The Purchase Contract – Part 2

The Purchase Contract – Part 2  (Click Here for Part 1) Buyers and sellers often ask me “what’s customary for a home purchase contract?” or more simply “What do most people do here?” As a real estate attorney with many years of FSBO experience (my primary practice area), this blog post will explain the typical contract terms for parties without a realtor:

  1. The purchase price. Most people choose the ‘market value’ as the purchase price (note that the purchase price does not include closing costs). Market value is considered the amount that a reasonable seller is willing to accept and that a reasonable buyer is willing to pay for the home. Historically and today, reasonableness is measured by ‘comparable sales’. If the home is located in a city or suburban neighborhood (with lots of comparable sales around), then you can get a pretty accurate estimate of market value from Zillow, Redfin, etc. If searching yourself for comparable sales, keep in mind that the most important factors are square footage, the number of bedrooms and bathrooms, and the age of the house. One of my favorite things about realtors is that they do ‘comparative market analysis’ (CMA) reports that help their clients accurately assess a home’s market value.
  1. Initial Deposit. The initial deposit (also called ‘earnest money’) is usually 1% of the purchase price. (In a seller’s market, where there are lots of potential buyers competing, sometimes this number is 3% or higher). Approximately 1-3 days after both parties sign the purchase contract, the buyer gives the initial deposit to the escrow company (by check or electronic funds transfer) for safe-keeping. This money counts toward a buyer’s home purchase (so for example on a $500,000 home purchase, after the buyer makes his initial deposit of $5,000, the remaining sum due at close of escrow is $495,000 at close of escrow). The initial deposit is refundable if the Buyer cancels within a contingency period.
  1. The Loan. Most buyers need a loan to purchase real estate, and most people use a conventional loan (i.e., a loan from Wells Fargo, Bank of America). The typical purchase contract will specify the loan amount and interest rate, so it’s helpful to know these upfront (otherwise you have to write ‘buyer’s choice’). Most buyers get a loan for 80% of the purchase price – for example, on a $500,000 home purchase, a loan for 80% is $400,000, so the Buyer’s lender pays $400,000 at close of escrow and the Buyer pays the remaining $100,000 out-of-pocket at close of escrow.
  1. The Interest Rate. Because the purchase contract requires the maximum interest rate that the Buyer would feel comfortable accepting, most buyers use the interest rate quoted by their bank (i.e. 4.5%) and then add one-half percent or so (i.e. 5%). The contract specifies the ‘maximum rate’ the buyer will accept, so buyer remains free to accept a lower rate (i.e., 2.5%) if Buyer can achieve it.
  1. As-Is Sale. Most sales are as-is, meaning that the buyer purchases the property in its current condition, and the seller will not perform repairs before close of escrow. Having an as-is sale doesn’t change the fact that buyer still has contingencies – so buyer can cancel the as-is sale within a certain amount of time (i.e., after buyer has done property inspections). Sometimes the property inspections reveal property damage, and the Buyer will negotiate with the seller for a contract amendment to give buyer a ‘repairs credit’ (i.e., $10,000) so the Buyer gets a price reduction on the as-is sale. And of course, the seller is still required to provide disclosures on an as-is sale. In this way, disclosures help both parties, because when an issue is disclosed, the buyer learns what he needs to know and the seller stays protected (i.e., the buyer cannot later come back and make a claim against the seller for nondisclosure). Disclosures are win-win!
  1. Contingencies. It is customary for the buyer to have two contingencies: (a) inspection, and (b) loan & appraisal.   The normal time period for these contingencies is 17-21 days. During the contingency periods, the buyer processes his loan application, reviews the preliminary title report from the title/escrow company, and also hires professional contractors (usually one home inspection contractor, and one termite inspection contractor) to prepare inspection reports. During these contingency periods, the buyer is free to cancel the contract and receive a full refund of buyer’s initial deposit. At the end of the contingency period, the buyer must decide whether to cancel the contract (cancellation) or go forward with the contract (release contingencies).
