What is a Cooling Off Period? An Introduction for REALTORS®
CATEGORY: Advocacy Supporting Consumers
TAGS: Cooling Off Period Practice Tips Real Estate Practice
The BC Government has announced its intent to introduce legislation in spring 2022 to mandate a cooling off period for buyers of all residential real estate. But what is a "cooling off period" and how might it impact you?
A cooling off period, also known as a "rescission period," gives buyers the right to withdraw from a purchase agreement within a specified period of time after an offer is accepted. Without a cooling off period, if a buyer wishes to terminate a contract for reasons other than those laid out within the terms and conditions, they would need to negotiate with the seller and would typically face significant financial penalties or legal ramifications. It's important to note that the government's resources only mention the cooling off period applying to buyers, there is no mention of it applying to sellers as well.
BC already has a mandatory cooling off period for pre-sale developments. Buyers of strata properties under construction have a seven-day period from the time they receive a copy of a signed purchase contract or acknowledge receiving a disclosure statement where they are allowed to withdraw their offer.
While BC will be the first Canadian jurisdiction to legislate cooling off periods for all residential real estate sales, other countries can serve as case studies. For example, in Australia most states have some sort a cooling off period. Here are some highlights:
- For states that have implemented the policy, the period lasts between two and five business days.
- States have exemptions for mandatory cooling off periods, including but not limited to instances when the home is sold by auction or if the buyer waives the cooling off period.
Some states do not have penalties for terminating the contract within the cooling off period, while others have penalties ranging from $100 up to 0.25 per cent of the purchase price. Penalties are intended to deter potential buyers from making offers without an intent to purchase, which can cause issues for the potential seller. If a 0.25 per cent penalty were to be implemented in BC using an average MLS® price of $913,000, that would result in a $2282.50 penalty.
Existing research suggests that a cooling off period is unlikely to have a significant impact on consumers' decisions. Research by Deakin University found that when 60 consumers were faced with a 48-hour cooling off period, none of them changed their minds when faced with a better alternative. The reason behind this lack of change is called "loss aversion," that the cost of losing something tends to be greater than making equivalent gains. For example, this means that the feeling of losing $100 tends to be greater than the feeling of gaining $100. Within real estate, this means that once a consumer has purchased a house, they are unlikely to change their mind and make use of a cooling off period to terminate the contract, even if given with comparable options at a slightly lower cost.
While the government's goal of a cooling off period is increased transparency, it's worth considering the potential impact the policy could have on BC's housing affordability crisis. If implemented, more buyers would be likely to bid on more properties, potentially causing in increase to housing prices. In BC's extremely low supply conditions, this could increase prices by an additional two to three per cent according to initial research conducted by BCREA.
BC's real estate regulator, the BC Financial Services Authority (BCFSA), is consulting stakeholders on the appropriate length of a cooling off period and whether or not to include penalties for exercising the right to rescission. In addition, the Ministry of Finance has also requested consultation on the following consumer protection policies:
- restricting blind bidding,
- mandatory conditions, such as home inspections or financing, and
- other practices that may be identified as consumer protection risks.
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