Every region of the country has some unique real estate vocabulary and phrases. Here, in Silicon Valley, when we say “you’re out of contract“, it’s another way of saying “you are not doing what you promised to do in the purchase agreement that you signed” (meaning the real estate contract). In other words, there is a seller or buyer default happening.
“Out of contract” is not a legal term. I remember hearing a local real estate educator say “there’s no such thing”. It’s not an official status. But it is a way of describing behavior that’s not in alignment with the contract’s express promises.
Contractual “Save the Dates”
Both sellers and buyers make promises to do certain things and most of these promises are tied to time frames or dates. Here are a few of these time-sensitive promises or contractual obligations:
- sellers agree to leave the utilities on until close of escrow
- sellers promise to maintain the home until close of escrow as it was on the day the property went into contract (so mow the lawn, water it etc.)
- buyers assert that they will get their initial deposit to title within a set number of days (the California Association of Realtor’s form states 3 business days or provides a blank to fill in an alternate number – it’s often 1 business day here)
- buyers promise to remove contingencies within the times they stipulated in the offer
- sellers will move out in according to the date set out in the contract
- indecision over material facts or between buyers may make it hard to decide whether or not to remove any contingencies
- buyers agree to take possession (move in) per the time/day agreed to in the purchase agreement (not before)
- sellers bind themselves to having repairs done in a certain manner (depends on contract and clauses, if promised)
At one time or another, I have seen all of these items not adhered to by the parties who were supposed to make good on their word, and stranger violations that I don’t want to write about here lest I give someone a bad idea. I have seen sellers not move out on time (in some cases, elderly sellers who grossly misjudged the effort required to vacate.) The failure to do so causes stress and anxiety, and sometimes worse: fear and anger.
Out of Contract: Why the Delay?
Sometimes, when either party is consumed with worry, a kind of emotional paralysis can set in. Luckily that is rare, but I have seen it. Buying and selling a home is extremely stressful, and once in awhile it coincides with other things: the death of a family member, a diagnosis of cancer, a divorce, a relocation that one party doesn’t want. So many things can happen at the same time. You may have heard the saying that “a confused mind says no”. With real estate, the confused mind doesn’t write or accept an offer, or doesn’t move forward as planned.
If you are buying or selling a home in Silicon Valley today, you may be considering including the option to have a “seller rent back” after close of escrow. What does this mean? This is often referred to as “seller in possession after close of escrow” (often shortened to SIP) or “seller occupancy after sale” and it’s not uncommon in the San Jose or San Francisco Bay Area now.
Most of all, a rent back means that after the sellers have been paid and the new owner is on record, the seller stays on as a tenant and the buyer takes on the role of a landlord. The buyer as the new owner will carry home owner’s insurance (mandatory if there is a mortgage – the lender will insist) and gets a set of keys.
The terns for this tennancy relationship are drawn out in a separate addendum to the purchase contract. Depending on how long the term will be (less or more than 30 days) and which purchase agreement form is used (PRDS or CAR) the paperwork varies a bit. Whichever form you use and whichever side of the rentback you are on, here are some key points to keep an eye on:
- Amount of security deposit, if any
- Amount of rent being charged, if any
- Length of the rent back or lease (most buyers have loans, and most lenders start attaching fees to rentbacks longer than 29 days and do not permit more than 60 days or they consider the property “non-owner occupied” – if you aren’t careful, you could walk into an expensive mistake here!)
- Who will pay for things like gardening, utilities, pool maintenance, and HOA fees, if any
- Who will hold the deposit (the buyer or the escrow company?)
- Under what circumstances the new owner can enter the property
When the market is super over-heated like it is today, we tend to see nominal security deposits and free, no-cost rent backs. Usually the tenant (seller) takes care of utilities, garden, pool maintenance. (more…)
This post on the coronavirus impact on real estate sales here in Silicon Valley is updated periodically, depending on unfolding events, so please check back often.
The market for houses is hot (still)
The coronavirus pandemic caused a worldwide surge of buyers rushing to purchase homes with more square footage, more rooms (home office, room for elderly parents to move in), and more outside space.
Locally, single family home prices rose about 20% over one year, despite the initial lockdown and restrictions on showings. Pools had not been so desirable pre-Covid, but now they are more sought after as buyers want to vacation at home.
Initially, it was challenging to sell a condo or townhouse, particularly if there was no patio, balcony, yard, etc. Those homes did start appreciating, but have not performed nearly as well as detached housing has.