  1. Escrow & Title Company. It is standard to use an escrow & title company for real estate purchases/sales in California. Most people choose one of the big names in their area, such as First American Title, Fidelity National Title, Chicago Title, Old Republic Title, North American Title. Fees vary slightly from office to office – you can usually save a hundred dollars or so by calling ahead to get quotes from different offices.
  1. Close of Escrow Date. Typically, escrow closes within 30-days of both parties signing the purchase agreement. And it is common for the parties to work together if either side needs more time to complete the transaction (i.e., if Buyer needs an extra 10-more days to receive final loan approval (ie., commitment letter) from his lender, then the parties just sign a simple contract amendment allowing more time).
  1. Closing Costs. The parties normally pay closing costs according to the custom of the county where the property is located. Closing costs are miscellaneous expenses paid in escrow (i.e., escrow fee, title insurance, taxes). Nothing gets paid out until close of escrow. The parties are free to split closing costs according to local custom (which is normal), or 50/50, or any allocation desired. Here is a chart for California showing the custom of each county: http://www.firstam.com/assets/title/ca/respa-reform-tools/who-pays-what.pdf. And for a breakdown of average closing costs, please see my article here: https://norcalfsbo.wordpress.com/2013/04/23/closing-costs-an-overview/
  1. Liquidated Damages & Arbitration. It is customary for the parties to initial the sections of the contract relating to ‘liquidated damages’ and ‘arbitration’. In a nutshell, these say that if the buyer cancels the contract after the expiration of a contingency period, then the seller can keep up to 3% of the buyer’s initial deposit. And in the event of any dispute, the parties will first try to mediate, then if that fails, they’ll submit their questions to an arbitrator (usually a retired judge or experienced attorney) to bring a final resolution.
  1. Disclosures. It is customary for the Seller to provide a Real Estate Transfer Disclosure Statement (TDS) and a Seller Property Questionnaire (SPQ). The other standard disclosures are generalized (i.e., Natural Hazard Zone Disclosure) or standardized (i.e., Carbon Monoxide Detector Notice), so they require little or no input from the seller. It is customary for a seller to utilize the assistance of a realtor or an attorney (like myself) to prepare the disclosure package. Some cities have specific disclosure requirements, like RECO in Berkeley or the 3R report in San Francisco, so it’s especially helpful to work with a professional here.
  1. Included Property. It is customary for buyers to request any home appliances (i.e., fridge, stove, washer/dryer) and other personal property (i.e., outdoor fountain, window curtains) that they would like to be included in the sale. If an item of personal property is not specifically listed as included in the sale, then it is excluded. By contrast, ‘fixtures’ (i.e., built-in cabinets, ceiling fans, plumbing) are not personal property, so fixtures are automatically included in the sale unless the parties specify otherwise. The standard contract includes lots of standard examples to help the parties meet their goals here.
  1. Contract Timeline. It is customary for the realtor (or attorney) to prepare a contract timeline after the purchase agreement is signed. The contract timeline is like a checklist that helps the parties track steps and key dates toward close of escrow.
  1. Contract Amendments. It is customary for the parties to use ‘contract amendments’ when new issues arise that require small adjustments to the purchase contract. Some common situations are: (a) buyer needs more time for the loan contingency so he can process his loan, (b) the loan documents are late so the parties need to extend the close of escrow date, (c) the contractor’s inspection report revealed some unanticipated damage, so the buyer would like to receive a certain dollar amount credit at close of escrow so that buyer can handle the repairs himself after close of escrow.
  1. Lease Back. It is not common for the seller to lease the property back from the buyer after close of escrow. However, when it is desirable for the parties to have this arrangement, it is customary for the realtor (or attorney) to prepare a standard lease-back form (or lease form) that specifies (a) the amount of time that seller can lease-back (usually 30-60 days), and (b) the rent and security deposit amount (usually rent is set at the market rate or else the buyer’s mortgage amount). Also, it is customary for buyer to pay real estate taxes and insurance during the rental term, and for seller to pay for all maintenance, utilities, and upkeep.

