Westcoe Realtors, Riverside California…Ok…so I couldn’ t let a recent article in the local Press Enterprise go without comment, but sometimes, does it seem like the entire world has lost it’s mind?

The upshot of the article was that some bank repo properties (and individual sellers too) are spray painting their brown, dead lawns green with the hope that this will look better and lead to a faster sale.  It is noted that this has become a common practice for football fields with poor turf, or some golf courses with dormant grass (dormant=brown) and is done to make them look better from a distance…or when television is involved.  I suppose that may be justified when looking on your TV screen or from the nosebleed seats at a large football stadium, but at a house for sale?

Call me crazy, but who does anyone think they are fooling?  Dead grass is dead grass, whether the color is brown or green.  Also, does anyone think that the potential new buyer will not notice the dead grass has been painted?  I can see it now….”Look honey, new plush grass…this is great!”  You’ve got to be kidding here…not to mention the disclosures that would need to be made.

The bottom line is that this is one of those really ridiculous ideas that people who know nothing about marketing a home latch onto in a bad sellers market as the “magic pill” that will somehow get their home sold.  What a shame that someone actually thinks this will work.   Your home is not on TV, and is not 300 yards away from the buyer.  Your buyer will certainly walk-up your walkway, and unless they are clueless, they will see the lawn is dead.  What’s worse, since the dead lawn will be readily apparent, chances are they will begin to wonder what else has been “camouflaged”, and they may become suspect for anything else that may be hidden from them.  I would.

So…take it from someone who has been in this business for over 30 years…let this new “idea” die like the lawn.  Go natural, and green the lawn the old fashioned way.  Like I said…call me crazy.

Westcoe Realtors, Riverside California…Since the inception of this blog, there have been numerous postings regarding the pitfalls and frustrations associated with the attempt to purchase any form of REO or Short Sale listing.  It’s not that we at Westcoe are against a buyer trying to buy a home that is owned by a bank (or in the case of a short sale, possible owned by a bank soon) because we do it every day.  However, success goes to the prepared, especially at this time in our market.

So…why the quick update?  To remind you again of the following points.

SHORT SALES

1.  Remember, you’ve got nothing.  In most cases, the listing price means nothing.  It is just a number many times invented by the seller or listing agent to merely get the ball rolling.  Your offer is just a beginning point since the lender will not even consider how low they will go on their losses without an offer in front of them.  Your offer starts the conversation, but rarely finishes it.

2.  You may be a guinea pig.  Your offer forces the lender to give some type of answer, at which point another buyer can swoop in for a few thousand dollars more and purchase the home.  How can this happen?  BECAUSE IN MANY CASES, THE BANK AND SELLER HAVE ONLY VERBALLY AGREED TO TAKE YOUR LOW OFFER, AND THEN THEY DELAY IN GETTING YOU THE SIGNED CONTRACT…AND THIS DELAY ALLOWS ANOTHER BUYER TO WRITE A HIGHER OFFER THE BANK CAN ACCEPT SINCE YOUR VERBAL CONTRACT IS NOT BINDING…and who wants to sue the bank to prove your point anyway.  Remember #1 above…potentially, you’ve got nothing.  This stinks as a business practice, but we have experienced it numerous times.

3.  Do not forget that it can take weeks or months to get an answer from the lender…and no matter how much you push the listing agent, they have no control.  Also understand that while you are waiting around for your answer, the foreclosure process is still proceeding…which means it is not unusual for the property to go to foreclosure sale while you are trying to buy it!  Stupid…yes, but such is the nature of many lenders these days.  Their departments do not talk to each other, and as a result, the sale happens.  Remember…you’ve got nothing.

All of the above have happened to buyers represented by Westcoe Realtors in the past 10 days.  All of them knew the possibility of this type of “shenanigans” happening, but that does not ease the frustration when it happens.  Sorry…but you’ve got nothing until the lender has approved, IN WRITING,  the acceptance of your offer.

REO PROPERTIES

We cannot emphasize enough the enormous communication problems that are involved in an REO purchase.  Every single facet of the sellers side of the transaction is so grossly overloaded that communication is almost impossible.  Whether it be the lender, the asset manager, the listing agent, the listing agent’s staff, the escrow officer mandated by the bank that owns the property, or the title company also mandated by the bank, communication is the worst I have seen in my 31 years in this business…and this problem is not going to rectify itself anytime soon. 

IT IS HORRIBLE, UNPROFESSIONAL, AND BRUTAL ON EVERYONE INVOLVED…but with all due respect, you need to deal with it or don’t purchase a repo.  We cannot change it and we cannot control it…we can only control how we respond to the situation.

SO…when purchasing a bank owned property, take a deep breath, let this cumbersome process run it’s course, and release some of your control issues to the Real Estate Gods…because if you don’t, the resulting frustrations will eat you alive.

In the end, both of the above properties can be purchased and close escrow…we at Westcoe do it over 100 times per month for our clients.  However, forewarned is forearmed, and we want you to understand what is involved…because in most cases, if you are looking for the good deals, you will have to go through the banks to get them.

