Real Estate Questions by Home Sellers

Frequently asked questions:

Q:I want to sell a house, but I don’t want to pay a 5-6% broker’s commission. Can I sell this property by myself?
It depends. I know that sounds like a lawyer fudge, but in this case, the answer really does depend on some more facts that only you, the Seller, may know. The first variable is whether you are a first time seller or have limited experience in selling property. If that is the case, you need a broker to arrange the transaction and to assure that the transaction is final. If you are new to residential home sales, then there are a range of pitfalls that can cause you grief. My recommendation is that if you are not intimately familiar with the requirements of real estate sales, get yourself a listing broker, negotiate the best possible commission, if at all possible, a flat fee, and become as involved in the documents and sale process from beginning to end. If something looks like it is not right, it probably isn’t.

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.

Q:I want to sell a house, but I don’t want to pay a broker’s commission, but a buyer to whom I want to sell is represented by a broker and expects me to pay a commission, what do I do?
This is a problem that can be solved in your advertising for sale, by expressly stating in any ads that you place in the paper, the sign on the lawn, or any marketing that you do: You must DISCLOSE before any offer is presented that you will not accept offers from broker’s or agents. And, stick to it. If you don’t, and you are tempted to accept an offer from an agent for a buyer, that realtor has a right to claim a commission for preparation of the documents and bringing the buyer to you.

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!

Q:I have listed my house for sale with a broker, but I have had no offers, and the realtor is not doing anything to sell the house. Can I fire the agent and replace him or her with someone who is more aggressive?
The answer is not a simple yes or no. If you have listed your house, and signed the form that the realtor gives you, which is usually an “exclusive” listing for a period of months or a year. This gives the realtor an exclusive right to the commission agreed, under almost all circumstances, for the full commission for the period stated. This presents some difficult problems for a seller.

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!

Q:I have sold my house and now we are ready to close escrow. A former real estate agent has presented a demand for a commission, even though he or she agreed to withdraw. What do I do?
This is not an uncommon situation, most often occurring in commercial property sales, but not unheard of in residential sales. At the last minute, when you think that all of your ducks are in a row, an old broker/agent faxes a demand to the escrow officer to be paid a commission. I remind you of the advice given in response to the previous question: If you get your withdrawal in writing, you will not have a problem. It is only when you rely on an oral agreement by your agent or broker to withdraw that this can happen. The first thing the escrow officer will do is ask for a release signed by the claiming broker and agent. If you don’t have one, the escrow will not close. You will have to negotiate with the fired broker to get them off your back and out of your life. The agent knows that, and their broker knows that. Worse, like most businesses, real estate brokerages are becoming bigger and bigger, and are ruled by the bottom line. If a commission can possibly be recovered, a large firm will marshal its forces, and attorneys to get paid.

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.

Q:I have sold my property, bought a new house, and the buyer of the old house contacts me about deficiencies in the home and wants me to pay. What do I do?
At this point, you should call your lawyer. If you have used a CAR form, the first thing that you must do is offer the buyer mediation. As I have stated elsewhere in these pages, you MUST do this to preserve your right to claim attorney’s fees and costs if there is litigation. Beyond that, it shows the claiming buyer that you are serious and will not settle a nuisance claim of a few thousand dollars to make them go away. You must test this buyer and the claims they make, by forcing them to both show you evidence of the deficiencies, AND, if there are really deficiencies that they can prove, that they were either known to you before close of escrow or could not have been discovered by them by their inspector. These “latent” deficiencies used to be the bread and butter of construction defects plaintiff’s lawyers, because they could be brought at any time up to 10 years after close of escrow. Civil Code § 1102.1, et seq., a scheme of statutes passed to protect consumers can and should be your protection as a seller.

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.

Q:What do I do if I knew about a defect and I didn’t disclose it?
Some attorneys will tell you that this is the definition of a fraud. And they are right in most cases. A seller that makes omissions about defects in a property that are invisible to the buyer, expecting the buyer to rely upon the your disclosures omitting the facts you know, may be liable not only for breach of contract damages, but also liable for fraud and punitive damages in some circumstances. There are defenses, though. The main exceptions to the general rule are when the defect is readily ascertainable by a reasonable person, and the buyer’s inspection should have placed them on notice that the defect existed. There are many variations on this theme. But, to avoid this dangerous situation, and a potential judgment against you, you must go the extra mile to find out about defects in your property, and DISCLOSE them before you sell.
Q:Is a seller subject to the same disclosure rules in commercial sales?
Not necessarily. The law of disclosure in real estate sales at the commercial level is not augmented by the special rules provided for residential sales of fewer than four units. A commercial buyer is presumed to be a sophisticated investor, with the capacity to know and understand the value of a property and is able to protect him or herself in a purchase from a commercial seller. Often, unlike in residential sales, a sale of a commercial property is “as is,” meaning the buyer assumes the risk of all defects when escrow closes.

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.

