GENERAL INFORMATION FOR BUYERS AND SELLERS OF RESIDENTIAL REAL PROPERTY IN SAN FRANCISCO (DISCLOSURES AND DISCLAIMERS ADVISORY
This Advisory contains important information regarding the purchase of real property located in San Francisco. The information in this Advisory will change over time, new issues will develop, and laws and regulations will change at the federal, State, or City and County level. Where available, links to government websites are provided to allow Buyers and Sellers to update themselves as to any such changes.
Some of the issues that are covered in this Advisory are pointofsale requirements, or retrofit requirements that may also be triggered by remodeling efforts or efficiency requirements. In addition, there are many laws, regulations and ordinances which may impact Buyer’s plans for remodel, expansion or change of use after the purchase, which are too detailed to be covered in this Advisory. Buyers should be aware of the fact that the apparent or current use of a property is not a guarantee that such use complies with applicable laws, including zoning ordinances. Buyers must investigate the applicability of these requirements to the past, present and future sale, purchase, ownership, use and/or development of the Property.
Buyers must bear in mind that a Property may contain defects and deficiencies of which neither Sellers nor Brokers are aware. Buyers should also recognize that not all issues or conditions can be objectively determined even by professional investigations. Further, some issues can have varying impacts on different people since some people may be more sensitive than others to certain factors such as sounds and odors.
Although licensed to list, sell and lease real estate, Brokers may not have expertise on any or all of the topics discussed in this Advisory. Given Buyer’s legal duty to exercise reasonable care to protect themselves regarding facts that are known to or within the diligent attention or observation of a buyer, Buyer is urged to investigate, without limitation, (a) all public records which may affect the Property; (b) neighborhood conditions which may affect the Property; (c) the items detailed in this Advisory; (d) the condition of the foundation, roof, plumbing, heating, air conditioning, electrical, mechanical, energy/water efficiency, security, appliances/personal property, pool/spa, and all other systems and components of the Property; and (e) all laws, regulations, and ordinances that may affect Buyer’s intended use or development of the Property. The items and issues identified in this advisory may impact the value or desirability of the Property. Broker will not be investigating these issues for Buyer, unless agreed to in writing.
The San Francisco Association of REALTORS® does not warrant or guarantee the accuracy of the information contained in this Advisory or the adequacy of the information as it relates to a specific real property transaction. Any representations about the issues in this Advisory made by third parties have not been verified by Brokers and need to be independently confirmed by Buyer.
A. GENERAL ADVISORIES
1. CONTRACT CONTINGENCIES
Buyers should protect themselves either by obtaining a thorough understanding of the condition of a Property in advance, or by conditioning their purchase on inspections and the ability to obtain any necessary financing. Buyers who decide to enter into a contract without either or both of these contingencies to make their offer more attractive to the Seller assume major risks. For example, if after entering into a contract without a physical inspection contingency, Buyer becomes aware of a problem with the foundation, roof or mechanical systems before the close of escrow, the contract may require Buyer to nonetheless close escrow, or forfeit the deposit.
A lender’s approval of financing includes the determination that (a) the Buyer is creditworthy, (b) can afford to make the mortgage payments, and (c) that the Property appraises for at least the principal amount of the loan. Even if a Buyer has obtained a prequalification or preapproval letter from a lender, the lender may still not approve the specific loan requested by Buyer. Denial of a loan may result from a variety of factors, including but not limited to, changes in federal lending regulations, changes in the lender’s policies, changes to the Buyer’s employment or financial status, or because an appraiser determines that the Property’s fair market value is insufficient for the lender to approve the loan amount requested. If there is no financing contingency and the Property does not “appraise”, the Buyer may not be able to make up the difference between the loan amount applied for and the loan amount actually offered by the lender. Under those circumstances, the Buyer may not be able to perform their contractual obligations. This could result in a determination that the Buyer is in breach of the contract and must pay damages to the Seller. It is a serious risk for any Buyer to forgo including a financing contingency in any offer if they intend to secure a loan to purchase the Property.
2. PROBATE SALES
The Representative of a decedent’s estate (i.e., the executor or administrator) may sell real property of an estate if it is in the best interests of the estate to do so. The sale of probate property is typically subject to Probate Court Confirmation (see the next Section).
