Real Estate Questions by Home Sellers
Frequently asked questions:
On the other hand, if you are a sophisticated investor, and are familiar with the requirements for sale of fewer than four units of residential property, the forms used to get a purchase into escrow, the requirements of physical and termite inspection by the buyer, and the process to close the escrow, you may attempt it.
But, even sophisticated sellers often consult with me because something has gone wrong in the transaction, for example, the buyer stalls in closing because of some repair or concession that you may be unwilling to give. These clients often become confused and trapped in the requirements of the forms they use, usually the California Association of Realtor’s forms for residential sales. These forms are crafted to give the realtors a punch list of the very complex requirements of a residential sale, and to protect realtors, not buyers or sellers. While these forms are not without faults, they are commonly used by most real estate professionals in California, because they cover the basics. If you pay attention to the orderly sequence of performance provided in these forms, you will be better prepared for contingencies.
If you fail to advertise that you will not accept offers from brokers or agents, most, if not all the contact you will receive will be from real estate agents, either to seek a listing from you or to bring a buyer to you. If you do advertise your refusal to pay broker’s commissions, your traffic will be far less, with fewer potential buyers, and slower sales. In the market of only a year ago, this would not have been the case, but the residential market has cooled considerably, mainly because of the unrealistic prices sellers have listed their homes for sale, and by fear of trouble in the economy.
Unless you are an unusually sophisticated seller, honoring broker/agent offers may be in your interest. Realtors are in the business of making money and are always willing to make a deal. Listing brokers usually want a commission of at least 5% or more and expect to split that with the buyer’s agent/broker. You could try to negotiate with each prospective buyer’s agent for a commission of 2-3%, but this, too, has pitfalls. Any agent can only collect a commission if it is paid to his or her broker first. Any agent that negotiates with you about a commission must obtain the consent of the broker to any arrangement, and it must be in writing!
First, you can ask the realtor and his or her broker to waive the listing in favor of yourself or another broker. Most professional and experienced brokers will do this cheerfully, because they know that, even if you are unhappy with them, if you fire them and they go away amicably, you will not bad-mouth them as much as you would if they refused to withdraw. If you have a cooperative broker, this is the best of all possible solutions for everyone.
Second, not all brokers and agents are so cooperative. A broker’s refusal to waive the listing agreement is more frequent in a tight real estate market where listings and sales are hard to come by. If you make the offer to the agent/broker to withdraw and waive the exclusive listing contract, and they refuse, there is only one reason. They were counting on the money that they were going to earn, and now that you want out, they will want to be paid.
This is often the case when sellers come to me. While the realtor has enforceable rights, an attorney’s examination of the agent/broker’s performance to market the property with the broker usually focuses the broker’s mind. If your complaints are reasonable, reason can prevail.
One last point, all real estate transactions, even waiver of rights under a listing agreement must be in writing! This is required by what is known as the “Statute of Frauds,” so named because oral agreements often are in the eye of the one who seeks to enforce them, usually with an interpretation in their favor and adverse to the other party. If you read this page and no other advice sinks in, remember, ALL REAL ESTATE AGREEMENTS MUST BE IN WRITING!
What if you don’t have a release? This is a time when you cannot do it by yourself. You need an attorney. There will be delays, at the very least. You may have to impound some of the purchase price until mediation and arbitration process has run its course. You may have to pay a lot of attorney’s fees. So, GET THAT RELEASE IN WRITING! Get your attorney to draft one for you. Make sure that it has the magic words, including “waiver of all claims,” and an express waiver of Civil Code § 1542, for unknown claims.
You have several opportunities BEFORE close of escrow to make things right. First, before you sell, you should have a competent inspector examine the property to determine if there are any deficiencies. If there are any, have your realtor include those deficiencies in the ‘TRANSFER DISCLOSURE STATEMENT.” If you do this, you put the buyer on notice that those defects are there. Many realtors try to talk their clients out of this, for the simple reason that they believe hidden defects disclosed by a seller discourage buyers. There may be some truth to that, but you should anticipate that by setting your price so to take those defects into consideration. By disclosing the defects, you and the seller will be forced to do a cost benefit analysis of whether the defects should be repaired by you or whether the purchaser will purchase the property without repairs. In the end, you will have disclosed any defects that you know about, be able to show a paper trail that you have gone to great lengths to find any defects, and this will act as a defense against latent deficiency claims.
