Pens to Paper, or Should We Say Mice to Click Box?
The 2022/23 San Francisco Purchase Contract Marks a Slight Departure from What Came Before
Instead of the typical incremental changes and revisions, the San Francisco Association of Realtors released a new form contract at the end of 2022 that had a bevy of seemingly subtle changes that were actually quite substantial causing confusion and consternation among the agent community (a revision is in process and is expected mid-year).
The changes underlying this latest version have been debated for a long time and underscore a bit of pushback against the sellers’ market we’ve had in San Francisco starting around 2013 by requiring buyers to go through a few extra steps instead of being able to make completely non-contingent offers on the face of the contract itself. There is more nuance that we can discuss with you but suffice to say, whether it is this version of the contract or larger macroeconomic forces at play, our marketplace is different in 2023 than it was in 2013.
We will go over the document briefly below but do remember that each situation, property and set of parties is different and unique; sometimes even with the same property there are new considerations at play that come up over time (i.e., price changes, agent changes, changes in tenancy, among more). So it behooves you to not only talk to your agent (which hopefully is us) but also to a qualified attorney (we can refer you those) should you have any questions. Yes, Kevin is a licensed and ’active’ California attorney, who can speak to the contract below, but he would also refer you to an attorney if there were big and meaty questions.
The Factors Behind a Good Offer and the Safeguards the SFAR Contract Provide
The contract is one that has evolved just as the market has evolved here. Using the statewide version here will solicit an almost allergic reaction from agents listing properties for sale as there are so many inapplicable provisions and timelines in the California versions versus conventional San Francisco custom and practice.
The Four Element Problem
Before we delve into the document and text, we offer the following, law-school-like question: what is the best way to use the contract to balance the following elements underlying the contract itself and the process that its a part of. How you decide will depend on your tolerance for risk, how competitive the market is and how long you plan on holding the property you are attempting to buy.
Reassuring the other side
Being the appealing party
Trusting the process
Page 1: The Opening Act and Big Stuff
Shall we get started?
The Important Stuff
There is a lot to cover here. So, let’s get started...
Starters: Who and How Long the Offer is Valid
While the fine-print says 3 days to respond (like the statewide version) most offers in San Francisco will expire after 24 hours at most. Strong offers or preemptive offers may have as short as 4-hour responses deadlines. We always say that if you miss a response deadline as a seller, you simply write a clause in response that says that the for purposes of getting the deal done, the counter offer is considered valid. Further conduct will ratify that clause. Note that if you’re getting a TIC or Co-Op additional forms will be needed.
About the Agents and Brokerages
Interesting the last sentence says that agents are not part of the contract but, the reality is that, in an informal manner, agents are very integral to the contract. Formally, the brokerage and agents are third party beneficiaries. This section is a key to confirming that each side has an agent or that both sides are fine with having the same agent — dual agency. Also, with the reality of consolidated brokerages, it’s inevitable that there’s bound to be agents from the same brokerages competing for their clients for the same property as a colleague is.
The Escrow Holder/Title Company
In San Francisco, the key roles of Escrow Holder and the Title Insurance company are usually the same company (others places especially in SoCal they are really different companies) as the buyer is free to pick who they will get title insurance from while the seller and the seller agents can dictate which company will be the Escrow Holder — the third party neutral company that handles all the money and title transfer details of the sale). San Francisco agents will use “escrow” and “title” interchangeably. There is little choice for a buyer to move title in certain probate sales, multiple TIC unit sales happening at once, or new construction sales, otherwise we really do like bringing title to folks we’ve worked with for a long time.
How Long the Purchase Will Take — Closing Times
We move fast in San Francisco when it comes to selling properties. Unlike most places where an escrow (the time from when sellers accept a buyer contract to closing) can take weeks if not months, most San Francisco escrows take about 25-30 days for most single-family home sales and condo sales. TICs usually take about 45 days; same for multi-unit and some commercial transactions (where 60-90 days is more common). These are calendar days but you’ll see there’s a thing about holidays and weekends. For folks getting a mortgage, our advice has been to close on any day except for a Monday so you don’t get charged interest over the weekend as funds usually arrive on one day with the sale’s recording taking place the next day (although same-day special recording is becoming less special and more common these days).
