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  • 12265 Scripps Poway Parkway, Suite 115
  • Poway, CA 92064
  • P: 858.530.2374
  • F: 858.876.1701
  • E: info (at) sandiegocastles.com
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Escrow Cancellations are the New Pink for Spring – Again

Transaction Has Been Canceled (;_;)
Creative Commons License photo credit: The Consumerist

(Fashions come, fashions go. And then, about five minutes after you have thrown out all of your shoulder pads and parachute pants, they tend to rear their ugly heads again. I am re-upping this from 2009 because, well, it's been one of those months.)

I have a little something I have to get off my chest. Maybe it’s just that my deck has been stacked this month, or just maybe the things I am seeing are in fact signaling a pandemic.

When did the purchase agreement stop being seen as a legally binding contract?  Where did all that good faith go?

I wrote about the whole fear of commitment thing awhile back – I think I’ve written on just about everything “awhile back”– but the practice of buyers using the purchase agreement as a place holder until they decide if they really want to buy the house is spreading faster than the swine flu.

While you may be contractually within your rights to cancel on day 16, 21 or 29 of your 30-day contract (alas, the contract tends to like buyers biggest), you will likely be putting many other folks through the proverbial wringer. Lost market time, packed moving boxes, and a previously staged home which is now a shell of its former glory are just some of the side effects for the seller. Enormous time and effort – from the principals to a vast supporting cast of agents, escrow and title officers, and other professionals – are down the old toilet. Yes, you can take your money and go home. Just know that you will be leaving a path of destruction in your wake.

Perhaps you discovered something about the home while under contract that changed your decision to buy. I get that, but not all “discoveries” are created equal.  There are good arguments for bailing from an agreement, and there are bad. Let’s look at some examples:

Good:  Home is situated on a previously unmapped active volcano.
Bad: Home is situated on a foundation.

Good: Home was built entirely with duct tape and Lego bricks.
Bad: Home was built.

The problem for the seller is that there is no reasonableness test for cancelling contract during the inspection and disclosure contingency process. And when we hear that you are suddenly disturbed that the home faces west, fronts a street, or is painted beige – all stuff you would have known had you taken off the ski mask — we know this is code for “Neener, neener.  I changed my mind, and you can’t stop me.”

No reasonable person would expect you to proceed with purchasing a home you don’t like. Buying a home is kind of a big deal. But there is a little suggestion I like to share with my buyer clients; stay with me here, because this is where it gets complicated. If you don’t like it, don’t offer to buy it!

In business, there are strategies and then there are tactics. So it goes with home buying. Writing an offer is a tactic, but the seller’s assumption, crazy as it sounds, is that your underlying strategy is ultimately to purchase and move into their home. They are going to commandeer boxes, schedule movers, secure replacement housing, and even give notice at work. Putting them through all of that if you are just taking a practice run is not cool.

Competing with the “Fun” of Multiple Offers

If you walk into The Gap and find a shirt you like with a price tag of $39.95 – you expect to pay no more than the ticketed price and hopefully you’ll be surprised with 20% off at the register.  

Unfortunately, the home buying process isn’t as cut and dry. In today’s market, everyone wants the same shirt and there aren’t enough to go around. There isn't much on the market right now especially in the first time buyer range, so properties are going into escrow within days, with multiple offers on the table. We listed a condo on a Saturday morning and by Sunday afternoon we had half a dozen offers to present to the seller.

So, if you are a buyer, how can you make your offer stand out when it is evident that the seller will be receiving multiple offers?

