Explaining San Francisco’s Property Purchase Agreement: Our Ticket to Your Success (SFAR) from Kevin Ho and Jonathan McNarry, Vanguard Properties

THE MIGHTY MOUSE, OR THE STRONG PEN?

Writing A (Winning) Offer in San Francisco

Well, it’s time to write a — novel? sonnet? love letter? No, it’s time to write a winning offer contract that will win property in San Francisco’s competitive real estate market

After all of the open houses, disclosure review, inspections, debating, comps analysis and investigation comes down to this: will we be able to write a winning purchase offer contract that will not only carry the day but get you the property?

It’s our job to present a winning offer for you. We take this job seriously. Even if an offer is a simple placeholder offer while we get our terms and supporting materials together it’s better to have submitted something more than just a verbal offer as verbal offers are invalid in California.

Being first in terms and time matters. Instead of getting frustrated by losing offer after offer, we have told our clients to focus on writing contracts instead of offers. We need to present an offer they can’t refuse. The hard truth is that many sellers are greedy and really want offers that are: all cash that closed 2 weeks ago with a free rent-back period during which they get a basket of muffins from you every two weeks. Gold bullion preferred.

Okay, that’s not going to happen, right?

So what’s a buyer to do? We will come as close to that as possible. This involves really understanding what the sellers want. We use our great relationships in the City’s brokerage community to investigate the bigger picture for our clients and craft an offer to match. Yes, many times it’s just the number a seller is after. But there are just as many times where the sellers care about who’s buying their home.

And remember, sometimes offer terms will trump price. There is no exact right or wrong way to make an offer but it’s important that we make our offer the best one possible.

SOME WINNING TERMS

Real Estate transactions are as individual as people are; no two transactions are exactly alike. But there are some universal guiding principals that our clients have succeeded with:

  • All-cash, no contingencies, 7-day close

  • Contingency-free financing (you’ll buy it even if your loan doesn’t come through, i.e., you have enough cash otherwise to buy property but are getting a loan for the mortgage deduction/to lock in low interest rate)

  • Financing contingencies shorter than 21 days

  • Purchase of seller furniture (not the staging mind you)

  • Agreement to pay transfer taxes (a seller cost unless it’s new construction; most often used in probate sales)

  • Buyers pay commission costs (commission rates aren’t negotiated but sometimes buyers will pay it)

  • A reserve amount below the contract price for if there is a shortfall between the appraised amount and the contract price

  • No appraisals

  • Short 72-hour inspection periods

  • Seller-financing

  • Free rent-back periods whereby sellers keep possession of property after Close of Escrow

  • Long, long escrows to close in a different tax year

  • Promise that buyer would take seller out on a police ride-along (really)

Seven Pages, Millions of Possibilities

WHAT EXACTLY ARE YOU SIGNING?

Anatomy of the Our Purchase Contract

Our clients stand out from others because we use the form template documents listing agents expect smartly. Our clients get the benefit of Kevin’s attorney experience and MLS committee experience too.

We know that San Francisco’s real estate is unique unto itself — with its high prices, tenancy-in-common units, rent control laws, HOAs, co-operatives, pest issues, and more.

Our marketplace is so nuanced that Realtors seldom use the standard statewide purchase contract from California’s Association of Realtors. The local Realtor Board created and uses its own standardized purchase contract: the 7-page SFAR Purchase Agreement. This standard contract and its accompanying standard addenda are used in nearly all of our residential purchase-sale transactions in the City regardless of price point. And while California’s standard contract is disfavored for the City many of the standardized California forms are used in conjunction with San Francisco’s contract.

Local agents (such as yours truly), brokerage managers, real estate lawyers and sheer experience all combine to guide the continuing refinements the Standard Forms Committee have put into updating this essential document so that it tracks recent market practices and developments.

The latest version of the form contract hit our marketplace after 12 months of agent input and numerous revisions upon the most current version which the City’s Realtors have been using for the past few years.

