Contracts & Forms
Real Estate Contracts and Forms
What is an exclusion in a real estate contract? What is an inclusion? Both of these refer to fixtures at the property which is for sale.
What is a fixture?
Generally speaking, a fixture is any item affixed or attached to the house, townhouse, condo or property which is installed with the intention that it be there permanently.
Examples of fixtures (items which stay or are included):
- built in in cabinets (in the bathroom, kitchen, or anywhere else)
- lights mounted from the ceiling
- built-in ovens or other appliances which are built-in
- in-ground (not potted) rose bushes.
- built in fire screens
- a fireplace insert
- window coverings
- wall air conditioning unit
- built in speakers
- built in wine fridge
- hot tub (unless it is a portable model, which most aren’t)
The exception to the rule is anything attached solely for earthquake safety. This would be the case if you have a large hutch which you have bolted to the wall so that it doesn’t topple in the case of a big quake. In Silicon Valley, fixtures are normally included with the sale of the home.
What is an exclusion?
Exclusions refer to fixtures which the seller does not want to include with the sale of the real property (real estate) but which otherwise would or should stay.
- there may be a light fixture in the dining room which is a family heirloom and the seller does not want to leave it with the house
- an in-ground plant, bush, or small tree that the seller wants to take when moving out
- curtains which match a bedspread or other decor
- stereo speakers that are built in
- surveillance equipment, such as a Ring doorbell or camera (I saw this recently where the seller wanted to keep it)
An As Is sale is one in which the seller is not required to make any repairs and underscores that the buyer is purchasing the property in its current condition. In Silicon Valley today, nearly all home purchases are “As Is” and without the current owner providing fixes or improvements to the property.
One small note to the As Is being the norm: in California, the seller is usually obligated by law to have a gas water heater properly braced and strapped, to provide the necessary smoke detectors and carbon monoxide detectors. (There are very few exceptions for these three items.)
It wasn’t always that way. My mom was a Realtor and back in the 1960s, when their contracts were short, the one thing that seemed to be included in every sale was that the seller would provide a Section 1 Pest Clearance. If the termite and pest control company found active infestations of wood destroying organisms, such as drywood or subterranean termites, fungus, boring beetles, etc., they had to be eradicated before the sale could close.
Having roof, chimney, or foundation repairs paid for by the home owner was not uncommon, either. After the Loma Prieta earthquake of 1989, for years chimney inspections discovered breaks that required rebuilding the chimney from the roof line up. The seller paid for it most of the time.
This As Is situation being the norm is just a function of supply and demand. If the tables were to turn, sellers would be doing work as needed to get the sale to close.
Purchase agreement forms and As Is sales
A blind real estate offer is a purchase contract which is written by a buyer when the property is sight unseen. There are commercial properties, such as apartment buildings, in which this is the norm, and it’s not surprising for multi-family units such as duplex to fourplex properties. It is uncommon with single units or homes.
Right now we are in the midst of a Shelter In Place order due to the coronavirus pandemic. Current restrictions do not permit the showing of homes, inspections, or appraisals – though the latter two may change or get adjusted somewhat as this order persists. If you want or even need to find a property, how can you do it with this restriction? It is not advisable, but some would-be home owners are writing blind real estate offers.
It makes sense for a multi-unit property to be sold this way because the investor cares most about the numbers. How’s the cash flow? Are the reserves good enough? When will the driveway need repaving? All of these items address the question of whether or not it’s a good investment, a good business decision.
Blind real estate offer on your own future home
Buying a home that you are going to live in needs to make sense financially, but you also need to like it. You need to see if the home has enough light, if the rooms feel crowded or spacious. You must learn if there are floors out of level or odors or other issues undetectable from a virtual tour or series of photos.
Before the broad Shelter In Place order, I showed a home in Gilroy, and one of my clients had an allergic reaction in the house. Maybe it was the new carpet? Who knows – but it was imperative that we visit the property in person.
Blind real estate offers are dangerous since they curtail the buyer’s ability to have properly vetted the property. They are also dangerous for the seller, who can get the house tied up with a buyer who may or may not be willing to go through with the sale once the home is finally seen in person. If the Shelter In Place order continues for 2 or 3 months, which Governor Newsom suggested yesterday, it’s possible that access by appraisers or real estate agents may not be permitted for a long time. Long escrows carry their own risks.
