Should I Choose Arbitration in the Residential Purchase Agreement?

Purchasing a home requires a lot of decisions. Sometimes a choice seems obvious, such as the option to hire a home inspector. In other cases, you might worry that making the wrong choice today will cause unintended consequences later.

Such is the case with the arbitration provision in the standard home purchase agreement. This option is one of only two separately initialed options within the standard C.A.R. purchase form typically used in California, and the choice is yours whether to select it or not.

What is Arbitration? First, it’s important to understand arbitration. If a dispute comes up after the purchase of the home, disgruntled buyers face several potential paths to confront and resolve the problem. One of those choices is litigation, wherein the buyer sues the former owners and/or the real estate agent in the court system. Another option is arbitration.

Arbitration is an alternative to litigation. Instead of going to court, each party is bound to the decision made by an arbitrator. Arbitrators are neutral third parties, typically experienced attorneys or retired judges, and that person (or panel of persons) will make the final decision regarding your claim. Either party can hire attorneys to represent their interests, just as in a court, or you can represent yourself.

Arbitration is often presented as a more affordable alternative to court proceedings, and it typically (but not always) is, but that doesn’t mean the process is inexpensive either. The process, including attorneys and possibly experts, can cost many tens of thousands of dollars. And remember that whatever the outcome, whether arbitration or litigation, the losing party will likely have to pay for the costs and fees incurred by the wining party. That will drive the costs up even higher.

Speed is another potential advantage of arbitration. Litigation can take well over a year from start to finish, while an arbitration typically occurs in perhaps as little as half that time. The arbitration hearing itself is also much less formal that a court hearing, and consequently can be less intimidating to most people.

Is There a Downside? While arbitration can save time (and money, in many cases), one potential drawback is that the decision is final. Since you previously agreed to arbitration in lieu of litigation, you can’t reverse this decision by proceeding to court except in extremely limited circumstances.

Essentially, electing the arbitration clause means that you give up your right to litigation in the event of a dispute. This might be acceptable to you if you know that you wouldn’t want to, or couldn’t afford, an expensive court proceeding. (Very few people can afford a full legal fight!) However, you should be aware of the fact that electing arbitration locks you into this decision regardless of your feelings about the dispute later.

On the other hand, failing to elect the arbitration clause does not mean you give up that option in the future. If a dispute does arise, you can still opt for either litigation or arbitration in the future, but arbitration remains an option only if the other side agrees to it as well.

If you’re considering a residential purchase agreement, we suggest that you consult with a real estate attorney before signing anything. We can explain the pros and cons of individual clauses in depth, so that you can elect the options that feel right to you.

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