Having personally worked the Committee in reviewing and suggesting various revisions based on Jonathan’s and my collective sales experience, I was able to add our two cents to the final version discussed below. And take it from a lawyer-turned realtor who not only uses the SFAR Contract every day but as someone who read contracts everyday as a lawyer, little changes can have profound impact.

Note: Remember this commentary is only generalized and informational; ask us for details.

Page 1: The Big Picture Stuff

There’s no place to start like the beginning.

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The Deposit

The Deposit. The 3% Initial Deposit now defaults to being an EFT that needs to be transferred to the escrow company within 2 days of a buyer’s contract being accepted (down from 3 days);

Getting a Mortgage?

Time to Get Mortgage Loans Approved. Recent lending changes in light of the 2008 financial crisis ensured that anyone borrowing a mortgage loan is impeccably qualified. And in San Francisco, buyers who want to be able compete against all-offers are usually fully underwritten before making any offer. Up until October 2015 this usually meant financed purchases could have loan approval within 14 days meaning the entire escrow could be done in 21 days. Legislative changes, however, have only caught up and have now added a 3-day waiting period before loan papers can be signed. This is a long explanation of the 2015’s Contract’s change from a 30-day loan approval period to 21 days.

Appraisal Anyone?

Appraisals and Reserve Amounts of Cash. Real estate prices and values in San Francisco have surged since 2012 and buyers have been bypassing using appraisal contingencies so as to be competitive. In most cases this works out just fine as a property will typically appraise at the buyer’s proposed contract price. This matters less to all-cash buyers but can impact buyers who are making a purchase based on a 20 percent down payment with a bank providing the other 80 percent of a property’s fair market value (which is what the appraiser determines); what really matters is the ratio of down payment to loan. So if an appraisal comes back for less the price the amount the lender a buyer would be required to contribute more cash to make up the difference. If a buyer was already willing to do that they may just drop the appraisal contingency altogether or simply state that they would be willing to put a bigger down payment — we’ve used those tactics before with great success. The 2015 Contract now has a fail safe built in as it allows a buyer to proceed with a property purchase so long as a property is appraised at a certain price (below the contract price)

How Long Will Until We Close?

Close of Escrow is when? Whether it’s 7 days, 21, 30 or 90 days we have to set a time limit and timeline for a proposed transaction. The second most important factor in real estate apart from location is timing. This is where the buyers tell the sellers how long their proposed offer and escrow will take (escrow = the time from when an offer is signed and accepted by both parties until the time when the title deed transfer takes place). While shorter escrows are preferred in most cases  there are times when a longer escrow is preferred. It just depends on each circumstances.

The Escrow Company and Officer

The 3rd Party neutral. The people who help get us from having a contract accepted to get the transaction closed with the change of title recorded with the county is the Escrow Holder and the Escrow Officer. Because escrow duties are usually handled by the company that is going to be issuing title insurance for your purchase most agents use the terms Escrow and Title Company interchangeably.

The Agents

About Who Represents Who. The 2015 Contract puts the agency confirmation language that was buried in the last version front and center on the first page. It also says that Sellers are okay with the concept of dual agency, which is when the same brokerage represents both the seller and buyer — a Vanguard listing is sold bought by buyers working with a Vanguard agent. When the same person represents both a statewide disclosure and consent form should be used to as there are certain potential conflicts of interest issues that arise; although, these issues typically don’t rise to the level of an attorney’s conflict of interest.

Page 2: The Property’s Title, What’s included and Your Inspection Rights

More details about the purchase and inspection rights

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The Title of the Property Is...

Why Title Matters. In the end, all of this effort boils down to you getting a title deed over a piece of real property. Because it is so important, a buyer’s review of a property’s preliminary title report is actually a contingency upon which a buyer could, in theory, cancel a transaction if they don’t like what they see. The buyer has a default 5 days to review a preliminary title report’s contents. In practice, the listing agent would have already distributed a copy of the report as part of the property’s disclosure documents.

