The San Diego Home Blog

A rerun from November, 2006…

“Junk fees” we often hear them called. Those are all those fees that the buyers and sellers pay during the transfer of real property. Buyers and sellers alike groan over the need to pay the final tab, and the complaint I hear most often relates to the charge for Title Insurance.

In San Diego and in most cities, it is the seller that pays for the preliminary title report (PR), with the buyer responsible for obtaining additional coverage for their lender. A preliminary title report is a document that is intended to identify situations which may “cloud” title to a buyer’s new home. These situations might include outstanding taxes or assessments, easements, liens, and encumbrances. The PR will also identify anyone with special rights to the property (such as Crazy Uncle Bob who loaned the seller $14.72  twelve years ago and consequently appears on the loan and the recorded deed). The preliminary title report then becomes the final title report at closing, where the foregoing conditions become exceptions to title and therefore exclusions from the buyer’s title insurance coverage. 

In any real estate transaction, the buyer’s acceptance of the title report is a contingency of sale. Therefore, it is incumbent on the buyer, with the help of their agent, to review, understand and accept the report’s findings within their contractual due diligence time frames.

Seems pretty simple, yet it is astounding how few people actually take the time to read and understand this document. I do not blame the buyers for this; they are typically ear-deep in confusing fine print paperwork when the PR lands in their lap. Conversely, I blame their agent for not reviewing the PR carefully for any issues of potential concern. We are supposed to understand the reports when our clients may not. That it precisely why it has been our policy (Steve’s and mine) to initial every page of our copy of the PR before filing it away; it gives evidence that we have touched every page, and therefore forces us to read and understand it. Call it accountability.

Now for our latest real-life example of how the information contained in the PR can be of consequence and material to the transaction. This is Steve’s example, actually. He was representing a client in a home purchase here in San Diego. To the client, one of the big appeals of this particular home was an unusually large side yard. (We are talking “large” in San Diego terms, so don’t get too excited). A week into the transaction and during the contingency phase, the buyer, who currently lives in another state, flew in for the property inspection. Steve dutifully scurried to make sure that all disclosures were available with the intent of dispensing with all of the disclosure “formalities” during the buyer’s brief visit. While reviewing the PR prior to meeting with the buyer at the property inspection, Steve noticed an innocent little dotted line running along the side yard on the plat map: An easement. Now, easements by their very nature are not evil. It simply signifies that someone other than the underlying property owner has use rights to a portion of the land. We see them all of the time, and they can be blanket easements (non-specific, for instance those dealing with utilities) or specific, as was the case here. This one happened to be a sewer easement. Again, not a big deal, except…

The buyer wanted a pool some day, maybe. They admitted they might never build the pool, but then again they might. One of the conditions of your typical public easement, however, is that no permanent improvements be located within the easement boundaries. If the city needs to get in and replace a pipe some day, they obviously don’t want a guest house in the way. The bottom line is that Steve immediately summoned the buyer and pointed out the issue, knowing that the transaction was toast. It was his fiduciary obligation. The bad news was that the buyer was into the process for one very expensive plane ticket and a lot of time and energy. The good news was that he didn’t end up owning a home that didn’t offer a feature important to him - room for a pool.  Six hundred dollars or six hundred thousand dollars? I think it turned out to be a small price to pay, and that is precisely what a buyer contingency period is for.

In reliving the events leading up to the revelation, Steve and I had lengthy discussions about how or if this could have been avoided. Ironically, the buyer was grateful, saying he didn’t pay any attention to the PR himself and would have never known about the easement issue had it not been pointed out. Should the listing agent have known? Certainly the seller should have disclosed this up front. But absent a seller disclosure, the agent would have to smell something fishy, and it simply wasn’t that obvious (not all large yards involve something sinister). Should Steve have known? For the same reason, probably not. I think all we can learn from this is that the system worked, and one man’s “junk fee” is another man’s treasure.