Now, in September 2021, many of the requirements have been lifted. Buyers are still interested, but the steep appreciation has priced some buyers out of the market.
Quick overview of what is and isn’t allowed with real estate listings and sales
The landscape for home sales is complicated and more restricted than pre-pandemic times, but easier than it was in March – May 2020. The market is strange in many ways, but it is possible to buy and sell now and actually is not so hard at this point.
What’s changed with Covid: (more…)
Just about every year California amends what sellers are required to disclose, and one change that I think we’ll be seeing a lot of is about home fire hardening. Many agents, including myself, will begin to use the fire hardening disclosure / document (which has already changed once in six months). The current one, as of June 2021, is the C.A.R. Form FHDS, 5/21 Fire Hardening and Defensible Space Advisory, Disclosure, and Addendum.
So what is in this document, who will have to use it, and how can it help buyers and current home owners?
The CAR Fire Hardening and Defensible Space form is a two page document completed by the seller of a residential non-commercial property to notify the buyer of fire hazard zoning, code compliance, and possible vulnerabilities and/or defensible features. Both the buyer(s) and seller(s) sign to acknowledge receipt and consent to comply with the appropriate terms in paragraph 4B.
Who Will Use This Form? Paragraphs 1 and 2: Prerequisites
This disclosure is required for homes (1-4 unit residential properties) in high or very high fire hazard severity zones when the seller must complete a Transfer Disclosure Statement (TDS form). Sellers for California real estate transactions falling within those criteria are obligated to provide specific information contained in this form to the buyer. If these properties were improved or were built before January 1, 2010 there are additional stipulations. However, use is not restricted to properties in these zones.
Owners of residences where the zone is unknown, or those outside of the designated fire hazard zones which are “in, upon, or adjoining a mountainous area, forest-covered land, brush-covered land, grass-covered land, or land that is covered with flammable material,” (Gov’t Code 51182 and 1C in CAR FHDS 5/21 – basically, homes in or near ample kindling) should also make these disclosures if they might be considered materially important. Even when it’s not legally necessary, any homeowner might voluntarily disclose using sections of this form. To show that a home is not in a designated high or very high fire hazard severity zone, sellers simply check the box indicating so in paragraph 2B.
Is the address in a high or very high fire hazard severity zone?
Not all homeowners know if their property is in one of these zones, but it’s the seller’s responsibility to find out! In paragraph 1B the form suggests that a natural hazard zone disclosure company could determine this information (and if you’re selling you may have already ordered a report that would contain those details), but it certainly isn’t the only resource.
With multiple offer situations in Silicon Valley real estate bids, sometimes buyers write an offer and later decide that it’s too much or too little, or that some other change is warranted (before it’s submitted). Can you change your purchase offer after it’s written, or is it a “done deal” once you’ve signed it?
The good news is that you can change your offer before it has been given to the listing agent / sellers. Many buyers do, either because they changed their mind or strategy, or because they just got new information. What is key is circling back to your buyer agent quickly, before the email is sent.
Why would you change your purchase offer?
Awhile back, some of my buyers were bidding on a San Jose home. As I asked the listing agent more questions and we got a little more information from that agent on the numbers of offers being received, my clients wanted to improve their offer. We redid page 1 of the contract, which is where all the financial basics are listed. Their improved offer went to the listing agent and it was seamless.
At other times, even after the offer is submitted, I have had buyers ask to improve their offer. The pages of the contract which were involved in the change were redone, signed and resubmitted. This is a bit like going through the counter offer process yourself. (more…)
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. If you want to sell your home in 2021, it’s very important to understand the “law of fixtures” as it relates to what you leave and what you take with you – unless the inclusion or exclusion is specified in the contract.
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.
For all of these reasons, I do not suggest that homes be bought and sold “subject to inspection“. (more…)
Agent Visual Inspection Disclosure, top of page 1
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.
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 need to do this? 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.
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. On more than a few occasions, I’ve had sellers push me to change my disclosure to eliminate something negative that they denied was an issue or to change the wording – as if it were a marketing piece. Listing and buyers agents are legally required to make disclosures of known issues, though. Most sellers do understand this and appreciate that they are avoiding future lawsuits by fully disclosing what they are aware of and not impeding their Realtors from doing the same. On one occasion I had to cancel the listing agreement due to this issue: I had a legal obligation to disclose something, but the sellers refused to sign my AVID unless I removed it.
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: (more…)
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.