– Greg Glaser, Attorney at Law San Francisco Bay Area – Northern California (925) 642-6651 gregoryjglaser@earthlink.net Flat Fee Packages Available for Buyers and Sellers Without a Realtor For Sellers: www.GregGlaser.com/FSBO.html For Buyers: www.GregGlaser.com/buying-a-home-without-a-realtor.html

Closing Costs – An Overview

Closing costs are fees paid by the buyer and/or seller from funds that have been deposited in escrow.

Closing costs generally total around 1% to 2% of the home purchase price, and the buyer and seller apportion these costs between them according to the purchase contract — most contracts simply use local custom for the apportionment between buyer and seller.  For example, in Contra Costa County, it is common for the buyer to pay the escrow fees and title insurance costs, whereas the seller pays for the County transfer tax.  Here is a useful website charting these customs in Northern California: NorCal Closing Cost Allocation Chart.

And there are many other closing costs as well.  Here’s a breakdown of the most common closing costs and fees with a rough estimate of average cost in Northern California:

HOME INSPECTION-RELATED CLOSING COSTS

* Home inspection ($300 – $500) – This fee is paid by the buyer who hires and pays for a licensed contractor to inspect the property.  The contractor prepares a written report (often with photos) to chronicle any needed/recommended home repairs, including any safety issues as well.  The home inspection becomes part of the official disclosures on the property.

* Wood Destroying Pest Inspection ($125 – $200) – This report is generally paid for by the buyer or the seller.  The inspector is a licensed contractor who inspects the property and prepares a report chronicling any evidence of termites, dry rot or other wood damage.  Like the home inspection report mentioned above, this termite inspection report also becomes part o the official disclosures for the property.

* Natural Hazards Disclosure Report ($120)–  This is usually purchased by the seller.  It’s a long disclosure document covering miscellaneous facts about the geographical area and local governance, such as natural hazards (i.e., earthquakes), airports, taxes, etc.

* Home Warranty ($300 – $400; optional) – Often a seller, or a buyer’s agent, will pay for a 1-year home warranty to benefit the buyer. This is an insurance policy for the buyer to cover appliances for the first year of home ownership.  Additional items beyond appliances can be added to the policy if desired.

* Survey Fee ($200 – $400; optional) – This fee goes to a survey company to verify property boundaries.  In the average home purchase, this is not required.  It is only required if the buyer or lender require it by contract.

* Home Owners Association Documentation and Transfer Fees ($400 – $600; obviously $0 if no HOA) – Often the Seller will pay for these fees paid directly to the HOA covering the property.  The HOA documentation fees are almost always paid upfront by the seller, whereas the separate HOA transfer fees are paid out of escrow funds at close of escrow.  The HOA documentation includes things like bylaws, CC&Rs, HOA financial statements, minutes and notices.

TITLE AND ESCROW RELATED CLOSING COSTS

* Escrow Fee ($1,000 – $2000, or more specifically calculated around $2.00 per thousand dollars of purchase price plus $250) – This is paid by the buyer or seller (per contract and/or local custom) to the title company or escrow company.

* Lender’s Policy Title Insurance (around $800 for $750,000 home).  The party who pays this fee varies by local custom.  The fee itself is calculated from the purchase price off a rate table at the insurance company.  This is insurance to protect the lender in the event a third party challenges the ownership status/title of the home.

* Owner’s Policy Title Insurance (around $1,900 for $750,000 home).  The party who pays this fee varies by local custom.  The fee itself is calculated from the purchase price off a rate table at the insurance company.  This is an insurance policy protecting the buyer in the event a third party challenges the ownership status/title of the home.

* Courier Fee ($50; not always needed) – This covers the cost of transporting documents to complete the loan transaction as quickly as possible.  The party that necessitates the courier pays for the service.

* Notary Fee ($50 – $100) – This is the cost to have a licensed notary oversee the signing of the closing documents just before close of escrow.  This cost is usually split between the parties, or each party pays for their own notary signing.

* Recording Fees ($20 – $100) – This is the fee charged by the escrow company to record the new deed at the county.  This can be paid by either the buyer or seller.