Homeowners Associations (HOAs) are created to oversee condominium complexes, townhome communities and planned unit developments (PUDs) on behalf of their members. These are non-profit organizations whose purpose is to manage common areas, enforce neighborhood rules and standards, and often, unofficially, to foster community unity too. In most cases, they collect fees from members and have local authority. In other words, if you do not pay your homeowner association dues, or abide by one of its rules*, the HOA can and usually will fine you or even foreclose on you!
There are loads of HOAs in Silicon Valley. As with all organizations, some are better run than others. Its a little different than owning real estate outside of a homeowners association.
What are the pros and cons to Homeowners Associations?
At their best, Silicon Valley HOAs keep the communities they manage beautifully landscaped and maintained, they hire good providers for needed improvements, and minimize risk to all the members. By having reasonable rules and community buy-in, the neighborhood can look inviting and property values can be better maintained.
At their worst, HOAs can be unresponsive to members needs, erratic, arbitrary and irresponsible. They may, by poor planning, cause huge assessments to be necessary or raise HOA dues so that they are very high – to the point where they make homes hard to sell. Not only are those an unhappy occasion, they can also make it hard to sell a home with a special assessment looming. Fortunately, this is seldom the case in most areas – but if the HOA has a high number of defaults due to owner bankruptcy or inability to keep up with mortgage, property insurance etc. it can cost all of the members eventually.
When real estate sales people represent buyers and sellers on residential real estate transactions in California, they must do a visual inspection of the property. In other words, they are required to walk through the property, inside and out, and look carefully at what they sell and advise the parties to the contract of any red flags noticed.
In other words, if an attentive Realtor walks through and notes something that would make a buyer unhappy to discover after close of escrow, that agent needs to note it on the required form.
Where do the agents write up their visual inspection disclosure comments?
Sometimes the real estate licensees will simply make a few comments on page 3 of the Transfer Disclosure Statement (TDS). More and more, though, they are completing the separate 3 page AVID (Agent Visual Inspection Disclosure) form instead. It is larger and allows for more thorough list of items noted. Both approaches are permitted by law to fulfill that obligation, though.
Why is this required?
Why do we do this? Sometimes home sellers really don’t like the comments that the real estate licensees write, especially when it comes from their own listing agent – and there may be pressure to gloss over things which must be disclosed. As with much of our standard of practice, this has its roots in a lawsuit, the watershed case of Easton vs Strassburger (1984). The California Department of Real Estate put out information on this case which clarifies an agent or broker’s disclosure obligation (click on the link above to read about the case):
The Easton case stands for the proposition that a real estate broker acting as an agent in the sale of a residential real property has a duty to the prospective buyer, not only to disclose facts about the property known to the broker that may materially affect the value or desirability of the property to the buyer, but also a “duty to conduct a reasonably competent and diligent inspection of property . . . in order to discover defects … ” to be disclosed to the buyer.
What’s the difference between a home inspection by an inspector and a visual inspection by a Realtor or licensee?
Real estate agents are looking for a broad range of red flags, or anything that might impact value & desirability, which is discernible from a simple walk through of the property (inside and out). Inspectors are checking to see if the systems of the house are working as intended, or if there are problems structurally, and of course they do more than just walk through the townhouse, condo or house. (Please note: home inspectors have a scope of knowledge about these systems which far exceed an agent’s, so buyers and sellers should not rely on their agents as a substitution for any professional inspection.) Agents consider a wider range of issues, though. There will be some overlap, certainly, but they are not identical. The home buyer will benefit from the input from both. It is also always a good idea to have a second set of eyes looking at the property.
Here are some items that a buyer’s agent or seller’s agent might note which would not be discussed in a home inspection: Continue reading
Contingent offers are making a comeback as our Silicon Valley real estate market is becoming less intense of a seller’s market and inching a little more toward balanced market conditions.
What is a contingent offer? A contingent offer is a contract on residential real estate which is based on the contingency of or subject to the sale of another property.
