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 housing market.
Even though San Francisco uses a standardized form contract for the vast majority of home sales here, how the contract is completed makes all the difference in how an offer is received. Obviously, big-picture terms like price, down payment, escrow duration and whether contingencies are the most important ones that matter, but the detailed nuances matter significantly as they speak to how credible an offer is and how confident a seller and their agent believe a buyer really is.
While there is a statewide California standard contract, the City’s market place is so different — TICs, co-ops, rent control, etc — we have our own 7-page contract for San Francisco that is usually updated every couple of years. Changes tend to be small and accumulate over time. We know how the process works given Kevin’s time on the MLS Committee and because we work with many of the agents who serve on the various committees that examine the forms we use in the City, plus, years of experience from working with these forms help a lot too.
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).
Time to Put Pen to Paper (or Mouse to Clickbox)
After all of the open houses, disclosure review, inspections, debating, comps analysis and investigation it comes down to this: will we be able to write a winning purchase offer contract that will not only carry the day but actually 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. We have excerpted the latest version of the San Francisco Association of Realtors standard purchase contract (dating from June 2022) below with our highlights so you can get a better sense of what you’ll see via DocuSign where everything can blur together. Of course, we’re here to answer questions and to discuss. Without further ado, let’s walk through the contract shall we?
Page 1: The Important Stuff: Where, How Much, How and How Long
The big-picture terms of our purchase but there are a lot of details to follow.
Who, What, Where
Like any good news story, we start with the who as in who is buying the property. We like to add legal statuses after client names to keep it clear but, in the end, the title company and lender are the folks who get to tell you who gets to be named on the actual deed and mortgage. But this is the time to note if you are buying with a trust, or if you are getting this as separate property from a spouse, etc.
The Initial Deposit (Earnest Money)
The Deposit. This is when it gets real. Once our offer is accepted, the Initial Deposit, also known as the Earnest Money Deposit (or the Good Faith Deposit), is due within 1 day (2 at the most). The EMD is usually 3 percent in San Francisco. This amount also represents the most money a buyer can lose if the buyer fails to perform without any valid excuses or contingencies (see page 5 for liquidated damages). It used to be a check that got sent over to the escrow/title company 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 the contract being accepted with many agents now requiring the deposit gets sent to escrow within 1 business day.
NOTE: it used to be that folks would get cold feet and not put their deposit into escrow, while poor form, there wasn’t much a seller could do about it, but starting with 2022’s market correction, we’ve heard stories of eager attorneys being engaged to go after that deposit especially if a seller sells for less, so be sure this is what we want to do.
How Long Before We Close? (Escrow Duration)
How long until Close of Escrow? This is where buyers tell the sellers how long their proposed offer and escrow will take to complete (escrow = the time from when an offer is signed and accepted by both parties until the time when the title deed transfer takes place, i.e., closing.
In many parts of the country, this process can take months because there are lawyers involved and things just take longer. Because California is an escrow-title-company state, our escrows can be as short as 3 days for all-cash purchases. The typical escrow takes anywhere from 17 to 30 days in San Francisco for houses and condos; TICs usually take about 45 days; Co-Ops take anywhere from 45-90 days (Co-Op board approval process); and, multi-unit properties usually take anywhere from 45 to 60 days. If an extension is needed, it may be as easy as coming up with an addendum or next to impossible if the property is popular, subject to a probate sale or there is a rate lock expiring.
The Escrow Holder (Title Company)
The Escrow Holder. Once our contract is accepted, the action shifts to the title and escrow company (which are usually the same company in the Bay Area but can be different ones). 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 are 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’ interchangeably. For clarity’s sake, ‘escrow’ are the people who receive and disburse all the funds exchanged during a sale. They receive the deposit, down payment monies, and lender funds while they pay off any mortgages a seller has, any outstanding tax liens, liens, commissions and county transfer taxes so that a buyer is getting ‘clean’ title, which is a requirement a lender will have. The ‘title’ part of the process refers to the company that issues two insurance policies regarding the property, one for the buyer and one for the lender. (see below for more).
Semantics aside, the role of the Escrow Holder is key. They are third-party neutral that the buyer is entitled to pick as a seller cannot require a specific company issue title insurance (they can require a specific escrow company however). We have a great team we’ve been working with for years that we will usually suggest as they know how we roll and have always been responsive and on top of things for our clients. They’ve been so good, in fact, other agents who may have opened titled elsewhere switch to them in future transactions.
Page 2: Title Reports, Fixtures (What’s Included) and Buyer Inspection Rights
A pretty meaty page that tells you what you get with the purchase, if there’s anything leased (like solar panels) and, as a buyer, what your inspection rights are.
Usually the answer is that, yes, this will be your primary residence unless it’s not and you’re planning to use the property as a rental property or as a flip/fixer upper. Lenders care about this point and some sellers may car.