Practically, 7 days is almost too short (for cash purchases), 10 is more ideal. Quick financed offers can be ready to close in as little as 8-10 days, with 14 being especially fast and 21 days still being good. More conservative lenders can close in 25-30 days. TIC loans used to take 45 days or more, but in addition to seeing 30-year TIC mortgage rates come into vogue over the past few years, they took can close in just 30 days is all the ducks in the TIC are in a row.
The 3% Initial Deposit and...
Close watchers of this form (and we know you are), will notice that the line for “non-contingent” financing is gone. In fact, there is no way to write a truly non-contingent contract using this document alone any more with this edition. More on that later.
The Initial Deposit is the only one we usually use in San Francisco unless there is a very long Escrow and that is usually 3 percent of the purchase price that needs to be wired to Escrow within 2 business days by the form, but in practice most listings agents want the Initial Deposit in within a single business day as it’s a question of giving sellers reassurance and certainty that the buyers are legitimate and serious ones. This 3 percent deposit is usually the most you can lose if you breach the contract and fail to close on your purchase, but although rare, it’s important to note that there is a lingering risk that you could lose more if you never put your deposit into escrow in the first place.
We usually don’t use additional deposits or other financing here (e.g., seller financing/carry-back loans, construction loans or private, hard-money loans).
The cash balance total takes your 3% deposit into account. For example, if you’re doing a 20 percent cash down payment, 17 percent would be due when we close. Factor closing costs to be in the 1 percent range of the purchase price for the owner and lender’s title insurance policies, recording and notary fees and any prorated property taxes due at close depending on where we’re at in the calendar.
The Appraisal Contingency (Different than the Financing One)
Usually only used by all-cash buyers wanting to make sure they weren’t overpaying (which also has some inherent inconsistencies), most people getting mortgages would consider an appraisal an implicit part of any financing approval, right? The lender approves you and then approves the house.
Now the appraisal contingency sits apart from the financing one. In a nod to a strategy we deployed years ago, the appraisal contingency also has a place for you to say that you’ll still buy the property even when the appraisal falls short of the contract price, meaning you’re agreeing to make up any shortfall between the appraised price and the contract price. This also explains why any offer that has a greater than 20 percent down payment Is looked upon more favorably. Example: Contract price Is $1M. Lender will lend an 80 percent loan-to-value mortgage (which Is the backwards way to say you’re doing 20 percent down). Your cash = $200,000, Lender’s cash = $800,000. Appraisal comes back at $900,000. Bank will now only lend $720,000 instead of the $800,000 and there’s an $80,000 cash balance that needs to be taken care of in order for us to close. Here are the options:
If you had an appraisal contingency, you could formally move to cancel the contract and get your deposit back. The sellers will now have to disclose that the property didn’t appraise If they’ve been sent the appraisal. It can turn Into an unforced game of hot potato
You could try to negotiate with the seller for a new price, or maybe even a seller-carry back depending on the circumstances, we put the odds at 60/40 that this may get results.
You could accept the low value and put more cash down ($80,000).
You could challenge the appraisal, which can take a week or more and involve getting a second appraisal.
Now some more color:
If you were putting down $300,000 originally, this would be a non-issue as you were never borrowing 80 percent of the home’s value anyway. Whether you have an appraisal contingency or not doesn’t matter to you but It will be received better by the sellers and their agents as It’s one less escape route for them to worry about.
Is this Your Primary Home? Seller Rent-Backs
Lenders care about paragraph 6. If this is an investment property purchase some lenders may require a larger cash down payment because they think there’d be a greater risk of you defaulting on your investment property’s mortgage than your own home’s mortgage if you fell on hard times and were given the choice. That being said, once a purchase mortgage is closed, most lenders bundle lots of mortgages together to sell their mortgages off as securities while leaving individual borrowers to loan servicers who may have little to do with your original lender.
A perk that works wonders in some situations is the buyer giving the seller some extra time at the property after the purchase closes. Referred to as the seller rent-back form colloquially even though the lawyers chimed to rename the form as the Seller’s License to Remain/Use Property After Close.
Page 2: The Big Chart and Stuff You Get
Drilling down to some of the details.
Charting Out Timelines and Deadlines
Rather than have them scattered throughout, here is where we are supposed to tell the seller how long we want things to take and which contingencies we want.