I’m feeling a little like a home buyer or seller today. You have a lot of choices. As an agent, I know this, but I also know the differences. More than occasionally, I find myself wondering, “Why did they hire them?” To me, an insider, the differences are so obvious, and the best are so easily picked from the litter. Today, I am getting it. Maybe the certifications were there, the rhetoric was satisfying and the years of experience were compelling. Not being one who lives and breathes real estate, I can understand the confusion you must feel.

Take pricing a home for sale. Pricing a home, even estimating probable sale price and market time, is not a precise science. Ask a dozen agents, and I can pretty much guarantee that you will get as many different answers. If you are relying on others to consult and to advise, I can appreciate the confusion you must feel, especially when the others can’t even agree among themselves.

As a home buyer or seller, you rely on us to guide you through the process. As your agent, we also must rely on others throughout the transaction to perform duties for which we are unqualified. This week, I found myself confused.

We have a seller client whose home is in escrow in Scripps Ranch. It is on final approach, actually. During the initial days under contract, we did what we always do. We ordered the Wood Destroying Pest and Organisms inspection. You know this as the Termite Inspection.

Now pricing a home is one thing. Your agent is having to rely on his knowledge of the market, of buyer and seller attitudes, of economic predictions, of seasonal trends and a multitude of other factors — to predict human behavior. No one can argue that this is an exact science. But, in the case of a termite inspection, one would assume (one being me) that it is extremely scientific. You either have a wood destroying pest or you do not. The holy grail of the pest inspection process is the “clearance,” and this clearance will say something along the lines of “the property is now free of evidence of active infestation.” Easy enough, but not so fast. 

The State of California regulates structural pest control firms, and firms making household treatments must be licensed by the California State Structural Pest Control Board. Licensing is required to ensure, among other things, that firms practicing inspection and treatment will be thorough, honest and accountable. We have worked with dozens of firms in San Diego over the years and, with very few exceptions, we have found this to be the case. But, what do I know? I don’t know termites, that much is certain.

So, back to our seller’s home in escrow. We had the home inspected by a big, reputable firm. Here is the series of events:

• Big Reputable Firm came back with findings of evidence of termite infestation. The report called for fumigation of the structure. Fumigation will typically run from $2500 to $3000 or more, depending on the volume of the “box” and, of course, the company.
• The seller asked for a second opinion. Every penny counts; it always does. Smaller, Company #2 came back with a finding of no evidence of active infestation, but did identify several wood members on a patio cover (wood rot) requiring replacement.
• Big Reputable Firm was called back out for a second look. This time, I joined the inspector in the attic. The “dozen or so” termite wings (evidence) that the inspector previously noted were no longer present. Were they disturbed? There is no way of knowing for sure. Now she sees them; now she doesn’t. Oh, and the wood rot isn’t really wood rot, in her opinion, but now that I’ve brought it up, it should probably be noted.

We suddenly find ourselves with several issues, issues of “he said, she said,” but they all must be disclosed to the buyer. First, we have a report saying the home has termites but no wood rot. Next, we have a report saying the home has wood rot but no termites. Keeping in mind that I am in no position to make the call, as I wouldn’t know a termite wing if it landed in my coffee cup wearing a name tag, I find myself and on the behalf of my clients in the position of having to rely on the professionals. Meanwhile, the buyer’s inclination is going to be, “We will take all of the above.”

Every day in this business I learn something new, and this was a valuable continuing education. I challenged the Big Reputable Firm, of course, and here is the explanation I got. It seems that there was evidence that the home had been previously “locally treated” for termites in one portion of the attic. Forgetting the mystery wings, given the knowledge of previous treatment in concert with the age of the structure (mid-’90s), she told me that calling for a fume was automatic. “Local treatments are substandard, I can’t guarantee the work of others, and given the circumstances, there is a reasonable likelihood that termites are present.” Suddenly, I am thinking that pest inspectors are inspecting not with eyes but with actuarial tables. And, the reality is that the $75 inspection fee does not cover their gas and time; the repair work constitutes the business, the profit margin, their french fries.

