THE MIGHTY MOUSE, OR THE STRONG PEN?
THE MIGHTY MOUSE, OR THE STRONG PEN?
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 winning contracts instead of offers.
Our perspective: we need to present an offer they can’t refuse.
A “seller’s market” is one where most sellers want to maximize their returns (maybe it’s to offset inevitable capital gains tax obligations, maybe it’s so they can buy a replacement house or maybe it’s pure greed). What it really means is that sellers would like 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 should strive to come as close to that ideal as possible. 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.This involves really understanding what the sellers want. This is why 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 the best sellers.
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 is buying their home. And remember, sometimes offer terms do and can trump an offer price.
THE DETAILS THAT MATTER
UNLIKELY TO WIN IN A MULTIPLE-OFFER SITUATION BUT YOU NEVER KNOW.
MOST OFFERS ARE LIKE THIS AND FINANCED OFFERS CAN WIN!
LIKELY TO WIN IN A MULTIPLE-OFFER SITUATION AS THESE OFFERS ARE FAST, DECISIVE AND CONVINCING.
THE DETAILS THAT MATTER
WHAT EXACTLY ARE YOU SIGNING?
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. Instead 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. (Don’t get us wrong, the California contract can still be used as you cannot be forced to use on contract over another).
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.
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 own two cents. 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 text changes can have profound impact.
Note: Remember this commentary is only generalized and informational; ask us for details.
The Deposit. This is when it gets real. The 3% Initial Deposit is also known as the Earnest Money Deposit (or the Good Faith Deposit). This is the most amount of money a buyer can lose if the buyer fails to perform. It used to be a check that got sent over but now it’s done electronically. Once in contract we’ll get wire instructions from our title officer. The worry today is wire fraud. To combat this, you’ll need to call and verify the information the title officer gave you. All of this needs to take place within 2 days (business) days of a buyer’s contract being accepted.
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.
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, for example, 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. Post-2015 contract forms now have a fail-safe built in as it allows a buyer to proceed with a property purchase so long as a property appraises at a certain price (usually, below the contract price) meaning that they’re willing to make up any shortfalls with cash
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 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.
About Who Represents Who. The current 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 Properties’ listing is sold bought by buyers working with a Vanguard agent. When one brokerage represents both sides a statewide disclosure and consent form needs to be used too as potential conflicts of interest issues may arise; although, these issues typically don’t rise to the level of an attorney’s conflict of interest.
Why Title Matters.
In the end, all of this effort in buying a property — open houses, inspections, disclosures — boils down to a title deed transfer; in other words, you’re buying a title deed over a piece of real property (or a property interest). Because this is a solemn event the 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. But unless you’re a lawyer you might need some help deciphering. A buyer has a default of 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.
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.
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.
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).
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.
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 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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
— Listing Agent, Sotheby’s
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.
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.
Remember, information above is just that, information, that is subject to change without notice. Be sure to ask us if you have any questions.