The Big Chart & No Non-Contingent Offer Contracts Anymore
These two paragraphs are the among the biggest change to the standard contract that both track the statewide purchase contract but also tracks a changed market where there is slightly more balance skewed towards buyers so they can’t make as hasty or rushed decisions as they might have in an ultra-competitive, low mortgage-rate market. Only by just a bit though. Whereas previous versions allowed you to write a non-contingent offer using the contract alone, this version requires a buyer to do so affirmatively by requiring a Contingency Removal document accompany any offer, even if it is to waive all contingencies. While it may seem like just an extra step, the drafters of this version wanted to allow room for that extra bit of conversation or contemplation before a buyer gives up all of their “get out of jail free” cards.
If It is Bolted Down It Stays...
If something is bolted down or installed (like light fixtures, curtains and window hardware), it’s usually included with the purchase unless otherwise stated (as per subd. C). Note that appliances won’t come with warranties from the sellers, this is why we usually get our clients a home warranty for the first year they own. There are times, however, where original manufacturer warranties apply if the sellers got new appliances for the sale.
How About those Solar Panels?
Usually related to leased solar panels, this clause is a more technical one in that it speaks to any additional creditor obligations that can be tied to the home’s title apart from the seller’s mortgage. We’ve seen this arrangement used for state-sponsored programs where AC is installed or other energy or home improvement elements. They will likely be used more in the future as the Bay Area comes to terms with the all-electric mandates for home systems coming online in 2030. In any case, looking to the terms of the lien, if they can be transferred (if you want to assume them) or if they need to be paid off with the sale is something the title folks should assist on too as these items should be listed in the preliminary title report.
Page 3: Stuff We Get to Do and See + the Inspection Contingency
Details that matter and your right to investigate or requests for contingencies.
Assorted and Sundry
Important details for some folks and the most important detail for everyone.
Selling Before You Buy...
In years past, especially when it was a sellers’ market, it was almost unheard of to use this contingency in San Francisco successfully, but with a changed market where inventory is tight and rates are relatively higher, these types of coordinated sales may stand a chance. But even so, there are still logical times when this approach should be used. After your property is in contract with your buyers putting in their Initial Deposit is the minimum we’d suggest (we’d send the deposit receipt along as proof). Also, because we are asking the seller to put their fate in the hands of not only you but of yet another set of buyers, we should make the offer strong otherwise in terms of price, closing time and few, if any, other contingencies. We had one time where someone put in a well-under list price offer contingent upon the sale of a condo in a building with very high dues that was not yet on the market in a neighborhood that was severely impacted by the Pandemic’s reshuffling of desirable neighborhoods. While that offer went nowhere and the property sold for oodles more than the offer price, you still can’t blame people for trying.
Showing them the Money
By the time we get to this point, we will have already asked you to provide proof of funds and your preapproval letter if you are getting a mortgage.
The Title Report and Legalities
As we talk about in our discussion about Property Disclosures, most listings will already come with a preliminary title report, which is also an offer by one of the established title companies to extend a title insurance policy to you as the property’s future owners and, if getting a mortgage, a policy that protects your lender. Banks and lenders will require you get both policies as a matter of course. Your title insurance policy is good for the duration of your ownership and need not be renewed. A new lender’s policy will need to be in place if you refinance and/or get a new mortgage. If you’re buying all-cash, a title insurance policy is ‘optional.’ In reality, there is no way you should buy a property without tittle insurance. Not only to protect you but also to protect yourself when you sell the property one day or will it to your heirs. Title insurance protects you from weird things from happening that harken back to Gold Rush days and people staking claims on properties, parcels and disputing those.
The Inspection Contingency: The All-Encompassing Contingency in Para 16
This is the biggie — the inspection clause. Effectively a buyer’s remorse clause, this clause is one that sellers dislike and one seller agents will encourage people to forgo tacitly despite official admonishments otherwise. In the sellers’ markets that we’ve seen over the past 15 to 20 years in the Bay Area it was rare that you would see offers with inspection contingencies accepted. With 2022’s market change, however, we’re starting to see them come back in fashion and sellers accept offers with inspection contingencies. The clause works like this: during X number of days a buyer can investigate the property, its surrounds, the attendant circumstances related to the property, its potential future use and more. Once the period is up, a buyer has the “sole discretion” to decide if they want to proceed to Closing and complete the purchase. If not, the contract gets canceled, and the Initial Deposit is returned. Practically, and despite the use of an “as-is” addendum, the parties may attempt to negotiate a price reduction, repair or credits to be applied at close of escrow. Once the contingency is removed, however, there would be very few valid reasons for a buyer to cancel the contract and get their Initial Deposit back (the property burning down, death, or something that renders performance of the contract impossible), except for if there is a new TDS issued (see more on that below).