Title Insurance Matters, Here's Why

What’s in a Preliminary Title Report anyway? The title company does research on the obligations attached to a property’s title deed. They do this by examining county records to look for liens and items impacting the seller’s ability to sell title over the property ‘cleanly.’  Thus the report they prepare will include any liens (mortgages, judgments, security, unpaid tax property bills), assessments (parcel taxes and school bonds for example) and other restrictions (CC&Rs for example) so as to give the buyer and their lender a complete ownership picture for a given property.

While title insurance is technically optional, in reality it is essential. Most policies will cover any defects on title that are later discovered like hidden heirs with previously unknown claims on a property, or errors in descriptions of easements and encroachments that impacts an owner’s use of their land. The buyer has the prerogative to designate which title company and a good title/escrow company is worth its weight in gold as these folks will go the extra distance to help a transaction close on time because the escrow folks not only handle the deposit but they’re the ones who prepare the lender’s loan documents and secures a final pay-off amount for the seller’s mortgage or taxes.

Items Included/Excluded

What’s Included Specifically. What do you want Included with the purchase? The 2015 Contract now includes a section where you can buy the furniture (if it belongs to the seller). Also, in San Francisco, appliances are usually included with the sale; other areas are different, for example, on the Peninsula will take their refrigerators with them! But to guard against any ambiguity the 2015 Contract adds check boxes and space to list any items the buyer wants included. Of course, sellers may also want to exclude items (mostly light fixtures) too. Remember, staged furniture doesn’t usually belong to the sellers either.

The Inspection Rights Given

From the Contract itself, here’s paragraph 12’s inspection language:

Buyer’s obligations under this Contract are contingent upon Buyer’s written approval, at Buyer’s sole discretion, of the physical condition of the Property, including parking and storage availability, neighborhood issues, and any other matter reasonably affecting the Property. Within the time specified below, Buyer shall have the right to conduct inspections of the Property by contractors, engineers, architects, and/or other experts retained by Buyer, which inspections may include, but are not limited to, a general property inspection, a structural pest control inspection, the foundation, framing, roof, plumbing, sewer lines, heating, air conditioning, electrical and mechanical systems, built-in appliances, retaining walls, geologic conditions, pool/spa and related equipment, environmental hazards (such as asbestos, mold, electromagnetic fields, radon gas, lead-based paint or lead hazards, fuel or chemical storage tanks, and other materials or products), noise transmission, water/utility use restrictions, and location of property lines. Brokers/Agents do not certify or verify lot size, boundary lines or interior square footage, information contained in inspection reports, advertising, or representations of others. Seller shall permit the inspections upon receiving reasonable advance notice from Buyer. Buyer shall provide Seller with copies of all written reports received. During the due diligence period, Buyer may request that Seller make repairs or credit Buyer for the estimated costs of identified repair work, but Seller shall not be obligated to agree to any such request. If Buyer does not remove this contingency within 15 or ___ days after Acceptance, either Party may terminate this Contract.  (Italics added, bold original).

 

 

Consolidated Inspection Rights

2 Inspection Types Merged. The last, and perhaps most major contract change deals with a buyer’s right to inspect a property before a transaction can close. The California Legislature has codified a pro-buyer, pro-disclosure, perspective in the relevant statutes. Among the most solemn of rights is the right for the buyer to essentially reject a property for any or no reason within a certain time period without the risk of losing their 3% Initial Deposit. The relevant contract language creates a loophole so wide that you could drive a cable car through it and can really dilute the appeal an offer has to a seller who usually wants to go with a confident, clear and certain offer from buyers who won’t flake out on their proposed purchase.