Hang tough, and let us buffer your purchasing process.  Trust me, we are good at it, and can help you get where you are trying to go.

Westcoe Realtors, Riverside California…There is a nifty little paragraph in the standard  Residential Purchase Agreement (paragraph 16 for those who prefer the numerical reference) labeled LIQUIDATED DAMAGES.  It is not a long winded explanation as some other references in a standard contract, but  it does affect who gets the money on deposit in case the escrow fails to close, and like the saying goes, dynamite comes in small packages…so beware to both the buyer and seller.  We thought a detailed discussion here might help those who are concerned, confused, or both regarding this important part of your real estate contract.

First…some background.  Prior to the advent of this ”liquidated damages” portion of the contract, when an escrow failed to close, there was always a dispute as to whom was at fault…and more importantly, who was to get the money on deposit.  No matter the real reason or culprit for the escrow fall-out, both parties generally retreated to their prospective camps and dug in for the eventual battle between good and evil.  The seller would insist they were entitled to the money for whatever reason, and the buyers would become equally entrenched in their belief that the money should revert to them.  In the end, the money languished in escrow until either an agreement could be reached, or the matter wound up in court (see blog of 5/27…What Happens to the Deposit Money When Escrow Fails to Close).  To avoid all this “interpretation-of-the-law” stuff, the Liquidated Damages clause was invented and added to all standard real estate contracts…BUT IT MUST BE INITIALLED BY BOTH THE BUYER AND SELLER TO BE VALID.  You have a choice on whether it is an agreed upon part of your contract.

In generalized terms, what this clause states is that since damages cannot be foretold at the beginning of the escrow period, both parties agree to use the amount of the deposit as the actual damages to be given to the seller…thereby avoiding any interpretation at a later date.  Limitations are placed at no more than 3% of the sales price (any excess money is to be returned to the buyer), and the property must be a single family dwelling of 1-4 units.  The intent here was to establish the “worst case scenario” up front, and then if the property failed to close due to the buyers default, then everyone knew what the damages would be.  Sounds fair and reasonable…and at times, it is.

So what is the problem?  Well, like so many contractual issues, sometimes we solve one problem and create the possibility for a few others.  Let’s look below at some of the issues here from the standpoint of both the buyer and the seller.

BUYERS PROSPECTIVE

In essence, what this paragraph now does is completely limit your damages should you decide to bail out of the contract after your 17 day inspection period has expired…even if you cancel at the last minute.  The seller is agreeing to not sue you, but to accept the deposit money instead.  Clean, simple, and neat.  Depending on the size of your deposit, you can get complete relief from any continuing legal issues the seller may have with your failure to complete the contract for as little as one or two thousand dollars.

In essence, this paragraph was designed to make you a bit more reticent to cancel a contract by imposing a penalty on you if you bailed, but in reality, it gives you a total way out of the transaction without risking a lot of money.  We realize that you don’t want to lose any of your deposit money, but read below in the “sellers” section to see why this can be a large benefit to a buyer.

SELLER’S PROSPECTIVE

Obtaining the buyer’s deposit may, on the surface, seem like a good thing..but understand fully what you are agreeing to do.  The intent of this clause was to protect sellers from the buyers arbitrary decision on day 44 of a 45 day escrow to simply decide to walk away and say “I’m sorry.”  The originators of this part of the contract rightly felt that was  not fair to a seller to just get “dumped-on” so late in an escrow, so the Liquidated Damages clause was designed to get the seller some money if the buyer simply breached the contract and walked away.  However, beware.

In the above example, let us assume that the buyer has $2,000 on deposit, and on day 44 they bail out for whatever reason.  You have now just won the right to the $2,000 deposit if all parties have initialled this clause in your contract.  But what if this $2,000 is merely a drop in the bucket for what your actual damages are?  What if you and your spouse have quit your jobs, hired a moving truck, have already packed (since you are closing escrow tomorrow), put deposits down on your new home, sent the kids ahead, etc.  Sound far fetched?  Not really.  Is the $2,000 even remotely going to cover the costs you have incurred…and will continue to incur while you resell the home?  Of course not, but you have agreed ahead of time that it will, so you are stuck.  You have waived your right to sue the buyer…and while no one is litigation happy, sometimes the threat of litigation gets people back on track.  But you do not have that here…you have a buyer who can literally walk away and leave you with a mess for a mere $2,000.  Doesn’t sound fair, does it?

So what should buyers and sellers do?

In the theoretical world, it would be nice if everyone was fair about situations that arise in a real estate transaction, but we are not that naive.  If you are a seller, the solution is to refuse to initial the Liquidated Damages clause unless the buyer has a large enough deposit that it will hurt if they walk away…and benefit you should they do so.  You are limited to 3% of your sales price, SO IF YOU SIGN THE LIQUIDATED DAMAGES CLAUSE, MAKE SURE YOU ARE GETTING ENOUGH MONEY TO COMPENSATE YOU FOR THE POTENTIAL LOSSES THAT COULD OCCUR IN THE WORST CASE.  Also, by making the deposit large enough to hurt the buyer if they walked away, then perhaps you can get them to rethink their decision to “walk away”, and save the transaction…which is the best thing that could happen anyway.