Q:I want to become a developer or serious real estate investor. I have several friends that want to invest, and I have founds some properties that can be developed. What should I do?
This is serious stuff, and it is how most of the fortunes in Southern California have been made. If you want to dip your toe into the potentially lucrative real estate development/investment arena in Escondido or Southern California, you must be aware of the risks BEFORE you invest.
Q:What are the risks?
The primary risk is that you will lose your money and that of your investors. The only way to avoid this risk is to do your homework thoroughly, examine the current use for the property, and the investment that you must make to exploit current earnings or to develop the property to make it earn more. This takes planning. It also takes the assistance of professionals, such as accountants, attorneys, and contractors that are familiar with the costs, benefits, and risks of real estate investment. With your dream in place, you must plan both how you are going to finance your budget, plan for a range of contingencies, and make certain that you have a target market to ultimately bring the dividends that you expect to make with the business.

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.

Q:Is losing my money the only risk?
NO! Unless you are independently wealthy and you are only using your own money, you will have to raise money from investors and banks.

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.

Q:I have an investment property in Escondido County. I have seen that the market has risen dramatically over the last several years. I want to cash in on that investment by selling it. Is that a good idea?
It depends on your financial and tax situation. If you have lived in the property for more than two years and want to buy another house for your use with all of the proceeds, you may do so, and if you invest the money in another residence for your occupancy within two years, there will be no tax consequences to you.

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:

Q:Do I need a real estate agent to sell my house?
That depends on a lot of things. In the current market for residential housing, a for-sale sign goes up and the house is sold in a few days. In the old market, the value a realtor brought to the table was its ability to market an owner’s property through its advertising and the multiple listing service. Because owners see the value of such marketing is less due to the high demand for homes, they rightly resent the large chunk of the sales price they are required to pay to a listing agent. They ask, why can’t I sell it myself and save the 5-6% of the sales price?

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.

Q:I am a buyer of a home in a new development. The developer has given me a stack of forms to sign and is pressuring me to use their financing. What should I do?
This is a common predicament for new home buyers in the Southern California area. Developers wish to avoid payment of large commissions to independent real estate brokers, so they hire their own and collect the commissions themselves. They also see the advantage of financing the transaction, and collecting fees and points from the buyer for the privilege. In a market where inventory is meager and price and terms of financing fluid, this arrangement has all the economic advantages to the developer and the buyer often feels rushed and squeezed to make commitments he or she doesn’t really understand in the hopes of getting a home. The problems begin there and often the buyer is disappointed with the results.

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.

Q:I am a buyer of an older house. The seller wants to sell it “as-is,” but there are many apparent defects in the house. The seller won’t budge on the price. What can I do?
The seller may sell the house “as is,” but he must disclose known defects in the house to you before you buy. Further, you have an opportunity to perform a physical inspection of the property and object to defects within time limits stated in your purchase agreement. That is usually stated as a number of days after the final purchase agreement is signed, but that date may be stated otherwise. Look for “Physical Inspection” on the CAR form purchase agreement. The inspection periods are usually set at a default number but can be negotiated with the seller to another period. Work with your realtor to keep a schedule of all time limits on the agreement. If you do not observe these time limits strictly, you WAIVE any rights to complain later on most issues. If you comply with the time limits, this provides you with an opportunity to demand correction of the defects or concession in the purchase price. Sellers in a hot market rarely want to spend a lot of the purchase money on correcting defects that a buyer makes by himself, but if you hire a competent building inspector, who gives you a written finding of faults, you can use that report as a neutral examination of the property, which might provide the leverage to get the seller to fix the problems.

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.

Q:I am a buyer of a home and I have found problems with the plumbing that I am sure that the seller must have been aware of before close of escrow. Now, it is going to cost me thousands to re-plumb the house. The seller refuses to respond to my demands. What do I do?
This is a common situation. The buyer has a grievance, but the escrow is closed and the seller takes the position that the buyer had an opportunity to inspect and waived all defects in the inspection process stated in the purchase agreement. But the seller has a duty to disclose on the Transfer Disclosure Statement all “known” defects to the buyer. If you have evidence that the seller knew and did not disclose the difficulties with the property, you have rights under Civil Code §§ 1102.1, et seq. But if you used the standard California Association of Realtor’s set of forms for the purchase contract, to make sure you have protected all your rights, you must demand mediation as a precondition to any right to attorneys’ fees in subsequent litigation. It is a common error for lay persons and some attorneys to file a lawsuit first and then realize that by doing so they have made the lawsuit economically unreasonable by waiving the right to obtain attorneys’ fees. A seasoned real estate attorney will always demand mediation to protect these rights.
Q:I have had some financial difficulties and have fallen behind in my mortgage payments. The mortgage company is hounding me on the phone and the have sent me a threatening form called a “Notice of Default?” Will I lose my house?
This is another common situation. Homes in Southern California are very expensive and buyers must pay large mortgage payments to keep current. In the older market, where money was strictly rationed on an ability to pay; now, mortgage lenders grant loans based on loan to value ratios, with little consideration for the ability to pay. This is a sound strategy for lenders, because if they are forced to foreclose, the lender will be able to sell the property immediately at a substantial profit. What do you do if you fall into default?

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!

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