We found a middle ground, fortunately, that satisfied both the buyer and seller. Both findings had to be disclosed, but all parties (and Big Reputable Firm) agreed to spraying the entire attic versus fumigation at approximately one-third the cost. And, yes the wood rot which is (and isn’t) present is being addressed.

This discussion really only raises questions, and I am not sure I have the answers. It is a delicate dance. When more than one inspection is performed, you may overcome one issue yet raise another, and all must be disclosed. The buyer will typically want the most comprehensive solution, while the seller will want the least expensive. One thing I do know is that at the next termite inspection and at every one thereafter, I am going to be poking my head in the attic.

Ah, the glamour of real estate.

I encountered an op-ed piece this week which reminded me that it might be time to boldly venture into Boring Land. Boring Land is that place where we keep all of our contracts and disclosures, a place we visit occasionally when we receive the periodic Ask the Brokers question regarding the riveting world of transactional procedures and statutory obligations.

So, without further ado and lest your heads explode with giddy anticipation, I bring you our first installment of Better Know a Disclosure.

Disclosures are made during the residential real estate transaction to inform and to protect. These disclosures protect the buyer, in that they are presented with all material facts and considerations which might affect the decision to purchase or not, and they protect the seller, from potential future claims which might arise out of a failure to disclose. And they protect the agents for both from liability. Much like there is no guarantee that I won’t walk out the door this morning and be struck dead by an errant golf ball, the knowledge that this is possible allows me to make an informed decision and even take reasonable precautions. Fortunately for me, my home is located at least ten miles from the nearest driving range, but you can be sure I am always alert. This is because I read my…

Statewide Buyer and Seller Advisory (SBSA)

This is a ten page document that reads like a stream of consciousness. Number 18 on the hit list reads:

Buyer and Seller are advised that if the Property is located adjacent to or near a golf course there is a possibility that golf balls may damage the Property or injure persons or pets on it. Additionally, persons playing golf may enter the Property to retrieve errant golf ball or for other purposes.

So, that is what the dude with the nine iron is doing in my gazanias!

To the untrained eye, this may seem a little goofy. The reality is that each and every disclosure exists because, at some point, someone sued someone else over the issue. The fact that we have told your buyer that Fido might find a Titleist up his nose one morning does not guarantee he won’t sue both of us when this happens, but it does afford a level of protection that he won’t prevail in court.

Number 25 of the SBSA packs a bit more of a punch. Under Neighborhood, Area: Personal Factors, the buyer is advised that many things may affect their intended use and enjoyment. The list is long, but it includes things such as schools, crime, law enforcement, and “conditions and influences of significance to certain cultures and/or religions, and personal needs, requirements and preferences.”

This disclosure affords the seller and their agent protection for two main reasons. First, consider that “personal factors” are by their very nature subjective. If you ask me, “Are the schools good?” how do I know that my “good” and yours are aligned? What is “a lot” of crime? What constitutes “nice neighbors?” Second, and more importantly, I as an agent am forbidden from speaking in specifics about these things, with the obvious and biggest no-nos being related to race and religion. I could be charged with steering, with blockbusting and with Fair Housing Law violations. And I could lose my license.

In the article I alluded to, the contention was that agents get paid the big bucks yet want to relegate their duties of discovery to their clients, agents just want to sell the home at any cost (presumably so they can pocket the big commission check and themselves hit the links), and agents are lazy-lazy-lazy. The writer’s Exhibit 1 was Megan’s Law.

Megan’s Law Database Disclosure

This is the language which appears in the California Association of Realtors Residential Purchase Agreement:

Notice: Pursuant to Section 290.46 of the Penal Code, information about specified registered sex offenders is made available to the public via an Internet Web site maintained by the Department of Justice at www.meganslaw.ca.gov. Depending on an offender’s criminal history, this information will include either the addresses at which the offender resides or the community of residence and ZIP code in which he or she resides. (Neither the Seller nor Brokers are required to check this web site. If Buyer wants further information, Broker recommends that Buyer obtain information from this web site during Buyer’s inspection contingency period. Brokers do not have expertise in this area.)