 In the end, while we are advocates for our clients, no matter whether buyer or seller, the best real estate transactions are fair to both parties.  Remember…pigs get fat, hogs get slaughtered!  The buyers deposit should be large enough to signal that they are serious about purchasing the property, since the seller will have the home off the market and make plans to move based upon the buyers promise to purchase.  If the buyer fails to close for a legitimate reason…well, that happens.  But if the buyer has removed all contingencies, and then fails to close, there should be a financial repercussion because the seller will no doubt incur some potential large costs to go back to square one.

We hope this real estate situation never happens to you, but if it does, at least now you are aware of all the ramifications of deciding up front on what happens to the deposit.

Westcoe Realtors, Riverside California…Even the most ardent recluse probably knows by now that our current real estate market is dominated by properties owned by banks.  These properties are known as repos, REO’s, foreclosures, and sometimes they are even referenced as “corporate owned”, but the bottom line is that they are all referring to the same thing…a home that has been taken back by the bank in a foreclosure proceeding and is now on the market for sale at an aggressive price with a variety of possible ills.  The purpose of this blog today is to help you with some of the increasing frustration that comes with trying to purchase a home of this type.

Multiple Offers

The first thing you need to know if you are thinking about purchasing a repo is that in most cases, the asking price for the property is very low and will generate many offers.  You will not be the only player in the game, and you will be competing against every other person who also wants to buy a home at a good price.  These low prices (read that as good valued homes) are the most sought after properties in our marketplace, and contrary to what you may have heard, the market is very active for these properties. 

Almost all repos are generating multiple offers (it is not unusual for a really well priced property to generate 10-15 offers), and ultimately, the bank will instruct the listing agent to issue some sort of “highest and best” counteroffer…which means you may be given one last chance to submit your best offer, with the highest price winning the bidding derby.  In the end, almost all well priced repos end up selling for far more than the list price.  This can be a frustrating procedure when you get beat out on a home you want, but remember…the agents have no control over his process.  The lender is already taking a huge…HUGE…loss on the home, and they have a right to get as much as they can for what is left.  SO…if you are leery of paying more than the list price, or don’t want to get in repeated bidding wars with other buyers, then stay away from the good deals the repos offer.  Understand, you must adapt to the market…the market will not adapt to you. 

Time Frames

Just a quick note here.  Please be aware that almost every agent who works with bank repos is buried..and so are the bank people they work with.  In fact, in most cases, the real estate agent who represents the bank is not able to talk with the bank directly, but instead with a middle person hired by the bank called an outsourcer.  So communication goes from the buyer, to the buyers agent, to the listing agent, to the outsourcer, to the bank, and back again.  (For a more detailed view on this subject, read our blog dated 3/26, Buying a Repo…An Explanation of the Process).  Therefore, communication is clogged at best, and horrible at worst, and it is not going to get any better…so be prepared to wait days instead of hours, and weeks instead of days for problems to get resolved or answered.  We, as professionals in this industry, dislike these communication delays as much as you…but the market does not adjust to us…we adjust to it.

The Banks Don’t Care About You

OK…here is the real issue you need to understand if you are going to survive the repo purchasing process.  THE BANK DOES NOT CARE ABOUT YOU.  They do not care about your family, your reasons for purchasing their property, your time-table, your need for answers in a quicker fashion, your need for a little extra time to close, your personal feelings about what should and should not be repaired, the hassles in your life that this escrow is causing, etc.  THEY SIMPLY DO NOT CARE.  You are a number, and if you cannot or will not perform to the exact specifications of the contract, then someone else will, and they will shed you like the bark off a tree and move on to the next person.

This may sound cold, but it is the reality.  You must understand that it is not unusual for the individual hired by the bank (the outsourcer referenced above) to be accountable for approximately 750 files at one time.  Of course that is a ridiculous number of properties to handle, but such is the nature of the repo world.  SO…with 750 properties representing anywhere from 10-50 different banks, do you really think this outsourcer cares even one iota about you?  Get real.  THEY DO NOT CARE.

What this means is that when you are frustrated, angry, upset, hassled, and all the other adjectives you can think of, find a way to deal with it, because the bank will not respond to your personal situation.  You are one of 750 potential buyers…and do not forget, the bank probably had multiple offers on the home you want. 

Try to understand that from the banks perspective, they have lost thousands (or tens of thousands, or even 6 figures) on the loan they originally made, they must pay utilities, some repairs, code violations, selling fees, sometimes cash to get the existing tenants out of the home so they can sell it, back taxes if any, homeowner association fees if any, and the list goes on.  They are not asking you to feel sorry for them, but conversely, do not ask the bank to feel sorry for you.  THEY DO NOT CARE. 

In the end, the banks know they are difficult to deal with, and while that is not their intent when they begin their days, it is how it ultimately works out.  BUT…THAT IS WHY YOU GET SUCH A GOOD PRICE ON THEIR HOMES.  So in the end, the trade-off comes down to a simple equation…do you want to put up with the frustration for an incredible price on a home that you might not be able to afford otherwise?  Because if you can keep your eye on the big picture here, you just might survive the repo purchasing process.  You’ve got to travel through some of the muck to get to the good stuff on the other side of the real estate pond…and yes, it is a hassle…but remember…a few years ago this home was way out of your price range  Good luck, and hang in there…it’s worth it.