The Independent Administration of Estates Act (“IAEA”) provides a simplified method of probating estates with limited court supervision. Under the IAEA the Representative may list real property with a broker for a period not to exceed 90 days without prior court approval and to sell the Property without court confirmation. The Representative’s ability to sell without court supervision or approval under IAEA is not absolute and is conditioned upon there being no objections by interested persons (generally, the heirs) who are given the right to object. If there is an objection, Court Confirmation will be necessary.
Probate property is always sold “AsIs” and the Representative is not required to complete or sign a Real Estate Transfer Disclosure Statement. However, the Representative must nonetheless disclose all actual knowledge of material facts affecting the value or desirability of the Property. Real Estate licensees who are involved in the listing or sale of Probate Property are obligated to conduct a reasonably diligent visual inspection of accessible areas of the Property and provide a disclosure based upon that inspection.
3. COURT CONFIRMATION OF CERTAIN SALES
Whenever the sale of real property is subject to open competitive bidding, as in the case of a probate, conservatorship, guardianship, receivership or bankruptcy sale, it is strongly recommended that Buyers be in court when their offer is scheduled for confirmation. Buyers should understand that in sales requiring court confirmation, the Property may continue to be marketed by the broker and others, and that their broker and others may represent other competitive bidders prior to and at the court confirmation hearing. Different types of courts have their own rules for how to handle the possibility of overbids including whether initial deposits need to be in a certain amount or whether the amount of an overbid needs to be a specific percentage above the original offer. Questions regarding the specific rules for the court where the confirmation hearing is to be held should be directed to the clerk of that court, or if legal advice regarding property subject to court confirmation is needed, then it is strongly recommended that a qualified real estate attorney who is knowledgeable about sales regarding court confirmation be consulted. Real estate brokers/agents are not qualified to provide legal advice.
4. TITLE INSURANCE AND PRELIMINARY REPORT
Buyers will receive a Preliminary Report (“Prelim”) from a title company as a part of Buyer’s investigation and due diligence regarding the Property. A Prelim is only an offer of title insurance and may not contain every item affecting title. Title companies today will provide an electronic Prelim (“ePre”) that has hyperlinks to those underlying documents, many of which are important for full review of conditions. Buyers should be aware that a Prelim on paper may not have the underlying documents attached and any hyperlink may not be highlighted. Real estate brokers and agents strongly encourage Buyers to review all matters affecting title and to purchase title insurance at the close of escrow.
5. EXISTING HOUSING STOCK
Properties in this area have been built under different building codes. Regardless of the age of the Property, Buyers should have the Property inspected by a competent inspector and have additional inspections recommended in any inspection report, or as may be necessary to determine the actual condition of the Property. The Property’s components, appliances, fixtures, systems and materials will have varying degrees of remaining useful life and are subject to failure without notice. In addition, components, improvements and fixtures of the Property may not comply with current codes, zoning, health and safety, setback requirements, religious or cultural preferences. Some homes contain appliances, products or manufactured materials, such as dry wall from China, which may be defective, create problems with the use of aspects of the home and may be subject to manufacturer or governmental recall and/or a class action lawsuit. All homes include components which require ongoing maintenance. Deferred maintenance decreases the lifespan and functionality of many of these components. Buyers should seek reliable advice from appropriate professionals and plan for future maintenance and repairs.
6. FLOORS AND WALLS
The personal property of the Seller may make a visual inspection of floors and walls difficult. Certain types of flooring (e.g., carpeting and rugs), certain types of wall coverings (e.g., wallpaper and paneling), as well as furniture may prevent inspectors and brokers from inspecting the condition of the floors and walls beneath those materials. When exposed, these areas may exhibit a different pattern of wear or shade of color. If the Buyer desires to determine the condition of the floors and walls beneath such coverings, Buyer will need to secure the written authorization of Seller to conduct investigations with appropriate professionals since removal of floor coverings may be required.
7. TEMPERED GLASS
Many homes contain glass that is NOT tempered in locations where tempered glass IS now required by building codes. Buyer is advised to have a contractor’s inspection to identify the presence of any glass that is not tempered before removing a physical inspection contingency on a prospective purchase of real property. Buyer should consider replacing any nontempered glass with tempered glass to reduce the risk of injury.