GOVERNMENT-RELATED CLOSING COSTS

* County Transfer Taxes ($1.10 per $1,000 in sale price) – This is the county tax due whenever title is passing from a seller to a buyer.  This is paid by the buyer or seller (per contract and/or local custom).

* City Transfer Taxes (varies by city; sometimes no tax).  Separate from the county tax, some cities (like Oakland, Berkeley, Hayward, and Alameda for example)  charge their own separate city tax whenever title is passing from a seller to a buyer.  This is paid by the buyer or seller (per contract and/or local custom).  In Berkeley, for example, the city tax is $15 per $1,000 in sales price.

* Property Tax (varies due to closing date).  The buyer is responsible for paying property taxes.  And property taxes are 1% of the purchase price of the property per year, plus any extra sum for local bonds.  With regard to how these are paid as closing costs — because property taxes are prepaid by the homeowner during the year of the sale, the buyer must compensate the seller at close of escrow with a prorated amount covering whatever sum that seller has prepaid the tax for that year.  For example, if close of escrow is on June 1, and Seller already paid property taxes up until July 1, then the buyer must pay a closing cost credit to seller equivalent to one month of property tax.

* Credit Report ($30) – Buyer pays for a credit report from the three main credit reporting agencies (i.e., Experian), which is obtained directly by the Lender.  Buyer cannot supply his own report that he obtains independently.

LOAN-RELATED CLOSING COSTS

* Appraisal Fee ($150 to $450) – This fee is paid by the buyer (or the buyer’s lender) to the appraisal company to confirm the fair market value of the home. This fee will generally vary based on the price of the home.  Occasionally the lender will require this fee be paid upfront by the buyer, rather than at close of escrow.

* Escrow Deposit for Property Taxes, Mortgage, Insurance (varies widely) – Often the buyer is asked to put down two months of property tax and mortgage insurance payments at closing. These prepaid items usually include insurance premiums (for Homeowners Insurance — also called Hazard, or Fire Insurance — and Private Mortgage Insurance) and estimated Real Estate Taxes.  Notably, HUD regulations limit the amount of money a lender may require the borrower to hold in an escrow account.

* Loan Processing Fees (around $900) – Oh, lending fees. This fee is paid by the buyer to his lender to pay the lender for processing the loan.

* Underwriting Fees (around $700) – This fee paid by the buyer goes to the buyer’s lender, covering the cost of researching whether or not to approve the buyer/property for the loan.

* Loan Discount Points (zero to two percent of loan amount)
– This fee is paid by the buyer.  Points are often referred to as ‘prepaid interest’.  The key thing to know is that one point is equal to one percent of the loan amount.  So for example, 1.25 points is equal to 1.25% of the loan amount.

* Pre-Paid Interest (varies depending on loan amount, interest rate and time of month you close on your loan)
– This fee is paid by the buyer to cover the mortgage interest up through the first of the month.

PROFESSIONAL-RELATED FEES

* Real Estate Agent Commissions (3% of purchase price) – The seller pays the commissions of any licensed real estate agents identified in the purchase contract, including the buyer’s agent (if any).  The average real estate commission is 3%.

Greg Glaser, Attorney at Law
San Francisco Bay Area – Northern California
(925) 642-6651
gregoryjglaser@earthlink.net

Flat Fee Packages Available for Buyers and Sellers Without a Realtor
For Sellers: www.GregGlaser.com/FSBO.html
For Buyers: www.GregGlaser.com/buying-a-home-without-a-realtor.html

Rent-to-Own

Deciding Whether To Pursue A Lease-to-Own

If the price is right, a ‘rent to own’ option can be the best way to secure the right to buy from a willing property owner, and still keep your ‘options’ open. One way to look at the situation is that you are paying the owner a premium rent for the option to purchase if you choose. The risk that the owner could back out of the sale is offset by the rule of “specific performance” that empowers courts to force a property sale after the buyer meets his obligations.