Westcoe Realtors, Riverside California…Given the challenging nature of the real estate market we have chronicled here in the past few months, there appears to be one pressing question that is on everyones mind:  HAVE HOME PRICES BOTTOMED OUT YET…AND IF NOT, WHEN?

While I am loathe to get too fancy with any sort of predictions, I think I can get you close on the answer to the above question.  However, more importantly, I need to answer the underlying reason people keep asking this question…because I have come to recognize that the above question is really a code for another subliminal thought that has far more  implications than “have we bottomed out yet?”  Allow me to explain.

To answer the almost daily question about home prices…YES, IN A GENERAL SENSE, WE ARE NEAR THE BOTTOM OF THE PRICING SLIDE.  There maybe another 5% or so of pricing declines, but for the most part, we have taken the worst of the hit, and what is left is much less than what we have already absorbed.  The banks have pretty much determined the bottom pricing level with their repos, and they have no need to go any lower.  Why?  Because they have been very aggressive in their pricing and are now getting multiple offers on almost every property.  As a result, many of the repossessed homes being sold by the banks are now selling for more than the list price.  Given that, why would the banks go any lower on their pricing?  Hence, since they are the 800 lb. gorilla in the pricing arena, as they to, so go the rest of us…and they are not going any lower.  However, the above comes with a few caveats.

First, for some homeowners, their pricing still has a long way to drop, because some of these homeowners are still not willing to price their home as the market conditions dictate.  Unfortunately, everyone is competing with the bank prices, whether we like it or not.

Secondly, if the Fed decides that inflation is a far more dangerous animal than the housing market decline, and adjusts monetary policy accordingly (read this as higher mortgage rates), then our real estate market could soften further…which would lead to increased pricing declines.  So far, there is not indication of this, but stranger things have happened.

NOW FOR THE REAL REASON EVERYONE IS ASKING ABOUT THE PRICING BOTTOM.

On the surface, pricing is important for every homeowner to know…but I am afraid that my travels indicate that the real reason so many people want to know the answer to the pricing question is that they think THE MINUTE WE REACH THE PRICING BOTTOM, HOME PRICES WILL START TO RISE AGAIN AS THEY HAVE IN THE PAST, AND I AM AFRAID THIS IS NOT THE CASE.  All indications are that once we hit bottom, we are destined to bounce around on the “floor” for some time before we can see prices rise again.  How long will we bounce?  We have no crystal ball, but based upon what we hear, it would not be unreasonable to expect pricing to remain level for approximately 2 years, give or take.  Why?  BECAUSE HOUSING PRICES CANNOT RISE UNTIL THE LENDERS GET OUT OF THE HOMEOWNER BUSINESS…(AND BELIEVE ME, THE WANT TO EXIT THE OWNERSHIP MARKET AS BADLY AS WE WANT THEM TO GO)…but unfortunately, it will be quite some time before lenders sell all the properties they own, or expect to own.  We work with a lot of banks at Westcoe, and they are telling us that their number of repossessions are still increasing, with no short-term end in sight.  The bottom line is that after the ”bottom” comes a substantial period of pricing stabilization, not increases.  In the short term, this means it will be a buyers paradise for a while…and in the long term, this will benefit everybody…if we can just get there! 

Westcoe Realtors, Riverside, California…The absorption rate for the beginning of July, 2008 has held steady at 6.1 percent, matching the rate posted for the previous month of June.  The absorption rate is a measure of sales activity vs. available inventory, and those who frequent this blog on a regular basis (and if you don’t, why not?!) understand how incredibly important this measure is as an indication of the real estate market’s overall health and activity. 

An absorption rate of 6.1 means that it would take approximately 6 months to sell all of the available inventory for sale at the current rate of sales activity.  This 6.1 rate for July 1 is compared to a rate as high as 39.0 in September of 2007, and is truly an indicator that while prices have indeed fallen dramatically, the current real estate market is alive and kicking with sales activity at these new, lower home prices.

Since the beginning of 2008, the sales activity has risen from a January level of 154 sales for the Riverside area to June’s level of 428 sales…and the number of available homes for sale has held basically steady, with 2706 homes for sale in January as compared to 2602 on July 1, 2008.  All of this data paints an interesting picture of market stability in the number of homes for sale, combined with an increasing rate of sales. 

It is apparent that while the media continues to tout the vast number of foreclosure properties still “flooding the market”, the reality is that the number of new bank owned properties is generally keeping pace with the number of people who are looking to buy.  Call me crazy, but that sounds like a stable marketplace…and the numbers seem to prove that out.

Does this mean pricing has hit the bottom?  In many areas, we are very close…but in some, where the previous sales activity of the past few years dominated the entire neighborhood (a new housing tract, for example), there is probably more room for prices to edge downward.  However, as the numbers reported today indicate, at least the sales market is starting to rebound and support the new properties for sale…and that is the first step to stopping the merry-go-round of the past 12-18 months. 

