Buyers

What environmental hazards is a seller to disclose?

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A: Environmental hazards are man-made hazards such as noxious or annoying conditions, not natural hazards that exist at the location of the property.

As environmental hazards, the conditions are classified as either:
• Injurious to the health of humans; or
• An interference with an individual’s sensitivities.

Environmental hazards are defects in a property affecting its use by humans. If known to a prospective buyer, the defects may affect a prospective buyer’s decision to purchase the property. Thus, the environmental conditions are material facts. When known to the seller or the agents participating in a transaction, environmental hazards are to be disclosed to prospective buyers since material facts adversely affect
the property’s value.

Environmental hazards located on the property which pose a direct health threat to occupants include:
• Asbestos-containing building materials;
• Carbon monoxide;
• Formaldehyde;
• Hazardous waste;
• Lead;
• Toxic mold; and
• Radon gas concentrations.

The seller’s agent conducts a visual inspection of the property for visible environmental hazards, as well as physical defects, before reviewing the seller-prepared Transfer Disclosure Statement (TDS) for correctness.

On review of the TDS, the agent enters on it any of their observations inconsistent with the seller’s entries to correct the TDS for seller errors or oversights. The TDS becomes one document in the marketing package used to induce buyers to acquire the property.

The timing for delivery of the TDS to prospective buyer as a disclosure is as soon as practicable (ASAP) after the buyer or their agent makes an inquiry seeking further information on the listed property, usually by delivery of a marketing package which includes the TDS.

Also, the seller’s agent delivers, or confirms the buyer’s agent has handed the prospective buyer a copy of the environmental hazard booklet approved by the California Department of Health and Safety (DHS).

The seller is not obligated to hire a third party to investigate and report on whether an environmental hazard is present on or about the property. It is the seller’s and the seller’s agent’s knowledge about hazardous environmental conditions affecting the property which is disclosed on the
TDS.

What are HOA Assessments?

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A: Ownership of a unit in a condominium project or other residential common interest development (CID) includes compulsory membership in the project’s homeowners’ association (HOA). The HOA is in charge
of managing and operating the entire project.

The obligations you undertake when you purchase a unit in a CID, and the HOA’s documentation of those obligations, fall into two classifications:

  • Use restrictions contained in the HOA’s:
  • Articles of incorporation;
  • By-laws;
  • Covenants, Conditions and Restrictions (CC&Rs) of record;
  • Age restriction statements; and
  • Operating rules.
  • Financial obligations to pay assessments as documented in annual reports which include:
  • Pro forma operating budgets;
  • A Certified Public Accountant’s (CPA’s) financial review;
  • An assessment of collections and the
  • Collections enforcement policy;
  • An insurance policy summary;
  • A list of construction defects; and
  • Any notice of changes made in assessments not yet due and payable.

There are two types of assessment charges to fund the expenditures of the HOA:

  1. Regular assessments fund the operating budget to pay for the cost of maintaining the common areas. Regular assessments are set annually and are due and payable in monthly installments.
  2. Special assessments are levied to pay for the cost of repairs and replacements that exceed the amount anticipated and funded by the regular assessments. Special assessments are generally due and payable in a lump sum on a date set by the HOA when making the assessment or added to the regular assessment monthly installments for a specified amount of time.

Annual increases in the dollar amount levied as regular assessments are limited to a 20% increase in the regular assessment over the prior year. An increase in special assessments is limited to 5% of the prior year’s
budgeted expenses.

It is recommended you review all readily available HOA information with your agent before making an offer. With this information, you and your agent are able to better determine the price you will pay for the unit and whether or not you have the ability (and desire) to carry the cost of ownership after acquisition.

Credit Freeze Basics

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What is a credit freeze?

A credit freeze limits access to your credit report, making it more difficult for would-be identity thieves to open accounts in your name. You can still use your credit card normally, but you won’t be able to open new lines of credit.

How do I freeze my credit?

To place a freeze on your credit report, contact all three major credit reporting agencies:

Equifax: 800-349-9960
Website

Experian: 888-397-3742
Website

TransUnion: 888-909-8872
Website

You’ll be asked to provide personal information to verify your identity, and may be a fee, depending on your age and where you live.

Are there drawbacks to a credit freeze?

