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Copyright 1996, Marc S. Weissman Weiss & Weissman, San Francisco, California (650) 574-0362 To Contact us: email Phone/Fax/Mail Homepage |
When buying or selling a single family home most Californians proceed without a lawyer. In simple, routine transactions this is not a problem, although any time a transaction is the least bit out of the ordinary an experienced real estate lawyer should be consulted to ensure that your interests are protected.
The purpose of this Guide is not to supplant a review of real estate transactions by an attorney. The purpose is to give a broad overview and understanding of many situations and contract clauses common to simple, single family residential transactions.
Real estate transactions are the biggest investments most people make. Stress levels on all sides of the transaction run high and the financial stakes are the highest in your life.
If a Seller negotiates a reduced fee, will the other agents have adequate incentive to sell the property when the house down the block is a full commission deal?
The agent wants a long duration. For a `hot' property 90 days may be enough; in a depressed market the agent may ask for 6 months. The Seller is stuck with the agent for the specified duration and should not sign a listing for more than 3 months; the Seller can always extend the term if the agent is doing a good job.
If the listing expires and a sale is completed with a Buyer brought in by the agent (or another agent acting through the listing agent), a commission is probably owed.
Many agents list the property with "Multiple." Multiple Listing Service disseminates information about listed properties, both `on line' and by book. This gives wide publicity to the property. The listing agent splits his commission with the agent who finds a Buyer for the property. The normal split in the Bay Area is 50-50.
It is vital to understand every "standard" clause and its consequences BEFORE signing any contract. If you do not understand a "Standard Contract" do NOT sign it. Read it entirely: the front, back, and all the fine print.
What is needed to turn an offer into a binding contract? Acceptance, without significant change. Any counteroffer cancels an existing offer; it may not thereafter be accepted.
How long is the offer valid? All offers should have an automatic expiration clause, so that the offer self-destructs if the other party does not accept it within the specified time. A couple of days may be reasonable; "expiration on presentation" is the fastest possible self-destruct if the other party does not accept immediately.
CONTINGENCIES Normally the offer has many contingencies. Contingencies give one party the right to back out of a contract. Be sure that you understand who is to give notice under each contingency, and if and when notice is required. Don't miss any notice deadlines.
The offer should clearly specify the ground rules about the financing contingency. If the Buyer applies promptly he should have an answer within 30 days. After the specified time what is required? Does the contract require that the Buyer give the Seller notice of: failure; success; or nothing?
Notice of loan approval or rejection is required in the manner specified by the contract. Each contract is different and many are vague. Some contracts require notice if the Buyer is successful. Other contracts require notice if the Buyer is unsuccessful. Other contracts require the Seller to give notice!
A typical loan contingency clause reads:
"Buyer may cancel the contract if he is unable within 30 days to obtain an 80% mortgage for 30 years at 7.5% fixed rate."
If the Buyer's loan application is rejected, what is he required to do to cancel the purchase?
The above clause is vague. It does not state what notice is required, nor how nor when. A better clause would continue:
"If Buyer cannot obtain this mortgage within 30 days Buyer must notify Seller (in writing within 30 days of the date of this contract) of his election to cancel this contract. Failure to give notice of cancellation within such time period constitutes waiver of this financing contingency."
This clause is clear; the Buyer's obligations are certain; there is no confusion about what is required when.
Failure of the financing contingency is the greatest cause for cancellation of a contract for the sale of residential property. It is also the greatest cause of disputes because most contract clauses commonly used are too vague and create uncertainty.
Buyers should never waive a loan contingency until they receive an unconditional written loan approval. "Pre-qualification" is NOT sufficient.
Pre-qualification usually are full of escape language, such as, "Based on Buyer's unverified application he appears to qualify." This is NOT a commitment; the lender can reject the loan. Then the Seller must refund the deposit and remarket the property.