Logistics of Lease-to-Own Agreement

To make sure that your option (right to purchase) is “certain” in the eyes of the law and therefore enforceable, it is recommended that you physically attach a copy of a completed property purchase contract (but unsigned) to the lease itself. This will ensure that both you and the owner are on the same page with regard to all purchase terms (i.e., purchase price, allocation closing costs, character of title conveyed, whether option payments go toward the purchase price).

One item to beware is landlords who request an exorbitantly high non-refundable deposit for the lease-to-own option.

A local realtor can assist you by using the applicable ‘CAR forms’. Or hire a real estate attorney such as myself (with purchase option experience) to draft these documents for an affordable flat fee.

Some common terms of a purchase option agreement (added to the lease): (1) date the option begins, (2) date option expires, (3) consequences of accepting option, (4) consequences of not accepting option, (5) method of accepting option, (6) whether previous option payments offset the purchase price, (7) consequences if property is destroyed during existence of the option.  Here is a sample contract I drafted for illustrative purposes: http://contractwell.com/real-estate/lease-option-to-purchase-residential-home.html

Helpful tip for 2013: Try to find ‘rent-to-own’ situations for homestead acreage with water rights, then farm the land organically and watch the income not only pay for the option but also increase the value of the land, thereby making it more purchasable at a fixed option price. Steps: (1) Find a Property with accessible water (pond, natural spring, or underground water): You can find these properties on Craigslist or Realtor.com.  (2) Apply Basic Organic Farming Techniques.  For organic heirloom seeds, use Sustainable Seed Co and for sustainable farming books, check out Joel Salatin’s Polyface Farm.

Compare Seller Financing

Another option you may wish to consider is “seller-financing.” With seller-financing you pay your monthly mortgage to the seller, but you receive the deed immediately. Generally, a seller will only finance for 3-5 years (at small monthly payments), after which the whole loan amount becomes due, so the buyer needs to refinance or sell the property before the 3-5 years are up.

Assistance Starting an Organic Homestead

For assistance buying or renting an organic homestead, please contact me for free legal services: www.gregglaser.com

Here is my homestead: http://www.PeaceDomeRanch.com

Purchasing Property – The Big Picture

Purchasing real property (land, home) is an important life decision with rewards and responsibilities.

Throughout the ages, humans have revered land ownership as a symbol of power and independence. However, in certain cultural views (my own included), humans cannot own the land, but rather we are only land stewards.  This point has a strong ethical and romantic foundation, because it places humans in the role of actors in an ecosystem, rather than as “owners” of mighty forces beyond our control.  We are guests on earth, and the Father in heaven hosts us.

Philosophically and practically, the owner/steward of a resource has the greatest incentive to protect it and promote its value. Therefore, the majority of societies have found it to be sound economic and environmental policy to vest legal title to land with individuals. The so-called “Tragedy of the Commons,” provides the rationale – the masses tend to overexploit limited community resources, whereas individual owners/stewards tend to protect limited resources. Notably though, there is an opposing perspective that the Tragedy of the Commons is actually a myth – http://www.globalresearch.ca/index.php?context=va&aid=9916.

In any case, the distinction between “legal owner” and “steward” may only be semantics. By focusing on title ownership rather than land ownership, society tends to accomplish each of the following goals:

  • Protecting the environment – Legal title helps avoid the tragedy of the commons (overexploitation of the commons by the insatiable hunger of the masses).
  • Promoting economic productivity – Legal title gives individuals the incentive to promote the value of the land’s resources
  • Dealing effectively in legal matters – Legal title is generally all that is needed to become the official steward of a piece of earth with respect to all other human beings on the planet. One couldn’t, and shouldn’t, ask for anything more.
  • Retaining ethical respect for the land – Legal title is a document that humans use to express an interest in land, but it does not (at least theoretically) seek to deprive any other living things of their respective rights. This allows respect for ethical/spiritual views that treat the earth as a living organism, and also respects the rights of animals and other living things to have the opportunity to thrive on the earth.

For more information about being a good steward of the land visit, check out farmer Joel Salatin’s view of what it means to go natural: http://www.polyfacefarms.com/. And also read this author’s expose of the danger of modern pest control practices, and his offer of some natural solutions to promote good stewardship: http://www.stephentvedten.com/
Lastly, for a philosophical view of land ownership and class issues, see the works of Henry George.

