out potentially costly legal proceedings with their own labor — to which the other side would have to hire someone. Many attorneys now charge $300+ per hour. When two parties get together and neither are attorneys and neither are already working with an attorney, both sides often feel equal. However, when one side has representation already, the other side should take this into consideration when entering the deal.
In other words, the state of California requires the buyers and sellers disclose if they are licensed real estate agents because there is deemed to be an advantage. I would argue that buyer and seller should be required to disclose whether or not they are attorneys — although most voluntarily due anyway.
Here’s the Thing
Real estate is meant to be win-win. No one likes to have disputes and my goal is to avoid disputes at all costs by always doing the right thing, properly disclosing information, and being upfront with all parties. When one side feels like they have a disadvantage, the deal tends to be harder to complete. In fact, here is my inspiration for this posting: In the last year, I have had 2 transactions cancel and subsequently resell (both my listings). Out of the 35+ closed transactions this year, that ratio is pretty low. However, in the last 30 days, I had two additional deals — both where the other party (not represented by me) either was an attorney or had a family member that was an attorney. Both sides refused mediation and arbitration. Both deals cancelled within 10 days.
This is just my hypothesis, but I tend to find that when opening escrow on mutual terms is a struggle — or someone feels disadvantaged — the deal generally does not get any better through escrow, it usually gets worse.
Important note: My clients still love me and we’re moving on — so it’s not me!
The Take Away
No one should misconstrue that I am suggesting mediation or arbitration is better or that waiving mediation or arbitration is bad. All I am saying is that buyers and sellers should be prudent that IF someone waives mediation and arbitration, it could be wise to consider if the other party has a competitive legal advantage. Some buyers that I have worked with have considered this and have refused to open escrow without mediation and arbitration — they would rather find another property. Others do not mind and take the leap of faith that everything will work out. So there is no right or wrong answer, but I always suggest considering all facts — I’m all about full disclosure and letting my clients make informed decisions.
Note: I am not an attorney and none of this should be deemed legal advice. I am a real estate broker. Not all red flags are bad. So please don’t sue me for saying that people should recognize that not signing mediation and arbitration may be a sign of an unequal playing field. Thanks.
Chart on Mediation vs Arbitration vs Litigation
Post written by Realtor Kevin Paffrath at “Meet Kevin“, the amazing real estate agent and brokerage serving Ventura County, including Camarillo, Ventura, Oxnard, & beyond. Writing for home buyers, sellers, investors, and anyone with an interest in real estate, Kevin thanks you for reading.