Westcoe Realtors, Riverside, California…While it seems ironic to be concerned with “crazy financing” in our current real estate market (since one could say crazy financing has led to our current real estate predicament), there are some “less-than-optimal” financing schemes that always seem to resurface during lean real estate times…and today is no exception.  Having gone through 4 of these up-and-down cycles in my career, I thought it might be useful to forewarn both buyers and sellers of the pitfalls of the “new” financing options that are once again being trotted out as alternatives in our current market.

These financing options I will soon discuss always float to the top when we have two simultaneous things happening:  sellers who are having trouble selling their property in a conventional manner (owe too much, prices have fallen, want too much for the home, etc.) and buyers who cannot purchase in a conventional manner ( bad credit, lost their home, cannot qualify for current financing, etc).  When these two forces come together in the marketplace, driven by a desire that is not necessarily backed-up with ability, then it is a recipe for misunderstandings at best, and future disasters at worst. 

While all of this “alternative” financing can go by many names (those in a minute) THE COMMON FEATURE THEY SHARE IS THE PURCHASE OF THE HOME BY THE BUYER WITHOUT NOTIFYING THE EXISTING LENDER THAT A SALE HAS TAKEN PLACE.  This financing can be called “AITD (all inclusive trust deed), wraps, land contracts, and “subject to” financing.  Lease options can sometimes be included here as well, although we will discuss them separately at the end of this blog.

Understand, the scenario generally goes something like this.  The seller is desperate, and really wants/needs to sell the home.  In a market like this, the loan balance is generally higher than the current value of the home, so they cannot sell without having to bring forth some cash…cash that they do not have.  They are stuck, and cannot sell the home in a conventional way.

Enter the buyer…who is also equally desperate.  This buyer cannot purchase in a conventional manner either, generally because they have poor credit (possibly foreclosed upon which is happening a lot these days), lack the necessarily income to purchase at the price they desire, etc.  SO…what happens when these two highly motivated parties get together…maybe with the help of a less than honest real estate broker?   Generally speaking…a short term solution and a long term mess.

 Here is the problem.  When everyone in this equation gets their heads together, all they do is form a rock pile!  Eventually, no matter how one slices it, these enterprising people decide to let the buyer take over the existing financing on the home, not tell the lender, and then worry about it later.  Understand that almost every loan has a clause (alienation clause, or due-on-sale clause) that is very specific here.  It says, in legalese, that the seller cannot sell the home and keep the financing in place without the lenders specific approval.  If they don’t get this approval, then the lender can call the entire balance of the loan due and payable the minute they discover the transfer of title has taken place.  Simple, clean, and deadly to our buyer and seller in this situation.

Knowing this, the buyers and sellers proceed anyway.  Why?  Because they are desperate, and they think they can outsmart the bank.  The problem here is that this type of financing is the “real estate gift that keeps on giving”…and what it generally gives are headaches for both parties.

First, the bank is like your parents…they have seen it all.  No matter what mechanism you come up with to keep the payments going to the bank, the outcome is that they will eventually find out.  Trust me.  They can check the utility bills now in the new buyers name…the tax write-offs by the new buyer instead of the old seller…the new mailing address for the old seller…they can check with title because something will have to be recorded or the new buyer is merely renting the property with no legal protection from the seller selling it again to someone else!…and I could go on.  It may take a year or two, but in the end, the lender will find out, and they get very angry that you tried to pull a fast one on them.   They will have every right to call the entire amount of the loan due right now, and if the buyer doesn’t have the cash the lender wants (and few of us do), then foreclosure will ensue.

Ready for more downfalls?  I know everyone thinks that if the lender does find out in a couple of years, then the buyer can simply refinance at that time, and all will be well.  But…doesn’t that sound a lot like the same line that has currently gotten a lot of people in trouble today?  Remember…there is no guarantee that either the buyer will be able to refinance in 2 years, or that the home will qualify.  So…Once the you-know-what hits the fan, now what?

Well…assuming the buyer still cannot qualify for a new loan to replace the one now being called by the lender, here’s what happens.  FOR THE BUYER:  unless you can replace the existing loan, you will lose all the money you have paid the seller (down-payment and monthly payments) and you will lose the home as well.  FOR THE SELLER:  for you, it is worse.  Since in the eyes of the lender you are the rightful owner of the home, it is your credit that is now going to be harmed.  The foreclosure will appear on your record, and will stay there for 3-5 years.  Like I said…this type of financing can be the real estate gift that keeps on giving.

Lastly, let me discuss briefly “lease options…or rent to own” type of transactions.

Whereas in these cases, the “buyer” is really just a glorified tenant who is making extra payments towards the ultimate purchase of the home at some later date, please beware.  You may not run afoul of the existing lender (in most cases, the lender allows the seller to rent the property),  but there are plenty of issues here as well.  The traditional structure of a lease option is to establish a purchase price now, a time frame to exercise this purchase price (usually 1-2 years out), and then a rent (plus some extra to be applied towards the tenant/buyer’s ultimate purchase) to pay until this “sale” is finalized at the appointed time in the future.