And, because San Francisco is in a mild climate, we have pests like terminates, woodboring beetles and fungus, there used to be a separate inspection clause giving the buyer the right to request this type of inspection. Considering the average repair cost for an average house in the City is about $8,000-$10,000 (repairing decks, door thresholds and mudsills are the usual items you’ll see) this could matter and create an unwanted negotiation point during an escrow. Moreover, banks previously required these issues be mitigated before they release their funds. Against this backdrop, most sellers have gotten into the practice of doing pre-sale property inspections and giving prospective buyers copies of reports containing findings. Because of this most buyers would waive the right to do a structural/pest inspection, which was separately listed in the previous contract. This led to a weird tension between a buyer waiving the right to do a pest/structural inspection but retaining a much broader inspection right. The 2015 Contract gets rid of that paragraph and the generalized inspection right remains.

Page 3: On Waiving Inspection Rights, Condos and Income Properties

If you waive inspection rights, if you’re buying a condo or if you’re buying an income rental property

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On Waiving Inspection RIghts

Want to waive those inspection rights? After listing all of the possible things that can you can reasonably investigate  on the page before (remember destructive testing isn’t usually allowed before you buy a property), you then have the section that allows you to disclaim all of those rights affirmatively. This makes sense if the sellers are providing you with inspection reports (which will be relatively limited but objective as the folks doing the inspecting would be the ones we’d hire anyway) or if you’re planning on doing work or remodel a property. Also, in the sellers’ market we’ve just seen from 2013-2015, most buyers waived these rights to be competitive. One way of balancing competitiveness while also demonstrating that credibility to a seller is to do your own pre-offer inspections and visits with us and/or other professionals like contractors, engineers, architects, plumbers, electricians among other folks.

If You're Buying A Condo

If you’re buying a condo then you’re buying a pre-defined, specifically separated 3-D space in a building. Part and parcel of that is that you’re agreeing to be bound by the building’s governing documents (which are recorded with the city and county that run with the land) and the decisions the Homeowner Association makes and the dues they issue. There’s a lot of variation when it comes to condos in the City so ask us if you have questions as the experience will be different in a 2-unit building when compared to a 200-unit one.

If You're Buying An Income Building

Unlike Most Places Buildings Come with Tenants in San Francisco and a new landlord does not get a “reset” with the respect to tenants and their leases. Because there are loads of protections for tenants this paragraph contains a lot of important terms and seller obligations. We’ve represented both buyers and sellers in these cases and can help you too.

More on Tenant-Occupied Properties

If you’re buying a property with tenants occupying some or all of it there will be a series of documents you’re entitled to getting that discuss rent rolls, leases and the types of protected classes that tenants may be claiming. And even though the contract requires sellers to do the best they possibly can, a lot of times this type of information is incomplete. If you really want to know about a property’s rental or past eviction history (these issues matter for various reasons) you may have to go to the Rent Board in person at Van Ness and Market.Also, you’ll see that buyers have the right to walk-through the property before we close escrow (is it still there?) and you’ll see a place where a home warranty can be purchased. . Home warranty/protection plans are generally offered by third-parties (often affiliated with the escrow/title company) to a buyer or even a seller. These of the plans may provide additional protection of certain systems and appliances in the home. It’s always a good idea to get these programs as they cover most appliances and home systems. If our property is new construction, then certain statutory protections will apply too as will original manufacturers’ warranties. We usually take care of this for our client unless circumstances dictate otherwise.

Page 4: Documents Sellers Need to Provide & Other Disclosure Items

California is disclosure-heavy and this section discusses this stuff in detail

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Some Kitchen Sink Items

The Disclosures. California’s Legislature wants you to be as informed as a buyer as possible and therefore requires sellers complete standard forms and comply with various requirements mandated by San Francisco laws and regulations regarding energy and water conservation. All of this applies unless the property is being sold by a trust or the owner has otherwise passed away.

Page 5: Walk-Throughs, Warranties and More.

And there’s more to consider

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Walk-Throughs and Warranties

Buyers have the right to walk-through the property before we close escrow to verify its condition  (e.g., is it still there?). The walk-through is not a contingency however. Yes, we can overthink this point because if a property isn’t there or has changed so much the contract may well be impossible to complete, but let’s not worry about that now.