The protection a credit freeze offers isn’t perfect. Credit freezes only prevent new lines of credit from being opened in your name — if an identity thief already has access to one of your accounts, a credit freeze is not an effective line of defense.

In addition, a credit freeze remains active until you decide to unfreeze it. To unfreeze your credit report and open a new line of credit, you’ll have to contact each credit reporting agency with the PIN number given to you at the time of the initial freeze. A fee may be charged for unfreezing your credit.

What are encumbrances on title?

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A: An encumbrance is a claim or lien on a parcel of real estate and the ownership interests in the property.

A preliminary title report (prelim) issued by a title insurance company is intended to disclose the current vesting and all encumbrances reflected on the public record affecting a property’s title.

Encumbrances set out in a prelim include:

  • General and special taxes;
  • Assessments and bonds;
  • Covenants, conditions and restrictions (CC&Rs);
  • Easements;
  • Rights of way;
  • Liens; and
  • Real estate interests held by others.

The buyer, their agent and escrow review the report for encumbrances on title inconsistent with the terms for the seller’s delivery of title set in the purchase agreement and escrow instructions.

However, both the seller’s agent and buyer’s agent review the prelim immediately for any reported conditions that may interfere with closing the
transaction.

In practice, the buyer’s agent looks for title conditions which conflict with any intended use or change in the use of the property contemplated by the buyer. Interferences with use come in the form of unusual easements or use restrictions (CC&Rs) which obstruct known plans the buyer has to make improvements.

Ultimately, the escrow officer, on review of the prelim, advises the seller of any need to eliminate defects or encumbrances on title which interfere with closing the transaction as instructed.

My Deposit: Will I lose it if escrow is cancelled?

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When the escrow period begins, your good faith deposit is held by escrow to be applied on closing toward your down payment and transactional closing costs.

The deposit is your money, even though it is held in escrow. However, it also serves as a source of the seller’s recovery, upon demand, of any losses you may have caused them to incur. Thus, your deposit may be partially or totally offset when you cancel for any reason not covered by a
contingency provision in the purchase agreement — a material breach of contract.

In this situation, the seller consents to the release of the escrowed deposit to you less any out-of-pocket money losses the seller actually incurred due to your breach.

To disburse funds, escrow first needs to have mutual instructions signed by both you and the seller. When you or the seller make a demand for the funds and the demand is opposed due to a refusal to consent, the resolution and eventual disbursement depends on who has the right to receive the funds held by escrow. A forfeiture of the deposit is not permitted in spite of wording to the contrary in some purchase agreements.

Within a period of 30 days after escrow’s receipt of the first demand for the funds, you and the seller are separately obligated to:

  • Determine who is entitled to the funds; and
  • Hand escrow cancellation and release of funds instructions to clear the deposit out of escrow.

For a seller to receive any part of your deposit, they need to provide you with evidence of the money losses they incurred due to your unexcused failure to close escrow.

Money losses a seller may have incurred on a buyer’s breach include:

  • Lost rental income caused by the terms of the sale;
  • A decline in the property’s value below the price agreed to by the date of the breach when they re-market the property for sale;
  • Transactional expenses unrecoverable when the property is resold; and
  • Other expenditures directly related to the transaction which will go uncompensated (on a resale or retention of the property).

When escrow does not receive mutual instructions to disburse funds within 30 days of a demand by either you or the seller, the escrow company deposits the funds with the court and closes their file. On the deposit with the court, escrow is relieved of any further responsibility to account for the funds.

Types of Agency-Brokerage Relationships

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Seller’s agent

Also known as a listing agent, a seller’s agent is hired by and represents the seller. All fiduciary duties are owed to the seller. The agency relationship usually is evidenced by a listing contract. Once a property is listed, the seller’s agent either can attempt to sell it or, in addition, may be permitted by the seller to cooperate with another licensee who will attempt to find a suitable buyer for the property, A seller’s agent negotiates the best possible price and terms for the seller. The agent represents the seller’s best interest throughout the transaction.

Buyer’s agent

A real estate licensee is hired by a prospective buyer as an agent to find an acceptable property for purchase and to negotiate the best possible price and terms for the buyer. The agent represents the buyer’s best interest throughout the transaction. The buyer can pay the agent directly through a negotiated fee, or the buyer’s agent may be paid by the seller or a commission split with the listing agent.