Title Insurance and the Prelim
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. 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 can ask for time to review a preliminary title report’s contents, which may be important for that rare property that may have been a foreclosure property or something where there are multiple parcels/rights and easements being conveyed for example. In practice, the listing agent would have already distributed a copy of the report as part of the property’s disclosure documents and the vast majority of properties have clearly set descriptions making the prelim report a routine matter.
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.
Closing Costs. You would think this would be pretty clear but when we are near to closing time people can get all kinds of confused about what the final bill will be, so this is why it’s spelled out here. Sometimes these may be negotiable, if they are changed, these terms will either appear at the end of the contract or via Addendum.
The Buyer’s Right to Inspect is Broad
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 with your initials. 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. Because we’ve effectively been a competitive seller’s market since 2013, most buyers in San Francisco will waive paragraph 12 rights to be competitive, which is easier now that sellers usually offer up pre-offer inspection reports from the same folks we’d recommend if there weren’t any reports.
Page 3: Waiving Your Inspection Rights, if You’re Buying a Condo or Rental Property
Just as the 2nd page gave you the rights to inspect, the third page takes them away. Also if you’re buying a condominium, you should pay attention here. And, if you are buying a property with tenants or an income property generally, pay attention here.
Waiving Bye to those 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 will now encounter the section that allows you to disclaim all of those rights affirmatively with your initials. In a competitive setting, this makes sense if the sellers are providing you with inspection reports (which will be relatively limited but objective enough as the folks doing the inspecting would be the ones we’d hire anyway). Waiving these rights is something you’d if you’re planning on remodeling the property. Strategically, because we’ve effectively been a competitive seller’s market since 2013, most buyers in San Francisco will waive paragraph 12 rights to be competitive. If there is something we need to investigate further, either we’d do a pre-offer inspection (which may cost some money but also conveys a signal to the seller that you’ve done all the research you want and are nevertheless proceeding) or ask for a relatively short inspection period (i.e., a contingency). The reason why sellers and their agents are loathe to accept offers with inspection contingencies is because the contingency is so big you could drive a bus through it as a buyer retains all of the discretion to walk away from an escrow forcing the seller to put the property back on the market albeit in a disadvantaged position either because buyer attention has moved on to another property or because there may be a perception among buyers and their agents that there was something wrong with the property.
For Income Buildings or Homes with a Rental Unit
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.
Back to the contract. 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.
On Buying a Condominium
If you’re buying a condo then not only are you buying a pre-defined, specifically separated 3D space in a building but you’re agreeing to be bound by the building’s governing documents (CC&Rs, etc.) and the decisions the relevant Homeowner Association makes and the dues they assess. You will be entitled to a ream of paperwork that will vary by how large a condominium development is (2 vs 20 vs 200). As we’ve represented folks who’ve bought and sold condos in all kinds of buildings, we’ll be on the lookout for you but be sure to ask. To check out more information about buying a San Francisco condominium, visit our condo treatment here.
Page 4: What Disclosure Documents Sellers are Required to Provide and Point-of-Sale Requirements
As we move on to page 4, we will see the things the seller is required to do, provide, and abide by.
Disclosures Due from the Sellers, Conservation & Safety Requirements with every residential sale in San Francisco
The Disclosures. California’s Legislature wants you to be as informed as a buyer as possible and therefore requires sellers to complete a pile of standardized forms with questions about the property, your ownership, and the circumstances you’d expect a prospective owner would want to know. Sellers are also obliged to comply with various requirements mandated by San Francisco laws and regulations regarding energy and water conservation and statewide mandates regarding water heaters, smoke and carbon monoxide detectors (although if you’re getting a fixer the rules are a bit different. We have a lot to say about disclosures and have a whole section devoted to the topic here.
Pave 5: Unwarranted Units or Work, Various Notices, the Final Walk-Through and More
Typography is the art and technique of arranging type to make written language legible, readable and appealing when displayed. The arrangement of type involves selecting typefaces, point size, line length, line-spacing (leading), letter-spacing (tracking), and adjusting the space within letters pairs (kerning).
Not Legal Seafood But Illegal Units and Unwarranted Work in San Francisco (hardly surprising)
Unwarranted and Illegal units are a part of San Francisco for a number of reasons. We have a whole treatment about this elsewhere on the site you should review. In short this paragraph flags this as something that may pop up during the escrow (an underwriter may have questions or an issue, or an appraiser may question whether or not space can be counted as part of gross living area) or after close of escrow (the City comes and requires elements to removed, fines to be paid, or new permits to be pulled).
Logistics About Warranties and Walk-Throughs
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, which is why we usually will buy the 1-year warranty for our buyer. If the property you’re getting is new construction, then certain statutory fit and finish warranties will apply as will original manufacturers’ warranties, which negates the need to get a separate warranty in most cases.