The difference in a commercial setting is often the scale of the transaction. For example, at the writing of this page, the average home in suburban Escondido County may be sold for $650,000-$750,000.00. That is a lot of money, but not nearly as much as a commercial property would bring. A small office building with several offices in it may command $1.5-$5M, depending on its location. A buyer and the lender he or she elects to finance the transaction, will demand that “due diligence” be performed by a team of accountants, lawyers, and building inspectors to determine just what the buyer is getting into.
That is not to say that a seller is immune from breach of contract or fraud claims for undisclosed defects. The buyer in a commercial setting still has remedies for the damages he or she suffers because the seller did not perform or misled the buyer. The point of this section is that they buyer does not have the same remedies as a buyer in a residential setting.
That means a business plan, a marketing plan, and a sales plan. Each must be as detailed as possible. Each must be ready to present to investors and banks, who will only loan money if the plan, the calculations, and the marketing make sense to them. If you have never done a business plan, you must seek help in doing this work, and be prepared to pay for it. Do NOT think you can do this alone if you have never done it before.
You must understand that there are at least two general types of investors, which have different expectations:
The first type of investor is one that takes a piece of the action by investing their own money, with the expectation of a partnership or dividend share of the profits. If this type of investor, especially a friend, loses his or her money, they will probably look to you to pay them back by either suing you or making your life miserable for years. Unless you have made sure that you have created an entity that protects you from claims of investors, and the investor knows that the entity is the sole source of funds to investors, not you, you may be responsible for the debts and losses. This is an instance where proper planning prevents poor outcomes. This will not be an absolute protection from a burned investor, but it is a beginning. With full disclosures of all your planning, budgets, and market factors to the investor, you can shift the risk away from you to the well-informed investor.
The second type of investor is a bank or lending institution. To keep them happy, you simply must make your payments as promised. That lender or lenders will insist upon a security interest in any property you acquire, by a recorded deed of trust, no matter what condition the property is in. That means if you fail to pay the bank or investment capitalist that takes a security interest, they foreclose and take the property from you. This occurrence often prevents you from paying the first kind of investor, and causes the most difficulty, the end of your venture, and financial catastrophe, unless you have planned ahead for this contingency! You should always ask “what if?” and have a plan for that situation.
To protect against this outcome, you must be adequately capitalized. That means you must have enough money to buy, build, sell, and pay your taxes, either from lenders or in your investors’ money. Planning will tell you how much will be necessary. And, when you have your plan and a budget, you must add a substantial figure, at least ten percent or more, as a contingency fund, because the costs of any project are subject to market forces and delays that you will not foresee. Again, Proper Planning Prevents Pathetically Poor Performance.
If you had this property solely for investment, the sale of the property will be subject to capital gains. If you just take cash after payment of indebtedness and closing costs, you may have to pay a substantial amount of that sum to the IRS. The amount you owe will be calculated in a complex formula taking into account your original purchase price, the depreciation you have taken from the property, and your costs of acquisition and sale. When your accountant has calculated your capital gain, you will have to pay 15% of that to the IRS in capital gains tax.
If you plan properly, you can avoid this tax. The principal planning device is to take advantage of an IRC § 1031 tax deferred “exchange.” Basically, this means that you sell one property, and you invest the proceeds in another “like kind” property of equal or greater value within certain strict time frames. If you chose to do this, you must retain a “facilitator,” that will hold the funds and invest in the new property. Any money that you take out of the transaction, meaning if it goes through your bank account, is “boot,” subject to capital gains. So beware and take care.
The original question presented involved getting cash out of an investment. If you have not been hiding in a cave over the past several years, you know that there is a red-hot market of investors that are willing to lend on the equity in your property. If you choose to borrow more, or to refinance to increase your indebtedness, remember one thing. YOU HAVE TO PAY THE MONEY BACK.