Also you’ll see a place where a home warranty can be purchased. Home warranty/protection plans are generally offered by third-parties (often affiliated with the escrow/title company) to a buyer or even a seller. These of the plans may provide additional protection of certain systems and appliances in the home. It’s always a good idea to get these programs as they cover most appliances and home systems. If our property is new construction, then certain statutory protections will apply too as will original manufacturers’ warranties. We usually take care of this for our clients unless circumstances dictate otherwise.

Page 6: Should Something Go Wrong…

Most times contracts are clear on what needs to happen and by when. But if disputes arise mediation and arbitration are the preferred ways of resolving the dispute

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Liquidated Damages (aka, the Initial Deposit)

In most cases, the greatest amount a seller could recover for buyer failing to perform contract is the 3% Initial Deposit, which is known as liquidated damages if things should break down to the point where damages are due. Buyer breach doesn’t mean it’s automatically forfeited though. The three percent is meant to balance seller damages (additional carrying costs like taxes and mortgage payments, additional staging costs, lost offers) and a buyers inability to close a sale.

Mediation and Arbitration

So if things break down to the point where negotiations just don’t get you anywhere or if there’s a dispute the contract lays out a mediation procedure and, if that fails, an arbitration procedure. As a lawyer and mediator I can tell you that mediation is where people try to talk it out and reach something amicable together. Arbitration, on the other hand, is more legalistic and is usually decided by a retired judge arbitrator. It’s akin to a lawsuit but without evidence rules.

Tick Tock Termination?

And if we have deadlines in the contract and if they’re not met by the date agreed upon then a party is in breach. This means the other can tear up the contract and move on, right? Not really. There’s a built-in Notice to Perform document procedure that allows the breaching party a cure period (no, not the band) of 2 days. Sometimes this number is critical if there’s a better backup offer in play and the sellers want nothing more than to kick you out.

As we said, it’s not an instant termination like you’d think, Instead there is a built-in cure period of 48 hours and that’s only after the seller delivers a Notice to Perform or Cure document. What this really is then is a grace period for a buyer to remove their contingency (e.g., inspection, document return, appraisal, financing). Importantly, the 48-hour clock only starts to run once the Notice has been sent so there is a bit of flexibility. Conversely, if there’s a better backup offer, for example, you may get a Notice 2 days before the deadline.

Page 7: The Home Stretch

We’re near the end! Here is where additional terms might be included along with how a seller can terminate the contract if a buyer fails to do as promised

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Your Response Deadline!

There are 3 big items on this page: The response deadline is the first. The response deadline to our offer is usually 24 hours but that may be changed to fit the circumstances and may be used strategically too. We once had an ‘exploding’ offer with a 4-hour response time. On the other side of that we can set a specific time to respond, like right before an open house for example.  

Make It Official!

And it’s time to sign the document so it can be considered valid. Electronic signatures via DocuSign are perfectly acceptable under most practices. Usually only mortgage documents need ‘wet’ signatures.

You did a great job presenting your client. We should all be proud of what we do in this business and your presentation really just jumped off the page. You’re a great asset to your clients.

— Listing Agent, Sotheby’s

Kevin and Jonathan make a great team to help with the home buying process — their collective knowledge, hard work and persistence landed me with my apartment. They understand the market well, they have a good pulse for prices and bids, have a great eye for aesthetic and design. I would highly recommend them!

— Siran K.

Thanks Kevin!!  We love our new house!  It's absolutely perfect for us and we are still amazed that it's actually ours now.

Buying a house is complicated as there are numerous factors to consider and decisions to make. You helped us understand all of these, and you made yourself constantly available to answer our questions. We feel so lucky that we had you on our side;  without your help and guidance, none of this would have happened. You were friendly and helpful, but also a consummate professional throughout the entire process.  We highly recommend your services to anyone else who might be interested in buying or selling a home.

— Patch K.

