Should you sign the arbitration clause in your real estate listing or sales contract?  I can’t tell you.  Seriously. As a real estate licensee in California, I am not supposed to guide people to initial or not initial for it because that would be giving legal advice.  (Realtors and other real estate sales people are admonished not to provide, and are not qualified to give, either tax or legal advice.)

Arbitration is a choice that consumers have both when listing a home (between you and the brokerage/agent) and when selling a home (between you and the seller or buyer).  In reality, nearly all people do initial for arbitration, though, so many people do not feel that they really do have a choice. When you sell or buy your home here in Silicon Valley, there’s a very high probablilty (perhaps a certainty) that the other principals in the transaction will opt for arbitration – at least if it’s a “regular sale”.

With arbitration, if there were a big problem (not “small claims court” material), the issue would first go to non-binding mediation. That is, you’d all have to sit around the table (so to speak) and talk it through and try to find a resolution on your own. If mediation fails, then it would go before an arbitrator whom both sides would agree on. Usually they are retired superior court judges or someone with a lot of real estate law experience.  He or she would hear the case and decide. You only get one shot at it with arbitration, there’s no appeal if you’re unhappy with the decision.

With litigation you’re still supposed to do mediation first, but then if you go to trial and don’t like the decision rendered, you MAY be able to appeal it to a higher court if the system thinks you have a reasonable gripe about the decision. No guarantees, but the possibility exists.

The plus to arbitration is that it’s faster and cheaper. The plus to litigation is the right to continue to protest (appeal).
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How many home buyers and sellers understand what a default is?  Consumers often confuse the term default with cancelling the sale at any time – even backing out of a contract during the contingency period for a legitimate reason.  Cancellation does not always mean default, though – there are some  fair ways and times to get out of contract without it being a default. 

Default is a strong word which refers to a failure to do something promised in contract or not doing it on time; we sometimes call it “non-performance”.  In the purchase agreement, buyers and sellers both make promises to do certain things within a certain timeframe, so either one could potentially default.  For instance, the following items are areas where a buyer could default:

• not putting the initial deposit (good faith deposit) into escrow on time
• cancelling the sale after removing all contingencies or without cause allowed by the contract
• not removing contingencies on time (or possibly ignoring other deadlines)
• not completing loan papers on time

Missing contingency removal deadlines may be a default.  For instance, the PRDS contract states on page 1 of that agreement:

BUYER’S  FUNDS:  Buyer  represents  that  all  funds,  including  deposits,  cash  balance,  and closing costs, will be readily available as “good funds” (as determined by Escrow Holder) at  the  time  of  payment.  Obtaining  these  funds  is not a contingency of this Contract.

The loan approval, though, may be indirectly tied to whether or not the buyer liquidates stocks or other accounts to provide the downpayment.  What happens if the loan is fully approved except for the verification of this downpayment?  The buyer’s job is to have the funds available so that obtaining them later does not cause a delay.  If a delay is caused because the buyer didn’t get the funds ready on time, that is a buyer default.

Not every default is an equally grave problem, of course.  In the case above, the buyer can go ahead and remove the loan contingency and continue to liquidate the downpayment assets (which should have been done much earlier in the escrow).  BUT, if the buyer does not complete the sale due to a problem with getting those funds, his or her good faith deposit will be at risk via the liquidated damages clause because getting those funds is not a contingency.

Sellers, too, can be guilty of defaulting on contractual promises. Here are some areas in which a seller could default:

• not moving out on time
• not providing completed disclosures or reports on time
• not having work done which was contractually required (such as pest work or repairs)
• not keeping the power & water on for inspections and final walk through
• causing a delay in closing due to not signing off on time

In Silicon Valley, there are two purchase agreement forms in use: the California Association of Realtors (CAR) contract and the Peninsula Regional Data Service (PRDS) contract.  Generally speaking, the PRDS & CAR contracts are similar on many points.  They are not so similar in the treatment of defaults, though.

Oddly, the CAR contract only mentions the word default twice, and in both cases the topic is a buyer’s default, first in the liquidated damages paragraph (25) and next in the other terms & conditions paragraph (27).
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Today I was chatting with my lender friend, Shashank Shekhar, who’s also a very active blogger and social media maven. We discussed a variety of topics, including how to price a home for sale and establishing the real estate market value of Silicon Valley homes.

Sometimes it can be tricky to estimate what a home might sell for or its market value.  I usually talk with my seller clients about trying to find the probable buyer’s value.  The seller may have a range of prices that he or she anticipates and would accept.  So too with the buyer, whose range will likely be lower than the seller’s.  The key is finding where the buyer and seller price ranges overlap. If it’s unlikely that their ranges overlap at all, we’ll have a listing that is difficult or impossible to sell.

Let’s take a hypothetical case of a home worth about a million dollars (see image above). The seller would love for the property to sell close to $1,040,000.  The buyer would like to purchase it for $960,000.  The agent’s competitive market analysis indicates that similar homes have sold or are selling at around a million dollars, give or take a percent or two.  If the buyer and seller can come to a meeting of the minds, and there’s no undue pressure on either one of them, we have (hopefully) a sale and we have market value.

But as we know, sometimes homes sell for much more than they would seem to be worth, and other times much less.