8. CONDOMINIUMS, COOPERATIVES AND HOMEOWNERS ASSOCIATIONS
Properties located in a Common Interest Development (or “CID,” which is a broad term commonly used to describe a condominium, cooperative, planned unit development, etc.) are usually managed by a Homeowners’ Association, (“HOA”), pursuant to a Declaration of Covenants, Conditions and Restrictions (“CC&Rs”) which govern the use of the Property, assessments and costs for maintaining the HOA and common areas. The Seller should request that the Homeowners’ Association provide certain required documents regarding the HOA operation and expenses to meet the Seller’s disclosure obligations under Civil Code Section 1368.
It is strongly recommended that Buyers receive the current HOA documents from the HOA rather than from an earlier transaction. Buyers need to carefully examine all of the documents that are provided regarding the HOA and compare them with a list of required or potential disclosures. If any documents are missing, Buyer should send a written request to the Seller that the Seller provide the missing documents. Buyers should retain the services of experts, such as attorneys, accountants or others who specialize in reviewing HOAs to determine the adequacy of the reserves and assessments. In reviewing the adequacy of assessments and reserves, Buyers should also request and obtain any available information about intended maintenance, repairs or improvements that are planned by the HOA.
Due to noise transmission and other factors, the CC&Rs and Rules and Regulations of the HOA may restrict the use, the type of alterations/improvements, floor and/or wall materials that can be used in units and the number, size and/or type of pets. Buyers should carefully review the CC&Rs and other HOA documents and contact the HOA Board to determine whether or not the Property can be used for Buyer’s intended purposes. Buyer should also determine whether or not the Property meets Buyer’s subjective personal preferences.
Many CIDs have been or are presently involved in litigation regarding the design, construction, maintenance and/or condition of all or a part of the Development. Whether or not these lawsuits are successful, litigation is expensive and the cost of such legal actions may impact not only the adequacy of the HOA reserves but also the amount of current or future assessments. When an HOA is involved in a lawsuit, it can make it very difficult to obtain financing on a unit. Therefore, Buyers are urged to investigate the existence of any pending lawsuits.
Occasionally issues arise in the purchase of Property in a CID regarding parking and/or storage spaces associated with a single interest or unit in the Development. Parking spaces and storage spaces, if any, may be described in a Condominium Map/Plan or in the Preliminary Report issued by a Title Company. In some cases the HOA reassigns parking and storage spaces after a sale. Buyers should determine for themselves whether or not the allocated parking
spaces are adequate to park Buyers’ vehicles by actually parking in those spaces. The actual markings, striping and numbering of these spaces may be in conflict with the spaces designated in the recorded documents. It is therefore crucial that Buyer personally determine that the parking and storage spaces that are designated in the recorded documents are actually being transferred to Buyer and that those spaces are acceptable for Buyers’ needs.
Many HOAs prohibit or limit new owners from renting or leasing units, depending on when the prohibition or restriction was enacted. An existing owner in a CID may be exempt from any such limitation. However, generally any exemption will not apply to a prohibition that was in effect before the owner acquired title to his or her unit. Investor Buyers in a CID should be sure to check whether rent prohibitions are in effect; and inquire of the HOA if they are planning on implementing any such prohibitions which might go into effect prior to the close of escrow.
The existence of HOA insurance does not necessarily mean that there is insurance coverage for any given single interest or unit in the Development, an owner’s remodeling or upgrade efforts and/or the owner’s contents.
A “CoOp” (or more formally “Stock cooperative”) means a development in which a corporation is formed primarily for the purpose of holding title to improved real property, and all or substantially all of the shareholders of the corporation receive a right of exclusive occupancy in a portion of the real property typically by a lease. The owners’ interest in the corporation, whether evidenced by shares of stock, a certificate of membership, or otherwise is a form of common interest development.
Buyer is advised that all locks should be rekeyed immediately upon close of escrow for the Buyer(s)’ safety and security of their person(s) as well as their personal belongings. Alarms, if any, should be serviced by professionals and codes should be changed. Garage door openers and remotes should be recoded.
10. PERSONAL PROPERTY AND STAGING ITEMS
In order to show a property in its best light, Sellers and their Brokers/Agents often engage the services of “Staging” companies to assist in the presentation of the property during the sales process. The furniture, furnishings and accessories provided by the staging company are removed prior to close of escrow and do not transfer to the Buyer.
As stated in the Purchase Agreement, NO personal property is included in the sale unless specifically designated in the Agreement or an Addendum. Therefore NONE of the staged furniture or other staging items (e.g., window sheers, drapes, artwork, mirrors, rugs, lamps, planters and plants, etc.) are included in the sale. If Buyer wishes to purchase any of the staging items, Buyer should enter into a separate written contract directly with the staging company.