Subagent

A cooperating agent who works for a listing broker-salesperson in the sale of a property. The subagent represents the seller, and therefore, works with the buyer, but not for the buyer. The subagent owes fiduciary duties to the listing broker and to the seller. Although subagents can’t assist the buyer in any way that would be detrimental to their client the seller, a buyer-customer working with a subagent can expect the subagent to treat him honestly. A subagent generally may provide the buyer with certain types of services, often called ministerial services, which are factually based and do not require the licensee’s judgment.

Disclosed dual agent

Dual agency is a relationship in which the brokerage represents both the buyer and the seller in the same real estate transaction. Dual agency relationships don’t carry with them all of the traditional fiduciary duties to the clients; instead, dual agents owe limited fiduciary duties. The fiduciary duty of loyalty to the client is limited. This focuses on confidentially and the negotiation process. Because of the potential for conflicts of interest in a dual agency relationship, it’s vital that all parties to the dual agency relationship give their informed consent. In many states, this must be in writing. Disclosed dual agency is legal in most states.

Designated agent

Also called, among other things “appointed agency,” this is a brokerage practice that allows the managing broker to designate which licensees in the brokerage will act as agents of the seller, and which will act as agents of the buyer, without the individual licensees being dual agents. The designated agents give their clients full representation, with all of the attendant fiduciary duties. To use designated agency, it specifically must be permitted by state law. State laws vary, and in some states permitting this practice, the managing broker also is not a dual agent.

Nonagency relationship

This relationship is called, among other things, a transaction broker, or facilitator. Some states permit a type of nonagency relationship with a consumer. These relationships vary considerably from state to state, both as far as the duties owed to the consumer and the terminology used to describe the relationship. Very generally, in these relationships, the duties owed to the consumer are less than the complete, traditional fiduciary duties, but in most states which allow for this type of relationship, the licensee still owes fiduciary duties to the consumer.

What are Contingency Provisions? Do I need them?

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Contingency provisions describe an event, activity or condition which needs to occur before the purchase agreement transaction can proceed toward closing. On the occurrence of the event or approval of information described in a contingency provision, the contingency has been satisfied and is no longer an obstacle to further performance and closing.

Contingency provisions authorize the buyer or seller to cancel the transaction when:

  • The described event fails to occur; or
  • The information received is disapproved.

Contingency provisions stating conditions allowing for the termination of an agreement are separated into two categories:

  • Event-occurrence contingency provisions — those provisions satisfied by the existence, completion or outcome of an activity or event which eliminates the contingency; and
  • Further-approval or personal-satisfaction contingency provisions — those provisions satisfied by the receipt, review and approval of data, documents and reports which eliminate the contingency.

Event-occurrence contingency provisions address the occurrence of specific activities and events, such as:

  • The sale or acquisition of other property by the buyer or the seller;
  • Obtaining purchase-assist financing;
  • The approval of building permits; and
  • The elimination of title conditions, or the release of encumbrances, such as liens or leases.

Further-approval contingency provisions address the right of the buyer or seller to cancel the transaction on their disapproval due to unacceptable property conditions and material facts, such as:

  • Disclosures and inspection reports concerning the physical integrity and natural and environmental hazards of the property;
  • Appraisals;
  • Title reports; and
  • Rental income and expenses.

To terminate a purchase agreement under a contingency provision, the buyer or seller needs to have a reasonable cause to cancel for the cancellation to be enforceable. When a reasonable basis exists, they may avoid enforcement of the purchase agreement by the other person by notice of cancellation.

Contingency provisions contained in purchase agreements are eliminated by either:

  • Satisfaction of the contingency provision by the occurrence of an event or by someone’s approval of the conditions contained in information, data, documents or a report; or
  • Waiver or expiration of the contingency provision.

Contingency provisions are unique as they deal with uncertainties at the time an agreement is entered into. As a matter of good practice, contingency provisions are included in purchase agreements to eliminate any uncertainty about aspects the property’s title, income/expenses or physical condition. Before escrow is able to close, contingency provisions need to be eliminated.

Fixed Rate Vs. Adjustable Rate Mortgage Loans

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A fixed rate mortgage (FRM) provides the classic method for calculating interest that accrues on principal over the life of a mortgage. With an FRM, the interest rate and scheduled payments remain fixed for the life of the mortgage, giving certainty to future payment obligations.

