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.
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. (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…)
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.
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.
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: (more…)
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. (more…)
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.
“When in doubt, disclose” is the advice that real estate and legal professionals use as a guiding principal in home sales. And yet many sellers forget or miss things that should be told to the buyer, and some listing agents are a bit sloppy in reviewing their clients’ disclosure paperwork. It is not uncommon to see questions unanswered or only partially answered. The home owner may presume that if the disclosure paperwork was done wrong, the Realtor hired to help market and sell the home will catch it. Would that it were so, but too often, that is not the case.
To avoid problems later, whether small or big, it is best to be thorough and careful while making your disclosure.
Small problems are created by seller (and listing broker) omissions when the paperwork gets kicked back for clarification or to complete the needed response. Bigger problems are forged when a sale is nearly closed and a new disclosure is made – introducing a brand new 3 day “right of rescission” for the home buyer. Worse yet is something substantial which is only brought to light after the close of escrow. At that point, it’s not an inconvenience, it risks being costly and time consuming to resolve it.
The State of California requires that the Transfer Disclosure Statement or TDS be filled out in most realty transactions. The intention of the form is to help you, the property owner, to disclose anything materially impacting value or desirability. That’s a tall order to fill, so other forms have been created to supplement the TDS, which has pretty much become Step #1 for disclosing defects and other issues to buyers.
What kind of things are often skipped in the real estate disclosure paperwork?
On the TDS, a very common error involves the question as to whether the property has any shared features with other properties. Almost always, this answer is “yes” because there’s a fence sitting on a property line (or in the case of a condo, a common wall or at least common HOA facilities). Some sellers think that if they respond yes to anything, it’s a problem, so just check no, no, no. And many of the agents working with them don’t catch it.
Another common mistake is to answer “yes” but not explain further. Often a question will broach a broad subject. In the question about shared features, the question specifies walls, fences, and driveways – so if the owner marks yes, it needs to be clear which of these applies, or if it’s something else.
There are two other disclosures that sellers complete, the Seller Property Questionnaire (SPQ on the CAR forms, used in most of the San Jose area) and the Supplemental Seller’s Checklist (SSC on the PRDS set of forms, which is commonly used in Silicon Valley between Los Gatos and San Bruno). Both ask about modifications to the property (PRDS is far more thorough on that subject). Recently I showed a home that was almost completely remodeled in recent years, but when asked if the home had been modified in any way, the seller answered “no”. And the listing agent did not catch it.
Why an incomplete TDS is bad for seller
If a Transfer Disclosure Dtatement or TDS isn’t completed, the buyer gets an automated 3 day right of rescission when it is completed and delivered. Miss a box or an explanation? You’re at risk, Mr. or Ms. Seller, of giving the buyer(s) a new 3 day contingency.
Beware of under-disclosing. If you have had 6 repairs on a leaking deck over 6 years and it seems to leak after each repair, you don’t want to say simply that “the deck was leaking but repaired”. The new owners will find out, eventually, that you had what appeared to be an unfixable problem. It will not go down well.
It’s important for the home owner to really take time in thoroughly filling out this paperwork. Non-disclosure, or under-disclosure, by sellers to buyers is the #1 reason for real estate lawsuits.
It is also extremely important for home buyers to thoroughly review the disclosure paperwork and to look for any hints of further issues or red flags. Often the seller makes mistakes quite unintentionally due to rushing or sloppiness. But you do want to catch it if that happens. Ask questions. Look at the property carefully – you may see something that the listing agent and home seller missed completely. Investigate.
For more information, please also read:
What Do You Need to Know About Disclosures when Buying or Selling a Home in California?
Why do real estate agents do a visual inspection of the properties they sell?
What remodeling or replacing work requires permits and finals?
Why Is There So Much Paperwork When Buying or Selling a Home in Silicon Valley?
Unless you are a real estate licensee, it’s likely that you never heard the term “implied agency”. If you are in the realty business, you need to understand this concept. What is it?
Implied agency and agency relationships
Before explaining implied agency, it’s best to start with what an agency relationship is or means. If you hire a real estate licensee or Realtor to assist you in buying or selling a home, normally you and he or she create an agency relationship.
In California, a licensed real estate professional can be a buyer’s agent, a seller’s agent, or, if disclosed, a dual agent – representing both parties, both buyer and seller. The agent, by the way, references both the individual real estate licensee as well as the broker. If the same broker of record represents both the home buyer and seller, it’s a dual agency situation, even if there are different Realtors involved.
Here, we use a disclosure form (see link at bottom of article for the full text of it) which spells out the agency relationship and duties – it is statutory, meaning that the state dictates the words to be used on the form, whether it’s published by the California Association of Realtors, the Peninsula Real Estate Date Services or any other entity. An agency relationship means several things, but above all, it means that the real estate professional has fiduciary obligations to the seller or buyer being represented, including those of of “utmost care, integrity, honesty, and loyalty” to that client.
Most of the time, when an agency relationship has been created, there’s a meeting of the minds between consumer and real estate professional that they will be working together. The relationship is not accidental, but intended and explicit.
Sometimes, though, in the course of casual conversation, it may be possible to accidentally create an agency relationship. If this happens, it is referred to as “implied agency“. How can this be? This may occur when the real estate professional casually provides the type of guidance and advice that would be reserved for clients, but that consumer relies upon that advice. (more…)