Note that the MLS entry, flyers and other marketing materials are NOT part of the Purchase Agreement. Only the Agreement specifies the inclusion or exclusion of fixtures and personal property.
11. REAL PROPERTY TRANSFER TAXES AND PRIVATE TRANSFER FEES
Buyers should be aware that all counties in California impose a transfer tax of at least 0.11 percent (55 cents per $500 of value) on the purchase price of real property whenever a property changes hands. Transfers of leaseholds with a remaining term of 35 years or more are also subject to a transfer tax.
Cities may increase the transfer tax rate to generate additional local revenue. Some cities, such as San Francisco, have adopted tiered rates. San Francisco’s rates can be found at this link: www.SFARforms.com/TransferTax or by calling the county tax assessor’s office at (415) 5545596.
Since most transfer tax ordinances do not specify whether the tax is to be paid by the Buyer or the Seller, the custom that prevails in the jurisdiction in which the real property is located usually dictates who will pay the tax. In San Francisco, it is the custom for the Seller to pay the transfer tax. One common exception is in new construction sales, where the buyer usually pays the transfer tax.
However, the SBSA includes a paragraph referring to Community Enhancement and Private Transfer Fees. Although not commonplace, such fees are charged occasionally in San Francisco. For example, in Mission Bay, a Community Enhancement Fee is customarily paid by the Buyer upon resale.
B. REPORT OF RESIDENTIAL BUILDING RECORD (“3R”)
Local law requires that owners of one or more dwelling units obtain and deliver to Buyers a Report of Residential Building Record (“3R”) prior to selling the Property. The Records Management Division of DBI will issue a 3R upon request using the following online order form: www.SFARforms.com/3R. The fee for the report is shown on the form. The time to produce the report can be several weeks.
Seller is advised to instruct their Broker/Agent to order a 3R report on their behalf as soon as the Listing Agreement is signed. Review and approval of the 3R by the Buyer is a condition of the Purchase Agreement.
The body of the report purports to list all building permits for the Property, dating back to the original construction. However, if the original construction was prior to the April 1906 earthquake, that permit will not be shown, as the Building Department lost its records in the fire which followed. The 3R report does not include permits for electrical or plumbing work. Those DBI departments maintain their own permit history.
The codes on the line items are explained on the second page of the report. Note, however, that all permits prior to 1950 will show as ‘N’ (New), rather than ‘C’ (Completed), as the City did not issue Job Cards or record the Final Completion of permitted work prior to that time. The report also shows the Original and Current Permitted Use of the building, as an “nFamily Dwelling.” The Current Permitted Use shown on a 3R has more credence with the Planning Department than the Assessor’s records for the Property. If the Permitted Use is missing or “Unknown,” Buyer should contact the Planning Department and inquire whether or not this can be corrected or otherwise addressed prior to removing Buyer’s inspection contingencies.
The accuracy of 3R reports is less than 100%, as records have been lost, misfiled, or not copied accurately over the years. If the existence or absence of a particular permit is important, then Buyer should retain a qualified permit researcher to investigate further. The 3R report is not a guarantee that the work performed under any of the listed permits was done in compliance with applicable laws. Therefore, Buyer should conduct his or her own investigation regarding such work.
C. PERMIT ISSUES
Some improvements to property such as repairs, remodels and additions may have been done without a required permit. One such example would be where an additional living unit (an “inlaw”) is being rented by the Seller but the required permits were not obtained for it. An improvement that is made without the required permit can, among other things, have a negative impact on value, lending or appraisals; require a retrofit; impact habitability; preclude insurance coverage; and result in fees, penalties, and government and/or civil enforcement actions.
There are also significant restrictions affecting an owner’s right to construct or improve garages in San Francisco. Therefore, if Buyer intends to build a garage or alter an existing one, Buyer is strongly advised to consult a qualified architect, engineer and/or contractor before removing any inspection contingencies.