Most Buyers obtain a standard pest control report costing about $175. Although everything is negotiable, Section 1 defects (actual damage) are generally the Seller's responsibility; Section 2 defects (likely to lead to pest damage) are generally the Buyer's responsibility. The contract should put limits on responsibility. For example, "Seller shall pay for all Section 1 defects up to $3,000. If Section 1 defects exceed $5,000, the parties will re-negotiate."
Buyers should be present at the inspection and should freely ask the inspector questions. They should make sure nothing is "inaccessible." The inspector will not move boxes or materials or drill holes to inspect areas he cannot readily see. Instead, he will ignore them as "inaccessible."
If the property "passes" the $175 inspection, consider more in depth inspections (roof, structural, general) which could reveal costly future problems. Spending an extra $750 for thorough inspections may help avoid a lemon.
If undiscovered problems surface after a purchase many Buyers want to sue. Discovery of the problem by professional inspections before the purchase is a much better solution.
Buying a home is the biggest investment most people make, well worth having professional inspections by experts who work for you.
Click here for more information on Property Inspections.
We have seen situations where a chain of four transactions all fall apart because one buyer could not qualify for a mortgage, causing a chain reaction as each contingent deal failed. [Mr. A cannot get a loan so he properly backs out of his purchase of Mr. B's house; Mr. B then backs out of his purchase of Mr. C's house . . .]
Sellers must provide a Transfer Disclosure Statement (TDS) (except in Probate sales). Sellers must disclose any fact or condition which affects the value or desirability of a property to a reasonable person. This includes facts about the neighborhood and non-structural facts about the house. When filling in the TDS anything material must be disclosed, even if there is no place on the form for the fact.
If a Sellers provides reports to Buyers they should include a cover letter which states: "The attached report was prepared by a licensed independent inspector. Seller makes no warranty about the accuracy of this report."
Click here for Disclosure of Death on Property
ON AN "AS IS" SALE THE BUYER IS STILL ENTITLED TO INSPECT AND REJECT A PROPOSED PURCHASE IF A POOR REPORT IS OBTAINED.
LIQUIDATED DAMAGES means that the Seller may retain the deposit (up to 3%) and cannot sue for additional amounts for the Buyer's breach of the contract without cause.
From the Buyer's perspective Liquidated Damages fixes his downside risk. In a breach of contract case, at worst he loses his deposit.
From the Seller's perspective it limits potential recovery, but greatly simplifies smaller disputes. Typically the broker is entitled to half of the deposit as his commission for the failed deal.
The Liquidated Damages Clause must be initialled by each party or it does not apply. If you want Liquidated Damages to apply you must add the following clause to the contract or it is optional with the other party:
"This contract is expressly contingent on all parties initialling the Liquidated Damages clause."
ARBITRATION also must be initialled by each party or it does not apply. As a general rule arbitration is less costly and faster than litigation.
The Arbitration Clause must be initialled by each party or it does not apply. If you want Arbitration to apply, add the following clause to the contract, or it is optional with the other side:
"This contract is expressly contingent on all parties initialling the Arbitration clause."
As a general rule we recommend arbitration if we represent a Buyer but not for a Seller. This is because if the Buyer discovers a small problem, it may not be worth filing a lawsuit against the Seller, but it is easier to arbitrate and cause headaches for the Seller.
Click here for more on Arbitration & Mediation.
The Seller has greater risk since he has tied up his property; the Buyer has risked only his relatively small deposit. Further, in the event of a lawsuit, a Buyer may file a lis pendens against the property, freezing the Seller's ability to sell or refinance.
This Guide outlines legal ramifications of buying and selling real estate. For tax information, see our Home Owner's Tax Guide.
There are 4 basic problems:
During the Probate (usually 1 or 2 years), the Executor may sell property. If the Executor has Full Powers under the Independent Administration of Estates Act, with consent of all interested heirs he may sell without Court confirmation or auction.
Without Court confirmation we believe that sales prices are higher and the transaction is much easier and faster for everyone involved. For more information cluck here for Probate Brochure.
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