Professional Spotlight – Real Estate Agents

Professional Spotlight – Real Estate Agents

This FSBO blog would be incomplete without an article specially dedicated to the many benefits of hiring a real estate agent:

1. Knowledgeable

Real estate agents are knowledgeable about the buying and selling process.  I am as well, but real estate agents are often better trained at making appraisals on houses, and they compile lists of local sales.  They use these skills and their data to prepare Comparative Market Analysis Reports (CMAs).   I don’t write these reports — I’m generally no better at gauging a home’s sales price than looking at Zillow or Redfin.

I’ll also add that I have learned a great deal from real estate brokers about the buying and selling process.

2. Standardization

The real estate sales process is largely standardized today in the forms used to document the purchase contract, disclosures, title, and escrow.  High-level realtors and attorneys have worked together to create this standardization and it is relied on throughout the nation for efficiency and predictability.  And this standardization also helps minimize errors, which further promotes confidence in the real estate industry.  I use forms provided by the California Association of Realtors (CAR) because they provide that desirable confidence and efficiency.

Interestingly, having read a great deal of California real estate law in my career, I can assure you that not everything on the standard forms today is required by law. But I can also tell you from my experience working in this industry that the vast majority of clients have no interest in rocking the boat or learning what isn’t required – they want the forms because they want standardization.

3. Professional

Real estate agents are licensed by their State’s Department of Real Estate. By contrast, I am licensed by the California State Bar (a different entity).  Maintaining a clean record and a positive reputation in the community is incredibly important to the professionalism of both a real estate agent and a real estate attorney.

As part of their licensure, real estate agents are required to obtain basic knowledge regarding legal and contract requirements in the real estate sales process.  (A few years of experience goes a long way too!) Lawyers are trained differently – in some areas we are trained more specifically than agents (i.e., how to analyze and resolve title disputes – clouds on title) and others more generally (i.e., real estate sales contracts) – which is why it is customary that the only lawyers who document sales transactions are experienced ones with an established real estate practice.  And of course some attorneys are also licensed real estate agents.

The real estate industry provides valuable check & balances on buyers and sellers who may have unreasonable expectations or are prone to making odd statements when interacting with other buyers/sellers.  Real estate agents and attorneys are therefore quite useful to the system as a whole to counsel this segment of the population – as professionals we oversee the process and help to provide stability, predictability, and civility.  It is difficult to put a price tag on that added value.

4. Personable Negotiators

Real estate agents are generally very personable people who are skilled at showing homes and courting interested parties in a sales transaction.  By contrast, I personally lack the temperament for this sort of thing.   I may be relatively personable but I have no desire to show properties or engage in some long discussion about comparable sales.  Here is my goal as a closing attorney: I want to identify the agreed upon terms of a prospective home purchase, and then I want to document them, and then I want to assist in a limited role to oversee an efficient and orderly closing process.  You will never find me baking cookies for an open house.

The National Association of Realtors (NAR) has provided an industry publication that infers that homeowners are more likely to receive a higher price for their home if they use a realtor.  Source: 2011 National Association of REALTORS® Profile of Home Buyers and Sellers. The statistic makes sense to me because it’s a commentary about society as a whole.  But in that society there will always be savvy individuals who know they can achieve their desirable price or home purchase without a realtor.  It is for these individuals that my services make the most sense.  For perhaps the large majority of the home selling population though, choosing a realtor rather than a closing attorney is more advantageous.

 5. Commissions

If real estate agents didn’t receive 3% commissions, I presume there would be much more house-flipping in America.  So we can thank the industry for helping to bring stability to the real estate sector of the economy in this regard.

Notably, your average real estate agent does not receive the whole 3% of his commission: he has to pay a large portion to his brokerage house.  Realtors also have a relatively high over-head cost for things like office expenses and professional liability insurance.

The commission structure is nice for homeowners because it helps relieve the stress and pressure from an already stressful buying/selling process.