Kevin's enthusiasm with his profession was apparent when I first met him at an open-house he was hosting. Kevin not only helped us find a new home in the ideal neighborhood, he also managed to sell our condo (very shortly after) way above asking.

— Ron & Rick

I can't say enough about how great Kevin was an agent.

— Inga W.

If you have Kevin on your side, I think you will end up with a real advocate for your needs who can streamline the entire home buying process for you.

— Haas L.

Kevin has a great sense of humor, connects immediately with his clients and approaches real estate through a personal lens (not as a business sale). I highly recommend Kevin to anyone interested in a reliable, efficient and personable agent! He is wonderful.

— Nora H.

We were absolutely delighted with our purchase and Kevin was integral in the process and could not recommend him more to others.

— Mitchell & Debbie

Nobody puts in the time and effort you guys do.

— Howard E.

Kevin is fantastic — highly recommend! We worked with Kevin as our buying agent and he was superb. He invested considerable time and energy to help us understand how the market and process works. And he is super-responsive, even to late-night emails/texts which was great due to our work commitments.

— Ross & Sarah M.

Kevin is great! He is super knowledgeable, energetic and fun to work with. I'd definitely recommend him for your home purchase.

— Brian W.

There were several factors that made my transaction slightly different than the norm, but Kevin handled them all seemingly with ease and I got a new home that I love in a very tight timeframe.

— Jason S.

[Kevin and Jonathan] held my hand through the insanely stressful real estate process of San Francisco.

— Graham W.

We couldn't be happier with the service we received from Kevin. He's personable, helpful, tech-savvy and extremely dedicated!

— Aaron and Ashley

I was so impressed by his legal knowledge of housing, his depth & breadth of knowledge in the area and his true passion for real estate and working with buyers to find the perfect fit.

— Mandy M.

You are an incredible agent — sincere compliment btw!

— Amy H.

Kevin was instrumental in helping me find the right place for me and writing a winning offer for my new condo in Alamo Square. I knew the San Francisco market was competitive, but I had no idea how fast-moving and short on supply it was. Kevin was the perfect agent to handle these difficult conditions.

— Mike P.

Your clients would have gotten the property if they listened to you.

— Micheal

I love the way how you inspire your clients. They're lucky to have you!

— John

He focuses on finding a home that will fit his client's lifestyle. When he reviews open houses, he discusses what aspects of the home are good as is and points out ways it could be improved to meet one's hopes and desires.  He's looking for a match, not just a sale.

— Keli W.

The biggest compliment I can give to Kevin is he never stopped trying to find us the "right property." It paid off as the place we found wasn't even on the mls yet. Thanks again Kevin!

— Jay L.

I have worked with many agents. Kevin always makes himself available and is willing to go the extra mile for his clients. He is helpful with ideas and brainstorming. He definitely has a passion for real estate.

— Edward G.
Kevin is incredibly patient, and will spend the time with you. He's not pushy and wants to make sure you're very comfortable with the places you are seeing, as well as budget and timeline. He truly knows about all available properties — not just what's on the market, but more importantly, what's coming on soon so that you get early previews.
— Smitha B.

We bought our house a year ago and Kevin was super responsive, incredibly helpful and full of knowledge. He was the perfect guide in navigating what can be a complicated and confusing process.

— Christel

Kevin and Jonathan have relationships with the broader broker community which is incredibly valuable while buying in a complex market such as SF.

— Simran K.

We appreciate all you have done to help us. We were so afraid that the house wouldn’t sell, but it did and for more! You have worked a miracle inside and out!

— Sally & Gene B.

We didn't even think of any other agent when we decided to buy a house again. It makes a difference when your agent goes out of his/her way to sell you to the seller! As long as Kevin's in real estate, he has customers in us.

— Jay S.

Kevin sends all his clients weekly updates about new homes that are available and how the market is looking. He helped us find the perfect house and we couldn't be happier. I highly recommend Kevin as a real estate agent!

— Dana & Andrew N.