What causes property values to go above or below what would seem to be the probable value?  Undue pressure can certainly cause values to rise (desperate buyer who just has to get into a house, even if overpaying or desperate seller who has got to unload a property, even if selling too low).
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Many, many years ago, when I was a new agent, a friend of mine (who wasn’t a Realtor) suggested to me that being a listing agent takes knowledge and skill but “anyone could drive buyers around in their car”.  I was stunned that she could think that buyers’ agents do nothing more than drive from house to house and unlock doors for people. 

Lockbox and Keysafe Set

Last weekend I held a listing in Saratoga open and a young couple asked me if I could work with them in writing the offer on that home.  This happens a lot – buyers are out searching on their own, independent of any professional real estate guidance, and when they find a home they like they just “use” the agent who’s got the listing.

Apparently, the old view and the current one aren’t so different from each other.  It amounts to this: who needs a buyer’s agent?
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In the last few weeks, I have been very busy with Silicon Valley home buyers and on average am writing at least two offers per week.  Most of the time, the listing agent requests that the offers be faxed or emailed in.

Why do so many listing agents do this? It’s faster, it’s more expedient. But it may not give you all the information you need to know if you’re a seller (or a seller’s agent).

This week, I had the pleasure of twice being able to present an offer “in person”. In the first case I presented my contract to both the listing agent and her clients at the agent’s Cupertino office.  In the second I met with the listing agent at the home my buyers were bidding on in San Jose’s Cambrian Park (the seller is out of the area).  We got into contract on the first and are waiting to hear on the second.  Both were multiple offer situations (one with 6 offers, the other other 5 bids).

By presenting in person, the agents can get additional information, ask questions, and lots more.  They can also size up each other, get a sense if they could work together and whether the other agent is competent, for instance.  In some cases, a personal meeting may leave the seller or listing agent uncomfortale. With mutliple offer situations, this is huge.  The “red flag” may be there in person but not via email.

My hat is off to all the good real estate agents in Santa Clara County who slow down long enough to meet with the Realtors or real estate licensees who have taken the time to draft an offer on their listings.  Professionalism like that is to be respected and appreciated. I know it matters to me!

Recently I have been involved with multiple offer situations, both on the listing (seller) side and on the buyer side. All of the multiple offer bidding events have involved first time homebuyers and in every case, at least one or some of the offers were presented with FHA backed financing.

Sometimes agents rush when they write up the purchase contract, and the offer is not well done; we call that “sloppy” and it’s not helpful to your position as a would-be homebuyer.  As a buyer, you won’t know which box needs to be checked or which blank filled in, but there are big areas that you can double check to make sure that your offer is “clean”, which will present you in a more favorable light and increase the odds that your offer will be the one the seller and the listing agent will want to work with.

1. If your offer is an FHA offer, make sure that the box on page 1 says so (there are boxes for FHA and VA offers on page one of the California Association of Realtors contract)
2. Make sure that the numbers all add up – the initial deposit, the increase of deposit (if any), the loan amount and balance of cash downpayment should all be listed and should add up to the correct number for your total purchase price.
3. The “loan terms” are supposed to be specified too. What’s the interest rate? Are there any points being paid – and if so, by whom? Blanks in that area are a problem because you have a finance contingency which relies upon everyone knowing those terms. Be specific.
4. It is doubly important – no, triply important – that your offer comes with a soid pre-approval letter.
5. Make sure that you give your agent a check, or a photocopy of the check you’ll use if your offer is accepted.

Once the offer is drafted, your agent should go through it with you so that you understand all the clauses and terms.  Ask your agent to double check everything; it’s better to take a lilttle longer and make sure it’s right than to get it off fast but sloppy.

Recently I’ve seen a few FHA offers from agents who’d rushed and many or all of the items listed above were off. In one case, the agent didn’t even include the loan amount.  In two offers recently, the real estate licensee hadn’t checked the FHA box when the contract was dependent upon it going through as FHA.

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In addition to the financial part of your offer and your contingencies and timeframes, there are other terms that may help you to be more competitive when writing an offer in a multiple offer bidding situation in Silicon Valley.

What other terms could matter, beyond price and contingencies? Lots – they will matter to the seller and they’ll matter to you. 

As Is Offers

Sellers always want to sell “As Is” if possible. They don’t want to have to do repairs, to spend the time or the money to fix what may not be perfect.  This is an extremely important area to research, weigh, and understand prior to drafing your real estate purchase agreement, particularly if you are not the only one trying to buy that real estate.  When it’s a seller’s marker (and with multiple offers, it IS a seller’s market), the seller can request and will usually be able to sell As Is.

Buyers always want every imaginable repair done, if at all possible.  Buyers don’t want to have to do termite, roof, electrical or other work on the home. They want a “red ribbon deal” where the home’s been or will be in very good to excellent shape.  They want a section one clearance from the termite & pest company.  They want a leak free roof warranty. When it’s a buyer’s market, and you’re the only one attempting to buy the house or condo, you can usually request and get the seller to do all the basic repairs.

The important point is to understand which of these two markets you’re dealing with – buyer’s or seller’s - if it’s a seller’s market and you’re behaving as though it’s a buyer’s market, you will hurt your odds of getting the property if you request repairs or if your contract provides a seller’s warantee.
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