D. NONCONFORMING ROOMS, ALTERATIONS OR ADDITIONS
Buyers are advised that any rooms, alterations or additions to the Property that were made or constructed without necessary permits or certificates of completion (“nonconforming improvements”) may be subject to fines, permit costs, construction costs and other expenses to bring into conformity. In some cases, nonconforming improvements may be subject to tenants’ rights, and/or removal by local building inspection and code enforcement agencies. Nonconforming rental units may be required to be vacated and possibly removed. It might not be possible to legalize such nonconforming improvements because of zoning or permit issues and/or other legal or regulatory limitations. San Francisco Department of Building Inspection and code enforcement agencies may conduct random inspections of properties for permit, code and other violations while the Property is being marketed. Such nonconforming improvements may also be discovered when anyone applies for a new permit to do work on the Property. Whenever nonconforming uses are discovered, the current owner could face expensive repairs, permit fees and other costs and/or even removal of the nonconforming improvement.
While Sellers are obligated to disclose any known nonconforming improvements, the Seller may not be aware of some or all illegal improvements or uses, especially those that were made prior to the Seller’s ownership of the Property.
Current City policy and practice favors requiring homeowners to legalize “illegal” units where feasible, possibly at significant expense to the owner, and with consequences to the owner’s rights to use and occupy the property in accordance with local rent and eviction control laws and policies. The City may investigate prior occupancy; and where evidence of prior occupancy of an “illegal” unit is discovered the City may require restoration and the legalization of the unit.
In addition, real estate Brokers and agents are not required by law to inspect public records and cannot determine the legal status of improvements based solely on their required visual inspection of the property. For these reasons, Buyers are strongly urged to investigate possible nonconforming improvements by contacting the local building inspection and code enforcement agencies as well as obtaining the advice of contractors, architects, engineers or other professionals regarding the status and condition of the Property prior to removing inspection contingencies.
E. CODE COMPLIANCE AND ENFORCEMENT
F. SELLER OCCUPANCY AFTER CLOSE OF ESCROW
G. TENANCIES-IN-COMMON (TICs)
A TenancyinCommon (TIC) is a form of ownership in which all of the owners of the Property (the “cotenants” or “tenantsincommon”) own undivided interests in the entire property, in percentages set forth in their respective deeds. By agreement, the owners may assign to one another specific occupancy and other rights. Usually, all of the owners are fully liable for the mortgage, unless each owner has secured an individual loan for their TIC interest, and the mortgage generally cannot be modified without the consent of the lender and all of the owners. These are extremely complex
relationships requiring, among other matters, a carefully written TIC agreement setting forth the rights and responsibilities of all of the owners, including rights of exclusive occupancy of specific units, parking or storage spaces, financial obligations, restrictions on use, use of common areas, restrictions on subsequent sales and dispute resolution mechanisms. Brokers are not qualified to review and analyze TIC agreements. Prior to purchasing a TIC property, Buyer is strongly urged to seek the advice of a qualified California real estate attorney to review any existing TIC agreement, and to otherwise advise Buyer regarding the nature of this unique form of real estate ownership in general, and specifically this particular TIC arrangement. See SFCA form TICFDSF.
H. SQUARE FOOTAGE DISCLOSURE
Measurements of a property vary from source to source and often conflict. There is no official source and no agreed upon method of calculation. For instance, appraisers often include the thickness of exterior walls; surveyors of condominium units typically measure the space between interior walls and around obstructions, such as fireplace flues; and floorplan designers employ a wide variety of methods. Tax records are often out of date and may fail to reflect various structural modifications. Measurements may or may not include some ‘finished’ or ‘unfinished’ space and may not make a determination of the ‘legality’ of the space. Different sources of building or interior square feet can include the following: the San Francisco Assessor’s tax records, condominium maps or plans, floor plans by graphic artists, architectural drawings and appraisal diagrams.
Buyers may perform their own measurement prior to entering into a contract or during their due diligence contingency period. Any figures which quote a “price per square foot” for properties are broad estimates only, and the accuracy of any such figures should be independently verified by Buyer.
I. WATER HEATERS
J. SMOKE AND CARBON MONOXIDE DETECTORS
California Health and Safety Code §13113.8 and San Francisco Ordinance 386‒84 require smoke detectors in residential property. If a TDS is required, the Seller certifies that the Property has (or will have prior to Close of Escrow) operable smoke detectors which are approved and installed in compliance with the State Fire Marshal’s regulations and applicable local standards. In addition, DBI requires smoke detectors in all bedrooms of residential property before it will issue a Certificate of Completion for any permitted contracting work costing $1,000 or more.
State law requires carbon monoxide detectors in living areas for all residential properties that have fossil fuel burning appliances, even if those are several floors below, such as furnaces in the basement of a condominium building.