Page 6: In Case Something Goes Wrong and Contingencies
While the contract is meant to promote a positive outcome, there are times where a negative outcome is unavoidable. Rather than adding to the drama, the contract talks about how disputes are resolved.
Arbitration and Mediation
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.
Page 7: Termination Language, Expiration Times and Agent Sign-Off
If things go south here’s how it’s managed. If you want to add terms,
Termination (You Won’t Be Back or will You?)
If a deadline is missed to remove a contingency or to close escrow, then the contract has been breached. This means the other can tear up the contract and keep the deposit, right? It doesn’t quite work that was because there is a built-in grace period of two days (three days under the statewide form). Because this isn’t litigation, there is a procedure (and form) that has to be followed before someone is kicked out of contract. Indeed, a Notice to Perform document will be prepared and sent to the non-performing party informing them that the breaching party has 48 hours to cure the non-performance.
As we said, it’s not an instant termination. The clock only start to run after the seller delivers a Notice to Perform or Cure document, which could be after the deadline or two days before a deadline is due. To illustrate, let’s assume that a financing contingency was due by the 6th. The 6th comes and goes and the seller and the seller agent don’t issue a Notice to Perform until the 8th, this means the buyer has until the 10th to remove. If the contingency isn’t removed, then the seller will issue a notice of termination whereby they request the title company disburse the buyer initial deposit. If a buyer agrees and accepts the termination they’ll sign the form and the deal is done with the initial deposit being released to the seller; if the buyer disagrees, that’s when things move onto mediation arbitration. Conversely, let’s say there is a higher and better backup offer in place behind you, the seller could send the Notice to Perform on the 4th to force you to remove or move to cancel by the 6th so that they can work with the backup people instead.
Signing, Expiration and Where Additional Terms Go
The remaining 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.
While not required, offers that include these are usually considered to be more complete.
The As-Is Addendum
In a rising or competitive market, or if we want to demonstrate the seller that we’re really fine and cool with the property (either because we’re satisfied with the condition and what pre-sale inspection reports say about it or if we’re getting a fixer and could care less about its physical condition) we can send the As-Is Addendum along with our contract. While you should read the text itself, essentially the practitioner’s view on this is that if something is discovered after the contract is accepted that a buyer will not ask for a credit or price reduction because of X. The As-Is Addendum is also meant to control in situations where an appraisal falls short of the contract price, which may mean that a buyer must contribute more cash to make up for a short fall.
This is as close to a buyer-beware/caveat emptor California law will allow for. The addendum does NOT, however, allow for a seller to be fraudulent or negligent with their disclosure obligations. And, in addition to a property’s physical condition, the addendum’s language is intended to remind folks that there are other concerns that matter too like property lines, zoning issues and neighborhood conditions that you should be comfortable with before relinquishing inspection rights or valid termination rights that would entitle you to a hassle-free return of the initial deposit. If we ever get to a place like this, the circumstances and specific facts will control of course.
People often ask what the biggest risk is if you decide to terminate a transaction. In most cases, the greatest amount of money you could lose if you choose to cancel and have no valid contingency that would allow for cancelation, is the 3 percent initial deposit (the earnest money deposit) that was deposited within 1 or 2 business days of when the contract was ratified (which may be via a signed counter offer, or multiple counter offer).
Whether or not you lose that 3 percent deposit will matter. If there is a contingency in place that hasn’t been removed then it becomes a matter of filing out the right paperwork and sending it to the escrow/title company. But if it’s not that and a cancelation is for something that’s changed or information that has come to light, then whether or not the 3 percent deposit can be recovered will depends on why this change-of-heart is happening and when the request is made. Also relevant is the market we find ourselves in. If we’re in a rising and/or very competitive market favoring sellers where there are multiple offers and a seller would be more than happy to cancel a contract because a backup is a stronger and better offer, then canceling a contract may be easier. If, on the other hand, we are in a tighter market where there are no other buyers and the reasons for wanting to cancel a contract are necessarily valid (per the contract terms we’ve agreed to) then it becomes very challenging to leave without forfeiting your initial deposit.
The Contingency Removal Document
If our offer is contingent from the start, then this document is a little redundant because the contract itself will contain all the indications of where we’ve signed off on making a contingency-free offer. The Removal document serves as a summary and handy reminder that there are no contingencies outstanding. But if our purchase contract did contain a contingency (with the two most common ones being for inspections and financing) then we would send the seller subsequent versions of this document as contingencies become due and, providing you agree to proceed, are removed. When the last contingency is removed, we will check the very last box that says “all contingencies” are removed. Remember the exception to this is if a material (substantial) fact that was known to the seller is disclosed after the contract was accepted or if it turns out there was a misrepresentation or changed circumstance that requires a reconsideration of the purchase, price or terms.