This Megan’s Law site is an important one, and we disclose it as being a valuable resource to the concerned buyer. However, I can not say this emphatically enough - Sellers and their Brokers SHOULD NOT attempt to provide affirmative information regarding the presence or absence of neighborhood sex offenders. This is not lazy; it is prudent. It is prudent if I want to keep my client out of court, and it is prudent if I want to keep my license.

Now, to be clear, if I have specific knowledge of any issue which might affect the buyer’s decision to purchase, I must disclose. If my selling client has knowledge, he must disclose. And, if my client simply represents something of potential import to me in passing, I have the responsibility to share this information with a buyer. This applies to both golf balls and sex offenders, and to dozens of other issues both large and small. So why shouldn’t I save my client, buyer or seller, a little time and check out the Megan’s Law web site myself? Because of the danger that I might misrepresent.

• The Megan’s Law web site is not mine; it is designed, populated and presented by the Department of Justice. I have absolutely no way of ensuring that the information is absolutely current and 100% accurate (which it is not).

That is it. Period. A “dot” may be present on the map when in fact no sex offender resides at that location.  A “dot” may not be present when a registered sex offender does live at a location. And, I can give a real life example. We had an home in escrow several years ago. The buyer visited the web site and found that a registered sex offender was shown living one block from this home. The seller had no knowledge, and we had no knowledge, but the buyer flipped out and canceled contract, which was within their rights. Within days, the home was back in escrow with a new buyer. This time, I did have knowledge and we did disclose. The new buyer chose to be more thorough, however. They knocked on doors up one side and down the other of the street in question. The neighbors told them that the gentleman no longer lived in the home, was in fact in the hospital and would likely die. Escrow closed. Within a month, the “dot” mysteriously disappeared from the map. Should I have knocked on doors? No. It turned out the neighbors were right, the map was wrong, and the buyer was happy with their purchase. But, it might not have turned out this way at all, and my clients and I would have been telling it to the judge.

The flip side of this scenario is the one that frightens us most and keeps our attorneys up nights. What if I check the database and, finding no “dot,” give the high-five, all-clear? What if, based on my representation, the buyer answers his door to receive his first Welcome to the Neighborhood bundt cake from Charles Manson who lives two homes over in the cute single-level Craftsman?

Let’s Get Sued (Again)

Real estate agents are a lot of things. We are advisers, we are negotiators, we are marketers and market experts. And this list just scratches the surface. The list of what we are not is longer yet. We are not plumbers, roofers, hazardous materials specialists, or criminologists. We do not set school boundaries, we do not draft and approve land use plans, and we can not guarantee that what we know today will be true tomorrow or even that what we know today based on the representation of others is in fact the truth today. And we are not mind readers. I like the people in my neighborhood; you may find them infinitely unlikeable. I like my daughters’ school fine; when your child fails European History, you may have another opinion entirely.

We disclose our britches off, but there is a limitation to our knowledge and expertise in all areas that may be of import to all buyers. We have many responsibilities and obligations, all of which carry significant liability baggage for both ourselves and our clients. Risk avoidance is not lazy, its not lacking in compassion and it is not a shirking of responsibility or duty. Risk avoidance is in fact a large part of our duty to our clients. It is a harsh reality of the world we now live in.

In our next installment, we will talk about the San Diego Local Area Disclosures, beginning with all-important Number 1:

Buyer and Seller are advised that various public attractions and amusement parks may impact the traffic in the area near the Property or create noise which may be of concern to some Buyers.

I am ashamed to admit that as a part of my services, I do not perform peak hour traffic counts at nearby intersections, I do not time your commute to work, and I do not maintain sound influence charts. There are agencies, however, who do these things, and I am happy to give you their contact information. I suspect somebody has been sued over this one as well.