In the big picture, real estate agents help ease the buying/selling process, and they add professionalism – I like that a lot.

Greg Glaser, Attorney at Law
San Francisco Bay Area – Northern California
(925) 642-6651
gregoryjglaser@earthlink.net
www.GregGlaser.com/FSBO.html
Flat Fee Packages Available for Buyers and Sellers Without a Realtor

California Home Sale – Required & Standard Disclosures

For a California home sale, here is a list of the required/standard legal disclosures:

Usually provided at the time of signing the contract Usually provided within 10-17 days of signing the contract
8-page (varies) Purchase Agreement specifying the right of the buyer to   terminate the contract upon 72-hours notice upon receiving a new inspection or disclosure 2-page Lead based paint disclosure
2-page Real Estate Transfer Disclosure Statement (TDS) 17-page EPA lead disclosure pamphlet
2-page Buyer’s Inspection Advisory 40-page (varies) Natural Hazard Disclosure Report (order it online from 1st American)
1-page Seller’s Statutory Disclosure (SSD) 1 or 2 page Water Heater & Smoke Detector Statement of Compliance
1-page Megan’s law disclosure (if not already in the purchase agreement) 1-page carbon monoxide detector notice

 –

53-page guide to earthquake safety

 –

45-page environmental hazards pamphlet

 –

16-page energy conservation booklet

 –

10-page (varies) Home Inspection Report (by a contractor chosen by Buyer)

 –

10-page (varies) Wood Destroying Pests and Organisms Inspection Report (by   a contractor chosen by buyer or seller)

The buyer does not need to print and sign every page of these documents above, only the pages where a signature (or initial) is requested. Also, every page can usually be processed electronically (even signature pages), so the parties are free to exchange fax/email copies as if they were originals.

If you are a paranoid detail-oriented seller, consider making a checklist of every disclosure document you give to the buyer. You can invite them to sign your checklist to ensure everyone is on the same page.

Sellers, the law requires you to be honest and reasonable when making disclosures.  You are not required to disclose trivial or immaterials things; but you are required to disclose all material problems or conditions that a reasonable buyer would want to know. What does a reasonable buyer want to know?  A reasonable buyer wants to know matters that are relevant to the property’s condition and market price (i.e., safety, livability, construction, neighborhood, insurance claims, liens, etc.). It definitely helps to put yourself in the buyer’s shoes; would you want the matter disclosed to you?  Experienced real estate attorneys agree – when in doubt, disclose it.

Greg Glaser, Attorney at Law
San Francisco Bay Area – Northern California
(925) 642-6651
gregoryjglaser@earthlink.net
www.GregGlaser.com/FSBO.html
Flat Fee Packages Available for Buyers and Sellers Without a Realtor

FSBO – The Purchase Offer (Part One)

Once the buyer identifies the home he would like to buy, he can either (a) negotiate informally with the seller regarding the essential terms of an agreement, or (b) he can prepare a formal purchase offer.

                Informal Negotiation

Starting the process with informal negotiation is usually the best approach for both parties.  The key items to discuss are:

(1) Purchase Price – This is the price that seller is willing to accept and that the buyer is willing to pay to buy the home, excluding any closing costs….

(2) Closing Costs – Closing costs are added onto the purchase price and usually represent about 1-2% of the purchase price.  The main items are the escrow fee, title insurance, and city/county transfer taxes.  Most buyers and sellers choose “the standard allocation” of closing costs for their county.  But closing costs are negotiable too, so if you want any unique apportionment of closing costs between the parties, then the negotiations stage is the time to say so.  The typical allocation of closing costs varies from county to county – click here for a helpful list for Northern California.

(3) Initial Deposit – Also called an ‘earnest money’ deposit, this is the dollar amount that the buyer deposits (goes toward the purchase price) with the escrow company  promptly upon the signing of a formal agreement (usually deposited within 3-days of signing).  A useful rule of thumb is that earnest money rarely exceeds 1% of the purchase price.