HOA Stuff (if applicable)
If you are buying into a homeowner association (usually a condominium in San Francisco, but there are some neighborhoods with an HOA too), you are agreeing to be bound by the covenants, conditions and restrictions that govern this particular collection of homes. While most HOAs are pretty chill and relaxed in the City, there are examples of hyper serious and involved ones where personalities conflict and conflict in a big way. Understand what buying into a HOA means by asking us questions, researching the DRE website or asking a lawyer or by, well, reading the documents!
Page 4: Rental Properties, Unwarranted Spaces and Who Pays What
Income property purchases considered and cost allocations
Assorted and Sundry
More details but closing cost allocations which are dictated by local practice and custom. And our local custom about unwarranted spaces.
Rental Properties aka Stepping into the Shoes of the Owner
You are meant to get details about properties with tenants like leases, deposits, utilities and contact information for them too. Unlike other places and other states, the sale does not mean the tenancy agreement(s) are broken or reset in any manner. All the agreements, leases and the such remain in effect even if you never made them. For this you may want to consult an attorney who practices in this very fraught area.
On HOAs and Buying Into One
There is a lot of commentary about HOAs and what it means - you are agreeing to abide by the existent CC&Rs, Bylaws and House Rules. They are little pieces of private government in your hands (or, potentially out of your hands). We have a lot of discussion about it here.
On Unwarranted or Illegal Spaces...
In the City, you’re very likely to encounter properties with ‘unwarranted’ or ‘illegal’ living area (usually on basement levels). This is when the construction was done in the past and where you will see the seller agent or seller note that some of a property’s space is ‘unwarranted,’ or ‘illegal’ or added ‘without benefit of permit.’ It may have been built to code, but was never checked by City inspectors for various reasons — ignorance of the law, an owner thinking a project didn’t rise to the level of needing a permit, or because people wanted to avoid breaking their Prop 13 property tax protection. If you ever decide to 'legalize' the space in question with permits or plan a remodel that adds living space, this space will be added to your property tax basis and will likely raise/change your assessed value (which is probably why people never pulled permits for unwarranted spaces in the first place). The good news is that reassessments for new square footage aren’t usually based on prevailing market dollar-per-square-foot rates.
Page 5: Stuff We Get to Do and See
Documents are sellers are required to provide under California law and local practice.
Assorted and Sundry
Details about things you have already read by now. We hope.
Disclosure Documents You Are Supposed to Get (and Read)
The California Legislature has said sellers are required to provide buyers with various sets of documents in which the seller discloses what they know about a property. The requirements change a little for trust and probate sales because the main owner is out of the picture, but there are still requirements nonetheless. A lot of these statutes arose in response to various court cases that set varying standards and the democratization of the home-buying process. We cover disclosure materials in-depth elsewhere but suffice to say both sides have homework.
New Material Facts vs. What Buyers Learn
This is an important paragraph that can be a bit contentious and a little philosophical too in a chicken and egg type of way. If a seller figures that they didn’t disclose something correctly, or something changes at the property during escrow (like a new leak appearing or a new report or notice of something impacting the property), they’d be obliged to issue an updated TDS form, which would then give the buyer 5 days to review and, if they don’t like what’s just been disclosed, they can move to cancel the contract and get their deposit back, even if their offer was non-contingent initially. But if a buyer discovers something and tells the seller through their agent, the right of recession doesn’t necessarily arise. Remember that buyer investigations are limited to non-destructive testing absent a seller’s permission. The language here tries to reconcile that tension of disclosure and the right to investigate and to cancel a purchase. When or if substantial issues come up it can get emotional quickly. This is where years of experience can become especially valuable as the agents will try to broker a compromise if appropriate or, at least add some context and perspective as someone somewhere else is likely to have experienced the same issue that you’re going through and processing. Overall, the contract seeks to manage expectations in a marketplace that is fluid, expensive and one that has a lot of older inventory with people who tend to be more educated, aware and resourceful.