Sounds simple, BUT IN OVER 30 YEARS IN THIS BUSINESS I CAN COUNT ON ONE HAND THE SUCCESSFUL LEASE OPTIONS THAT HAVE EVER BEEN CONSUMATED.  The bottom line is that in the 2 years it takes to make this sale happen, too many things can go wrong.  First, who can say if the price you negotiated today is even remotely accurate two years from now.  Someone is going to feel they have been taken advantage of.  Second, what if the buyer still cannot swing financing?  Extend…kick out…raise the rent/purchase price?  Lots of choices.  Thirdly, since there is nothing filed with the title company to show that the tenant/buyer has any interest what-so-ever in this property, we have seen instances where the seller has refinanced, or even sold the property to another party without the knowledge of the tenant until they get a knock on the door from the “new” owner.  Far-fetched, but it has happened.

In the end, regarding all of the above types of financing, unless all parties are highly aware of all the pitfalls and potential disasters, and have been fully informed by an attorney, we really do not recommend you get involved at all with transactions of this type.  They just spell trouble, and at best, provide a short-term solution…but that short-term solution can cause such a long-term problem, that in our opinion, is just isn’t worth it.  We know your situation may appear desperate at the moment, but be very careful that by solving one problem now, you don’t create a larger one for later.

Westcoe Realtors, Riverside, California…Normally this blog stays on the path of real estate information, statistics, and concrete real estate issues…but for a quick moment, as the owner of this company, I would like to digress a bit from our usual path and “wax philosophical” for a moment.  I promise to be brief.

Unless we all plan to move to Mars and hang with the rover that is currently digging up dirt for NASA (see…we can even work in a real estate reference on another planet), there seems to be no way to escape the negativity that surrounds us like a new-born baby wrapped in a blanket.  Whether it be TV, radio, internet, cocktail parties, or ballgames, the airspace we breathe and listen to is filled with the drone of negativity.  Pick your subject.  Gas prices, food prices, cost of oil, of course the real estate market, interest rates, the falling value of the dollar, current flooding in Iowa, presidential politics (no matter who you like, at times, the process is disgusting and petty), etc.  You get the point…except maybe there is another point we can make.

Speaking only for my real estate agents, we have seen more distressed, hurt, damaged, and frustrated people this past year than I can remember in my 30+ years in this business.  Tempers are very short, and in the end, I tell my agents to remember one thing:  

STAY ABOVE THE NEGATIVITY AND REMEMBER WE LIVE IN A GREAT COUNTRY.

I know things are tight, and tough, and difficult…but it could be so, so worse…and sometimes we forget that as we get wrapped-up in our daily pace of life. Strictly as real estate agents, we try to be as helpful as we can with a very stressful home purchase or sale, even as the stress level rises as surely as the sun in the East.  But we try to remember that getting caught up in the negativity only breeds additional negativity, and pretty soon, if we are not careful, then we end up spinning down the toilet bowl of negative thoughts until it is simply too difficult to get out.

So…what to do?  Easier said than done, but simply try to avoid the negative people and information, and focus on the positive that exists everywhere if we take the time to look. 

It’s there in the faces of children in our neighborhoods, it’s there in the teachers who educate and work for far less money than they deserve.  It’s there in the face of the fire and police professionals who risk their lives daily for us (again for far less money than they deserve), and there in the wagging tail of your dog who only knows you are home and he is happy…and it is there in the actions of those military soldiers and families who sacrifice for us so we may have the right and freedom to voice our seemingly petty negative thoughts.

We at Westcoe are far from perfect, and of course there are days when we totally forget the above, and lose our perspective…but they do not last long…for in the end, we believe in this country, the right to own property, and each other.  We would never equate our profession with those who deserve so much more (see teachers etc. above), but we respect our own little slice of the world, and promise that when you enter, you will be treated with respect, kindness…and some of the positive energy that is seemingly so rare in today’s world.

Westcoe Realtors, Riverside, California…Funny how seemingly all things in life are circular.  Wide ties are in, then out, then maybe back in (I cannot say for sure where they are right now…I try to avoid them!).  Big cars are in, then with gas the way it currently is, they are headed out…and let’s not even start with what food is supposed to be good for you and what is now out (meat anyone?).  The simple fact is that everything is generally subject to change, and in real estate, we are not exempt.  The term ”caveat emptor” for buyers of real estate (translation here is “buyer beware”) gave way to numerous seller disclosures, and now that is circling back to “as-is” (see previous blog).  In the end, it’s hard to tell what is what…and that is why Westcoe is writing this today.  Maybe we can clear some of the real estate smoke for you.

A LITTLE HISTORY

For many, many years, the burden of discovery in the purchase of a home fell directly on the shoulders of the buyers.  This was back in the day when the price a seller could get for his home was relatively close to what he paid for it.  Real estate life may not have been entirely fair, but is was simple.  A one page purchase agreement was all you needed, and when the escrow closed, whatever warts came with the home were now the property of the buyer.  Yes, there were exceptions to the above, but not many.  This would be in the time of 35 cent gas, no cell phones, and no computers.