(4) Property Condition –  The parties should discuss the physical condition of the property and any appliances that will be included with the sale.  If the buyer wants the seller to make any repairs prior to the close of escrow, then those repairs need to be stated clearly in the signed purchase contract (usually described in an addendum/attachment).  Whether repairs are requested or not, after the purchase agreement is signed it is customary for the buyer to hire a contractor to perform a home inspection (average cost: $300-$500), and for the seller to provide a termite inspection report from a local contractor (average cost: $150).  After receiving these reports, if the buyer does not like what he finds (i.e., cracks in the foundation), the buyer has the right to promptly cancel the agreement and receive a full refund of any initial deposit.

(5) Close of Escrow Date – On this date the deed is transferred to the buyer, and the escrow pays off any of loans owed by seller on the property, and the seller receives the remainder of funds.  This date is usually at least 30-days from the time that the purchase agreement is signed.  So, in the purchase agreement you can specify this date either specifically (i.e., December 1, 2012) or generally (i.e., approximately 60 days).

(6) Other Key Dates – the parties need to specify the dates when:

  • (a) The seller will provide buyer with all the required disclosures — usually these are provided no later than 7 days after signing the purchase agreement
  • (b) The buyer will finish his home inspections — usually these are completed within 17 days.
  • (c) The buyer will confirm that his loan has been arranged and that the lender will pay out the funds on the date for close of escrow — usually this is confirmed within 17 days.

(6) Any Contingencies –  If the buyer is getting a loan, then the agreement will need a loan contingency.  Contingency is just a legal term meaning that some event needs to happen first before the agreement can be completed (i.e., loan must be approved, or buyer must first sell his own house); and if that event does not happen, then the agreement will not be consummated.  So for example – with a loan contingency, the buyer is only obligated to go forward with the purchase if he can get a satisfactory loan.  If the buyer tries diligently (in good faith) to get a loan, but is unable to do so, then the buyer is entitled to a refund of any initial deposit and the parties just walk away.  Thus, for purposes of the purchase contract the buyer needs to state how much money (the % of the purchase price) that he is prepared to put down (pay out-of-pocket) for the house to get a loan.  In the typical home sale these days, the buyer should be prepared to put down 20%-25% of the purchase price in order to get a conventional bank loan.

Formal Purchase Offer

A formal purchase offer is a complete and written ‘agreement’ document signed by the buyer and presented to the seller.  It becomes a binding contract when the seller signs it.  Or the seller can choose to present a counter-offer (see section below on counteroffers).

The purchase offer should be specific enough to define the key terms. Please see the six-part list above for the key terms that need to be in the purchase contract offer.  And here is an example: Purchase Offer Sample.  As a real estate attorney, I generally use a CAR form, especially when working with sellers who are represented by an agent.  It adds to the mutual confidence of both parties, and lenders like CAR forms too.

If the seller accepts the offer by signing it within the allowed time stated in the offer, then a valid contract is formed.  To open escrow, just give a copy of the contract to whatever escrow company the parties mutually choose.

     Counteroffers

Many times, especially where the parties have chosen to forego informal negotiations, the seller will respond with a counteroffer.  Then it is up to the buyer, to either accept the seller’s counteroffer or continue the formal negotiation process by presenting the seller with yet another counteroffer.

A counteroffer is accepted when both parties sign it.  If the counteroffer is not a complete contract itself (i.e., it is a 1-page document stating only a few sentences that request changes to the original offer) then to form an agreement it will be necessary for the parties to concurrently sign the original offer that the counteroffer is modifying, so long as they all handwrite at the bottom of the original offer, “See counteroffer dated _______”

Legally, if the seller presents a counteroffer and the buyer rejects the counteroffer, then the seller cannot go back to the original offer and accept it unless the buyer explicitly says the original offer is still valid despite the counteroffer.   This is because a counteroffer acts as an automatic rejection of the original offer or previous counteroffer, unless explicitly stated otherwise.

Greg Glaser, Attorney at Law
San Francisco Bay Area – Northern California
(925) 642-6651
gregoryjglaser@earthlink.net
www.GregGlaser.com/FSBO.html
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