Page 6: Logistics and Safeguards
Important detailed explanations, definitions and procedural items
Assorted and Sundry
Offers are not confidential, assigning the contract (permission required), your home on the internet (get over it) and if the seller is a foreigner.
Buyer Warranties (Means No Seller Warranties)
We usually get our buyers warranties for the first year they own. It is a great way for us to be there while not being there. This highlights the fact there are no warranties from the seller (unless you are buying new construction or something that has been at least 80 percent rebuilt, which is hard to determine; for new condos in new developments you would likely be using a different contract, so stop reading now). New appliance manufacturers warranties should apply if they are now.
MLS Data Stays Up (and It Should Stay that Way)
Pictures and sales data are important parts of understanding our market, setting values and keeping the marketplace operating as smoothly and efficiently as possible. Some folks are, of course, more inclined to be more private. If, for some reason, you want interior photos or other details taken down before we close let us know. Otherwise the default we practice as listing agents ourselves and as our earlier position states, pictures will remain up on the web. Also, remember that the MLS syndicates data but other external sources like Zillow, Redfin or Realtor.com may well archive listing information (including photos) on their own servers.
Take a careful read through these.
Page 7: When Things Go Wrong + Other Cautions
If things go wrong, how disputes get handled, the most you could lose (usually)
Assorted and Sundry
Language to handle any potential disputes that arise, which is relatively rare, but just in case...
On Mediation, Arbitration and the 3 Percent
Like most contracts these days, the purchase contract contains a mediation and arbitration provision. In fact, the contract won’t be considered valid unless both sides agree to these forms of dispute resolution. As a lawyer and trained mediator, I can say that arbitrations are effectively a trial without a jury and expedited evidence rules before an impartial arbitrator (usually a retired judge or attorney). There are rules and procedures that govern the process which is faster and less expensive than an ordinary trial would be should there be a dispute that arises after the fact. Most disputes usually involve a seller’s failure to disclose a condition or defect, or, in other cases such as new construction, construction and/or design defects (Google S.B. 800 for more on this; keep in mind that a property has to be 80 percent rebuilt to qualify for those remedies and warranties). One note on available damages. The 3 percent cap on liquidated damages applies only to a failed purchase in most cases, but if there are more serious matters like breaches of various seller and seller agent obligations and duties owed to a buyer, damages may be much higher.
Remember, the seller side usually pays commissions for all the agents involved absent an agreement otherwise, which becomes common when properties hit the $5 million mark because seller-paid transfer taxes reach an extra luxury tax rate.
Page 8: Terminating It All and Signing It All
How the contract gets terminated — it is not instant, signatures, acceptance (or counters) and a reminder of how agents get paid
And We Are Done...
Thank you for getting this far but there are still some important things covered here.
A Grace Period, How to Terminate and When to Terminate
Missing a deadline is bad but, sometimes unavoidable. If there is some reason that we will miss a deadline for a contingency removal or closing for example (funds movements, surprises, illness, etc.) that we know about in advance we will work on an extension for you. Otherwise, the purchase contract tracks statewide practice where sellers must give buyers an opportunity to cure a breach/missed deadline. Whereas the statewide contract gives folks 3 days to cure a breach, the San Francisco contract gives just 2 (calendar) days to cure once a Notice of Perform is sent by the non-breaching party. Oh and yes, a seller can issue a Notice to Perform 2 days before a deadline comes due. Why? Usually this may mean there is a higher back-up offer waiting just behind you snapping at your heels that the seller would rather close with instead of you. Take away point: communication and planning are key.
Everything Must Be in Writing
California adopted the Statute of Frauds long ago in its Civil Code that says changes (and offers) for real property must be in writing and signed to be effective. E-signatures are fine for these purposes.
The Contingency Removal Document
Now even more essential, this gatekeeping document must be used at least once in every sale.
Remove As You Like
This is pretty straight forward, right? Usually, yes.
Remember, If Something New Pops Up...
Just because all the conditions have been removed doesn’t mean sellers are absolved from telling buyers if something material happens, gets disclosed or is revealed. But this is not the same as failing to appreciate something that was already disclosed.