Then things changed…some for the better, some for the worse.  The main catalyst for change (at least here in Southern California) was our old friend supply and demand…for with the huge influx of people migrating to SoCal for the benefits of the weather, housing prices began to creep higher as there were more buyers than sellers.  To make a very long story short, over a period of years (approximately 1950-1975) this lead to higher and higher prices for homes, speculators, investors, good markets, horrible markets, pricing swings that would make a teeter-totter jealous, and ultimately where we are now…with the single family home becoming more of a financial vehicle than a place of shelter.

Whether you feel this massive change in housing is a good thing or a bad thing is irrelevant…it is here.  What you need to understand is that once a home became very expensive relative to the times, then litigation ensued when things went wrong (because of all the money the house now cost), laws were enacted to protect those the government felt needed protection, and viola’…here we are…in the land of real estate disclosure.

And that leads to the explanation of today’s topic…THE TRANSFER DISCLOSURE (TDS for short.)

While we fully admit the real estate industry has become inundated with paperwork and forms over the past few years (some really confusing and basically useless), the TDS is one of the good guys.  Simply stated, this form puts the burden of describing the home and all it’s past and current history squarely on the back of who knows the home best…the seller.  No more hiding the hole in the wall with a picture, or painting out the signs of a water leak with fresh paint, or not telling anyone that you have called the cops 426 times over your common sense deprived, decibel 100, 2:00 am next door neighbors.  

Nope…now the seller must disclose these things and more so the buyer can really decide what price they want to pay for the home, or even if they now want to buy your charming little castle.  No more ”buyer beware”…because the penalties to the seller for not fully disclosing are stiff and ugly…so it is in everyone’s best interests to fill the form out accurately and completely so problems are dealt with now, not later.  So let us discuss a few facts about this disclosure form.

 First, the TDS is required in all sales of residential real estate with 1-4 units.  This exempts apartments over 4 units, commercial property, etc.  This form is primarily for single family housing.

Second, upon delivery of the completed form to the buyer, the buyer has 3-5 days (depending on whether the delivery is by hand or mail) to rescind the contract if they do not like any of the information contained in the TDS.

Third, the form must be filled out by the seller AND any of the real estate professionals involved in your transaction.  The agents are required to make a “visual inspection as that of a lay-man and note any issues they see.”  This means that the agent is not held to a higher standard than that of a “layman” since agents are licensed to practice real estate, not construction…but is also means that if there is a huge water stain on the ceiling, they should note same since a “layman” would notice this stain as well.

Fourth, some entities are exempt from supplying the buyer with this form, since the selling entity may have no more knowledge of the home than the man-in-the-moon.  Notable exempt entities are probate sales, executors of an estate, and banks who have obtained the property through foreclosure, to name a few.

Lastly, understand it is the sellers responsibility to merely DISCLOSE issues to you, not necessarily REPAIR these items.  Nothing in real estate law requires the seller to fix what is wrong, or bring the home up to current building codes, or even repair a safety issue with the home…the name of the form is Transfer Disclosure…not Transfer Repair.  Of course, our experience is that all this gets negotiated in either the offer or requested repair list, so eventually everyone is happy one way or another.

As to the Disclosure form itself, it is separated into 3 basic parts…1) what comes with the property (stove, sprinklers, heating, air, etc) and does any of it not work? 2) are there any malfunctions/defects in some of the major parts of the home (roof, floors, foundation, electrical system, etc.) and 3) some specific questions not included in the above areas (any room additions, neighborhood noise problems, zoning violations, lawsuits, etc.). 

The form itself is easy to navigate, and the questions are fairly specific…but it is vitally important that the buyer understand the following:  THE SELLER IS ONLY OBLIGATED TO DISCLOSE THAT WHICH THE SELLER ACTUALLY KNOWS.  We know that sounds simplistic, but the seller cannot be held liable for what he did not know at the time the home is sold to the buyer.  What does this mean?

For example, it means that if there is an electrical plug in a no longer used bedroom that is not working, the sellers may not know about it because they haven’t been in that room for years…or that the roof never leaked for the seller, but you buy the home in April and it does not rain until November (at which time the roof now leaks), in which case the roof is yours to fix…or that a sprinkler has a slow leak that never showed any signs for the seller but after your owning the home for 30 days, the accumulated water is now leaking into your home.  I could go on, but you get the picture.  Hence, the statement above…the seller is only responsible for what the seller should have known, and in the examples above, there was no evidence seller could not have known about the problem.

So what does a buyer do?

The bottom line is that the TDS is a great form for everyone, and is wonderful for informing the buyer about some of the history of the home from the person who knows the home the best…but a good real estate professional should always encourage the buyer to have a home inspection done by a competent home inspector.  The home inspector will inspect all of the things referenced above and more, many times informing all parties of items the seller had no previous knowledge of..and then they can be addressed at the proper time…which is before the close of escrow, not after.

In the end, as a buyer, you will have enough “stuff” to fix on your home in the many years you will own it…the TDS is there to help you understand just what “stuff” is there before the home is all yours.