If a client asks me whether I recommend selling property in Escondido or Southern California, I ask them what their objectives are? If they just want cash to live, and they cannot afford to live without selling the property, then by all means sell, but beware of capital gains tax.
If the client wants to sell to reinvest, then the client must do reasonable cost-benefit analysis to determine if the lost income, lost equity appreciation, capital gains exposure, and costs of sale charged from the old property will be offset by the income and equity appreciation of the new property? Only examining all your options, and making the best calculation of a client’s can make this choice less difficult.
Real Estate Questions by Home Buyers
Frequently asked questions:
Well, they can and often do. But owners that opt to sell properties by themselves often wish they hadn’t. The value a realtor brings to the table now is the ability to negotiate through the blizzard of paperwork that is necessary to get a transaction into an escrow, to assure that all necessary disclosures have been made, and that termite and building inspections have been completed with information delivered to the buyer in some semblance of order. This is not rocket science; but, if you don’t do it every day, which a realtor does, you will be lost.
I often counsel sellers on an hourly basis, and the charges rarely compare to the $20,000.00-40,000.00 that a real estate broker wants in commissions for a middle range home sale in Escondido County. Unless the owner insists upon preparation of sales documents from scratch, for which he or she will pay a premium, I advise purchase of the California Association of Realtors forms from its web site.
The buyer should be aware that the developer often sells a shell house with minimum improvements, at market value. The developer will attempt to sell the buyer on improvements, such as flooring, windows, carpet, lighting, and other details for a premium, which will substantially increase the price of the home. Often the buyer is so rushed that he or she does not feel that they have no option but to sign the documents and hope for the best. It is at this stage that buyers come to me.
These contracts are by their nature “adhesion” contracts, in which the buyer has no leverage and all the power in the transaction rests in the seller. It is important that a prospective buyer have the patience to seek legal advice, even if the selling agent insists that other buyers are waiting to snap up the house. If you know what you want, you must compare your goals with the agreement you are going to sign. When faced with a 30 or 40-page set of documents, this is not an easy task.
If the buyer finds that he or she has signed a contract that is not what they believed it was, the buyer must act quickly to cut his or her losses to rescind the contract or negotiate for terms more in line with purchase goals.
The bottom line is the seller wants to maximize his or her return on investment and you want to get value for your money. If you and the seller cannot come to an accommodation about the defects, you must do a cost-benefit analysis of how much you have to spend, how much it will cost you to improve the home to a condition that will be satisfactory to you, and whether you have the purchase price and the corrections in your budget.
One of the most frequent consultations I give is to purchasers of homes after sale, when they have discovered defects that were not disclosed to them in the sales process. Buyers have rights to full disclosure of all defects in the condition of the property known to the seller before sale. If it can be shown that the seller knew of some defect and failed to disclose it to the buyer, the buyer can sue the seller under the Civil Code to obtain damages and attorney’s fees.
First, you must work with the lender. It will not go away if you do not make payments. You can negotiate with them, if you are persistent and patient. Make sure that you confirm each agreement with the lender in writing, as oral agreements regarding real estate are of little value. If the lender’s agent fails to be flexible, act quickly to secure representation to negotiate for you. Often when an individual is involved, the lender has no flexibility. But when an attorney becomes involved, the lender magically becomes more willing to deal.
Often, especially with the present lending market, the solution is to refinance the house with another lender. The borrower can pay off the defaulted loan, and get a deferral of payments until escrow closes. This option is only open to the borrower that acts quickly and diligently to enter the market and find financing. Often clients come to me too late, and cannot find a solution to their problem in the very few days left before a sale.
Second, if you do not reach an accommodation with the lender before it serves a “Notice of Sale” you will have 15 days or so to make a deal or pay the loan off in full, plus foreclosure fees and costs. This is the direst of situations, and unless you have resources to fully pay the loan off, you likely will have no leverage with the lender. Avoid this predicament and get to an attorney as soon as you have fallen into default!