A contingency is a way out of the contract. If “xyz” doesn’t happen, then someone (whoever has the contingency) can get out of the obligation to complete the sale. For example, a loan or financing contingency is very common when someone buys a home. But if the loan falls through, at least under some circumstances, the buyer can back out with little or no consequence.
Most of the time, the buyers have the normal contingencies relating to financing, appraisal, property condition, title documents, and related items (approval of the CCRs, HOA docs if any, lead paint tests and more). Sometimes the seller has a contingency (finding a replacement property, selling short and needing bank approval, or in the case of a sale after death perhaps the approval of the trustees or a right of first refusal of close relatives to purchase the house). Once in awhile, though, there is a sale subject to the sale of another house. Often this is referred to as a “contingent sale”, even though most offers have some contingencies. We do not see these kinds of purchase agreements accepted too often in the current market in Silicon Valley.
To muddle things a bit, recently our local multiple listing service, MLSListings.com, recently eliminated the sale pending or under contract status that had been associated with either the contingency to sell another property (formerly “status 2”). We used to have 3 types of pending sales – contingent (status 2), pending (status 3, normal contingencies in place) and sold but not yet closed (status 4, all contingencies are removed). I don’t know why we now have just “contingent sale” and “pending sale”, but I think it was a terrible idea.
Contingent offers: they are not all the same!
A contingent offer in the San Jose or Los Gatos area may come at any stage of the home selling business:
- the home may not yet be on the market
- the house may be on the market but not yet under contract
- the property may be on the market and sale pending (under contract), but the buyers’ contingencies are still in place
- the property is on the market, in escrow (under contract) and contingencies are all removed – it is close to closing escrow
As you can imagine, there are varying degrees of risk involved with a Santa Clara County home seller accepting contracts with these various scenarios. The closer a property is to closing, of course, the more likely it is to close and the smaller the risk. If it is not yet even on the market, the risk is far greater. Continue reading
Multiple offers continue to be a common occurrence in Silicon Valley right now, at least among well priced, well presented homes that are reasonably accessible. When facing multiple bids on a property, some sellers will just take the one they like best, or do a verbal negotiation to get the sale price and terms where they want it. This leaves those on the outside wondering “Why didn’t I get a counter offer?”
When there are an abundance of home buyers for one property, it can be overwhelming for the seller. Some home owners may want to issue a multiple counter offer to the best qualified, most serious bidders. (It is unlikely that every buyer will get one if there are a lot of bidders, as some may be too low or have terms that are too cumbersome.) Some sellers will issue just one, regular counter to the top buyer – but that is increasingly less popular, since if that buyer rejects the counter, the seller may then be back to Square One.
How to sellers choose which offer to counter?
Often, the highest price is not the offer with the best terms, even in a bidding war. Home sellers want both, of course – the least risk with the most cash. (Sometimes there are other factors, too, such as a rent back, escrow length, or other issues beyond cash and risk.) In those cases, frequently the Realtor or real estate sales person (the listing agent) will coach the seller to counter one or more of the better buyers (best prices and terms) to improve the final sale on both counts. Some sellers don’t want to do this, though – it’s stressful, they are afraid that everyone will say no and they’ll be left with the property unsold. Alternatively, then, they may counter only one offer – and tell the buyer’s agent that they are the only one, at least for now. If negotiations don’t work with the first buyer, the listing agent may go back to the others.
When you are waiting for a response to your purchase offer…
Meanwhile, everyone waits, everyone wonders what’s going on. The longer it takes to hear back, usually the lower the odds are that their contract will be the successful one, or even one getting a counter offer. Sometimes, though, the seller just wants to sleep on it.
If you heard that you didn’t get it, it’s helpful to ask for some feedback. Some listing agents will tell your buyer’s agent “you were close, but the other offers had no contingencies” or “we got 10 offers, and yours was in the bottom third”. This is a great opportunity to learn so that your next offer attempt has a better chance.
Without that information, you will be left wondering, again, “Why didn’t I get a counter offer?” “Why didn’t the seller at least give me a second chance?” Buyers wonder this all the time. Some buyers submit 5 or 10 offers, all unsuccessful, and they still wonder. The harsh reality is simple: your offer wasn’t good enough. Either your price or your terms (or supporting documents) didn’t cut it. Write your contract as if you only have one chance, because that’s the reality most of the time.