Westcoe Realtors, Riverside, California…While no one enters any real estate contract with the intent for it to go ”sour,” the simple reality in today’s society is that many times things do go wrong, and generally someone is going to get blamed.  If tempers or damages run hot enough, then legal action will ensue, and if that is the case, just what are the ramifications of the Mediation and Arbitration clauses that come standard in any real estate purchase contract? 

Before embarking down this legal road, let us first include the required caveat that Westcoe is licensed to practice real estate, not law…and you should consult your attorney for any legal matter.  However, that having been noted, Westcoe does have an enormous wealth of real estate experience, so it is this experience we wish to share with you regarding mediation and arbitration.

SO…your real estate transaction has hit the skids, and you want to sue the other party.  It doesn’t matter whether you are the buyer or seller, if you feel you have been damaged, then your remedy is the same…and that is what we will outline below.

Let us first begin with Mediation.  In the standard California Association of Realtors Purchase Contract (upon which we would hazard a guess is used in over 95% of real estate purchases) there is a mediation clause.  This clause does not require any initials by either party, and is therefore a part of the contract unless both parties take the overt action to exclude it from their agreement…which seldom ever happens.  Hence, it is part of your agreement with the other principal (real estate brokers are excluded from this, as the contract is only between the buyer and seller).  So what are you agreeing to?

Basically, two things.  The first is that you agree to mediate your dispute before initiating any legal action against the other party. The second is that if you fail to follow the first, then if by chance you sue the other party and win, you will not get your legal fees as part of any award…and since attorney’s are expensive, you really don’t want to go this route.

Some people have likened mediation to the job a parent does when the kids have a dispute.  Mom or Dad listens to the problem, and then helps the kids come to a solution that is fair and keeps everyone happy.  However, it is not that simple, and the similarity ends there.  In a real mediation, while the mediator will make every attempt to be fair, understand that their main goal is to solve the problem, no matter what is fair or not.  Parents want to be fair; mediators simply want the problem to go away…for if the mediator solves the problem, then the incredibly crowded courts are spared yet another trial.  So if you ever find yourself in a mediation, understand that while the mediator may appear empathetic to your problem, HE/SHE DOESN’T REALLY CARE.  They just want this issue to disappear, and they proceed accordingly.  Whatever they can get the parties to agree too is OK with them…fair or not.

Also, understand that there are real estate issues that are exempt from mediation, the main exemption being any matter that can be handled in small claims court (under $10,000 in damages).  If your damages are less than $10,000, you can mediate if you want, but it is better to head directly to small claims court.  Why? 

For the simple reason that when all is said and done, the mediator doesn’t really have any power…so if either party is not happy with the mediation, then they just get up and leave, and the party is over.  The process is not binding, and no one has to obey the mediator’s suggestions.   Crazy, I know, but such is legal life.  So…if your dispute can be solved in a small claims court, go for it, since that judgement is binding subject to appeal.

The bottom line, as far as mediation goes, is that you will be forced to partake either by your contract or by the courts, so grin and bear it, and maybe you might just get your case resolved.

Now, let us discuss arbitration…which is a whole different kettle of fish.

First, some background.  The arbitration process was established as an answer to the very expensive and very lengthy process of a civil trial.  These days, in Riverside, it can take 3-5 years to get a civil case to court…and if your case is important only to you, but not so important relative to all the other people who want a courtroom, you can expect the time period to be even longer.  And of course, the longer it takes, the more it costs.  So arbitration was created as a way to resolve civil issues without the undue delay and costs of a real civil trial.

Sounds good, but beware of the old saying…”be careful what you ask for, because you just might get it .”  You see, the arbitration process has a few warts….which the legal community considers a trade-off for getting your case resolved quicker and for less money.

While there are many differences between arbitration and a full blown civil trial, the main issues are these:  1) The decision of the arbitrator is binding, even if the arbitrator is an idiot and totally messes-up the law regarding your case, and 2) you have no right to appeal.  What you get is what you’ve got, and you are stuck with it, no matter how wrong you may feel it is.  Doesn’t sound fair, but that’s the way it is.  You wanted a quicker and perhaps less expensive way to solve your issues, so if there is a flaw in your case, such is the price you pay for expediency in time and money.

THAT IS WHY THE ARBITRATION CLAUSE IN A REAL ESTATE PURCHASE CONTRACT IN VALID ONLY IF ALL PARTIES INITIAL THIS PARTICULAR PART.

Do we advise our clients to agree to arbitration?   Yes and No…meaning that it is not our job to advise on this…only to explain and then let you pick.  We are not trying to cop out here, but it is a big decision, and you really should consult your attorney on that one.  We can tell you what saying yes or no involves, but we cannot make that decision for you.  About all we can say is that if you are unsure, then do not opt for the arbitration, and you can always try to get it later, if a dispute arises.  In our experience, most buyers/sellers push for it later anyway when they find out how really long and expensive a civil trial can be.

In the end, seldom is either of these clauses invoked in a real estate transaction if both parties are represented by good real estate professionals.  Yes, there can be issues, but the majority of problems are resolved far short of initiation of either of these remedies.  However, they are occasionally used, and we hope the above “real world” description is helpful in letting you understand what each of these important clauses mean to you.