The FRM is the most consumer-friendly and risk-free type of mortgage financing. While always available for homebuyers in need of a mortgage, FRM financing for business or investment properties typically has short due dates of three to seven years. 

An adjustable rate mortgage (ARM), as diametrically opposed to an FRM, calls for periodic adjustments to the interest rate. In turn, the amount of the scheduled payments fluctuates with each interest rate adjustment over the period remaining on the mortgage’s original amortization period. 

The unique feature defining all ARMs is an interest rate formula, typically comprised of:

  • An introductory interest rate applicable for a short period of several months, also known as a teaser rate or qualifying rate
  • An index figure, a proxy for future changes in the lender’s cost of funds.
  • A margin rate, which does not change during the life of the mortgage and is the earnings spread a lender adds to the index figure to determine the annual rate of interest charged on principal following each adjustment in the mortgage rate
  • An adjustment interval at the end of which the mortgage interest rate is changed to reflect a rise or fall in the index figure.

The ARM’s adjusted interest rate is determined by adding the index figure to the margin rate (at set intervals, and subject to any caps or floors as limitations beyond which the mortgage rate cannot change). 

ARMs become popular when property prices or FRM interest rates rise faster than the rise in personal incomes. ARMs allow you to leverage the lower initial interest rate charged on an ARM (compared to the FRM rate) into a higher mortgage amount to fund the purchase of a home. In turn, you are able to pay a higher price for a home, but take on the risk your payments will increase over the coming years.

 

How do I Use a Pest Control Report?

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A Structural Pest Control (SPC) report is not a legislatively mandated seller disclosure in a California real estate transaction, unlike a Transfer Disclosure Statement (TDS) or a Natural Hazard Disclosure (NHD). Most conventional lenders do not require a NSPC report or termite clearance.

However, the existence of pests such as termites adversely affects the value of property. Since this fact relates to value, the seller is compelled to disclose their presence before the buyer makes a decision setting the price and closing conditions in an offer submitted to the seller. 

To best disclose a pest infestation, the seller orders an SPC report. The report is included as part of the marketing package for delivery to prospective buyers or their agents when they inquire about the property — before the seller enters into a purchase agreement with the buyer. 

A Pest Control Certification — a certificate of clearance — is issued by the SPC company to indicate the property is free of infestation or infection in the visible and accessible areas. This certification is commonly called a termite clearance. If any infestation or infection is not corrected, it will be noted in the certification. The SPC report separates the findings and recommendations into two categories: 

1. Section I items, listing items with visible evidence of active infestations, infections or conditions that have resulted in or from infestation or infection; and 

2. Section II items, listing conditions deemed likely to lead to infestation or infection but where no visible evidence of infestation or infection was found. 

If a seller has obtained an SPC report which discloses the existence of conditions that have an adverse effect on value and does not inform the buyer of the contents of the report, the seller is defrauding the buyer. Therefore, the buyer may pursue the seller and the seller’s broker/agent to recover the cost of repairs, either prior to or after the close of escrow. Provisions in the purchase agreement allowing the seller to entirely avoid the cost of termite clearance and repairs are not enforceable when known defects go undisclosed at the time the buyer and seller enter into a purchase agreement.  

Further, when the seller does not provide an SPC report, the buyer needs to consider ordering their own SPC report.

How to get your security deposit back in San Diego

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More than half of San Diego County residents are renters and almost all have to put down a significant amount of money when they move into a new place. The dreaded security deposit typically involves one month’s rent but there are also extreme cases of requiring first and last month’s rent up front.

Since 2003, I have lived in 19 apartments across 11 cities. Aside from having a pretty wild sight-seeing adventure, moving was always difficult and security deposits were a huge issue. There was always the anxiety of waiting to get my landlord to give the deposit back while trying to get enough money for my new place.

Recently, I had a Hillcrest property manager tell me I couldn’t get a $300 pet deposit back because it was nonrefundable. I informed her that was illegal in California and, eventually, the landlord got involved and I got the deposit back.

There are likely hundreds of renters across San Diego County having similar issues — especially with a historically low homeownership rate in the county. Landlords also need protection from nightmare tenants but, on the flip side, tenants fighting bad landlords may need additional money they don’t have for a legal battle.

Read the rest HERE.