California Real Estate Contracts: Red Flags to Watch Before Signing
Claire Melehani, Esq. & Steven McLellan, Esq.·
September 2026 ·
9 min read
Before you sign a California real estate contract, you should know that the stack of documents in front of you contains provisions that can limit your recovery, waive your right to cancel, and bind you to conditions you may not fully understand. California real estate contracts red flags are not always obvious — and in a market like Silicon Valley, where purchase prices can reach into the millions, the cost of missing one can be significant. Read this before you initial anything.
Why California Real Estate Contracts Require Careful Review
A California residential or commercial real estate transaction is among the largest financial commitments most individuals and businesses will ever make. The standard California Association of Realtors purchase agreement is a dense document that addresses dozens of contingencies, timelines, representations, and obligations — any one of which can have significant legal and financial consequences if misunderstood or overlooked.
Concrete example:
A Saratoga buyer accepts a seller's counteroffer with a three-day inspection contingency to beat competing bids. During the compressed window, the inspector notes possible foundation movement but recommends further evaluation. The buyer removes the contingency without the follow-up. After closing, a structural engineer confirms significant foundation damage requiring $180,000 in repairs — a cost the buyer bears entirely because the inspection contingency was already waived. The following red flags are among the most consequential and most commonly overlooked.
"Signing a real estate contract without legal review is one of the most expensive shortcuts a buyer or seller in Silicon Valley can take."
Red Flag One: As-Is Clauses and Their Limits
Many California real estate contracts include an as-is clause stating that the buyer accepts the property in its existing condition. Buyers frequently misunderstand the legal effect of this language. An as-is clause does not eliminate the seller's obligation to disclose known material defects under California Civil Code section 1102. A seller who conceals a known defect — a leaking roof, foundation issues, unpermitted construction, or a history of flooding — may face liability for fraud or misrepresentation regardless of an as-is clause.
What an as-is clause does limit is the buyer's ability to demand that the seller make repairs as a condition of closing. It does not limit the buyer's right to conduct inspections, to receive accurate disclosures, or to seek rescission if the seller's representations prove to be materially false.
Red Flag Two: Shortened Contingency Periods
In competitive real estate markets like Silicon Valley, buyers are frequently pressured to accept shortened or waived contingencies as a condition of having their offer accepted. The standard California purchase agreement provides for an inspection contingency, a financing contingency, and an appraisal contingency — each of which gives the buyer a defined period to investigate the property and secure financing before being committed to close.
Accepting a three-day inspection contingency instead of the standard seventeen days, or waiving the financing contingency entirely, exposes the buyer to significant risk. A defect discovered after the contingency period has passed may not give the buyer the right to cancel without losing the deposit. A buyer who cannot obtain financing after waiving the contingency may be in breach of contract and exposed to loss of the deposit or a specific performance claim.
Red Flag Three: Seller Disclosure Deficiencies
California law requires sellers of residential property to complete a Transfer Disclosure Statement and a Natural Hazard Disclosure Statement, among other required disclosures. Sellers must disclose known material facts affecting the property's value or desirability. Disclosures that are vague, incomplete, or that contradict the condition of the property as revealed by inspection are a significant red flag.
Buyers who receive seller disclosures should review them carefully against the inspection report and against any information obtained through due diligence. Inconsistencies between the seller's disclosures and the actual condition of the property may indicate concealment of a known defect and can support a claim for rescission or damages after closing.
Red Flag Four: Liquidated Damages and Specific Performance Clauses
The standard California purchase agreement contains a liquidated damages clause that, if initialed by both parties, limits the seller's remedy for the buyer's breach to retention of the deposit — typically three percent of the purchase price. If the clause is not initialed, the seller may be entitled to sue for actual damages, including the difference between the contract price and the price ultimately obtained on resale.
A separate specific performance clause, also requiring initials, gives either party the right to compel the other to close the transaction rather than simply paying damages. Buyers who initial the specific performance clause without understanding its implications may find themselves compelled by court order to purchase a property they no longer want or cannot afford.
Red Flag Five: Unpermitted Improvements and Zoning Issues
Properties throughout Silicon Valley and Santa Clara County frequently contain improvements — additional square footage, garage conversions, accessory dwelling units, pool equipment, or solar installations — that were constructed without required permits. Unpermitted improvements create risk for buyers because the local authority may require removal or retroactive permitting at the buyer's expense, and lenders and insurers may treat unpermitted square footage differently from permitted space.
A thorough review of the property's permit history through the local building department, combined with a careful inspection, is essential before removing the inspection contingency. Real estate contracts that fail to address the presence of known unpermitted improvements, or that contain disclosures acknowledging them without providing a mechanism for resolution, warrant careful scrutiny.
McLellan Law Group represents clients in Saratoga, San Jose, Cupertino, Los Gatos, and throughout Silicon Valley and Santa Clara County.
Frequently Asked Questions
Key provisions to review include contingency periods and their adequacy, seller disclosure completeness, the actual legal effect of any as-is clause, liquidated damages and specific performance provisions, unpermitted improvements, and any representations about zoning or easements. A real estate attorney in Saratoga or Silicon Valley can identify provisions that create unacceptable risk for your specific transaction.
No — a seller of California residential real estate must disclose known material defects regardless of an as-is clause. The clause limits the seller's obligation to make repairs but does not limit the duty to disclose defects of which the seller is aware. A seller who conceals a known material defect may be liable for fraud or misrepresentation even after closing.
If you waive the financing contingency and cannot secure financing, you may be in breach of the purchase contract — exposing you to loss of your deposit and, if the specific performance clause was initialed, a court order compelling you to purchase the property. Waiving the financing contingency is a significant risk that should only be made with a full understanding of the financial and legal consequences.
Unpermitted improvements are structures built without required local permits — they can affect the property's legal square footage, insurability, and lender appraisal. Local authorities may require retroactive permitting or removal at the buyer's expense. Buyers should investigate permit history before removing the inspection contingency and address any unpermitted improvements explicitly in the purchase agreement.
Any transaction involving unusual conditions, seller disclosure deficiencies, modified contingencies, significant unpermitted improvements, commercial property, or a purchase price representing a material portion of your net worth warrants legal review before signing. A real estate attorney in Saratoga, CA can identify risks and negotiate contract protections that a real estate agent is not permitted to provide.
About the Authors
Claire Melehani, Esq.
Real estate and civil litigation attorney at McLellan Law Group with extensive experience reviewing and negotiating purchase agreements for buyers and sellers throughout Silicon Valley and Santa Clara County.
Steven McLellan, Esq.
Founding attorney at McLellan Law Group, specializing in real estate and business litigation throughout Silicon Valley and Santa Clara County.
ADVERTISING MATERIAL DISCLAIMER — This communication is an advertisement for legal services by McLellan Law Group, LLP. The content is intended for informational purposes only and should not be construed as legal advice. Each case and its facts are unique, and the outcomes mentioned in this advertisement, if any, are not guarantees of future results. Responsible Lawyer: Claire Melehani, Esq., 20665 4th Street, Suite 202, Saratoga, CA 95070.
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Advertising Material Disclaimer - This website is an advertisement for legal services by McLellan Law Group, LLP. Information provided is for general purposes only and not legal advice. Results vary by case. Responsible Attorney: Claire Melehani, Esq., 20665 4th Street, Suite 202, Saratoga, CA 95070