  • Price: If you are able to put in an initial offer above the asking price you are showing the seller that you are a competitive buyer. Even a few thousand dollars could put your offer at the top of the pile and at the very least make you competitive as the selling side decides who to counter.
  • Deposit: In our market, an earnest money deposit (EMD) is typically 1% of the purchase price. This money will be held in escrow until you purchase the property, whereupon it will be a part of your down payment. In the unusual event that you cancel escrow after all your contingencies have been removed, then this becomes liquidated damages for the seller. By increasing your EMD to 2-3% of the purchase price, you are showing the seller that you are serious about purchasing their home. Increasing your deposit helps you be more competitive without taking a greater risk.
  • Close of Escrow: Sellers typically want to move through the escrow process quickly and with ease. Having your agent speak to the Listing Agent about what the seller would like in terms of escrow length is helpful. Perhaps they need a rent-back period while their new home is being built or they want a 30-day escrow so they can move cross country before the start of the next school year. Including these terms in the offer can let the seller know that you are flexible to their needs.
  • Contingency Removals: It is standard in the purchase contract for you as the buyer to have 17 days after acceptance of escrow to conduct all inspections. By shortening this period by even a few days, you are letting the seller know that you will conduct your investigations in a more timely manner. If any issues do arise from the inspection they can be dealt with sooner rather than later. It is fairly easy to schedule an inspector and this can generally be done within a week of opening escrow. Thus, this is another element that can make you more competitive without adding any risk.
  • Tug on the heartstrings: If all else fails, go the emotional route. Include a 1-page letter to the seller about why you love their home and would like to move there. Explain a little about yourselves and maybe include a picture of your family. In the midst of all the contractual mumbo jumbo, this can be a nice little break for the sellers to get to know the faces behind the numbers – and the possible new owners of their home!

The market is quite competitive for buyers, so if you see something you really like online, try your best to view it within 24 hours.  If you are seriously interested in the home, ask your agent  to communicate that with the Listing Agent so that you are in the loop as to how many offers you are competing against. Happy home shopping!

Fixtures, Personal Property, and Those Little Contractual Gray Areas

“Can I keep it?” This benign little question is raised at some point during nearly every transaction. Usually, a discussion of “personal property” versus “fixtures” ensues, but many items fall into a gray area. Fortunately, our California Residential Purchase Agreement (RPA) has attempted to address these.

The purchase agreement includes a paragraph that addresses items “included in and excluded from” the sale. It is a zinger, and at both the listing stage, where we are representing the seller, and at the contract stage, we have the talk. If you want to take the whimsical cherub wall sconces when you leave, because they are cherished heirlooms that have been passed down for generations, most recently at your son’s Bar Mitzvah, then they need to be written into the contract as exclusions. If you are a buyer looking forward to lazing in the seller’s hammock after you have finished unpacking the FiestaWare, then you need to write the hammock in as personal property to convey. Memories tend to fade, however, and where our stuff is concerned, a food fight can easily break out.

First, there is the issue of fixtures and fittings, and everyone seems to be pretty clear on the idea that those come with the home. It generally boils down to method of attachment; if an item is bolted in and can reasonably be considered an integral part of the home, then a fixture it is. If you can pick it up and haul it to the moving van, it’s personal property. Even here, though, disputes tend to arise.

Then, there are all those little nits, those gray areas that over the years have been most often the subject of wars being waged. Garage door openers, pool equipment, and gas log inserts, for instance, are all listed in the contract as staying with the property. The potted plants go away, but plants residing in our “fertile” native Scripps Ranch soil remain. This list is dynamic, however, and as our standard purchase contract has evolved, certain things have needed clarification. Wall-mounted televisions are now specifically excluded from the fixtures list, although the mounting brackets remain a point of debate and, often, contention.

The single biggest whose-stuff-is-it-anyway dispute in the transaction is, in my experience, always related to the window coverings. Note here that I said “coverings,” because that is how our contract reads. According to our contract, window coverings convey unless they are excluded from the sale. Once, we had a seller argue that she got the whole part about the drapes being goners, but the contract didn’t apply to her decorative valances, because they didn’t really “cover” anything. Attorneys have repeatedly said otherwise. Decorative or not, fabric or wood or a sheet of butcher paper cut to size, window coverings – window treatments – are included in the sale.

Bottom line: When in doubt, write it in.

Easily Distracted

Back in the Mesozoic Era when I was a teenager, I took a little thing called a driving test. Well, that's not entirely true. I took my driving test three times before hitting paydirt, but that is SO not the point. The point is that the second time I flunked, the nice DMV man told me that it was because I was "easily attracted and distracted" (although I suspect it had more to do with my brief time spent piloting my '67 Belvedere down the sidewalk).

Easily attracted and distracted. Little did I know then that this would make me both a very bad homebuyer. 

We tend to toss the word "custom" around in real estate advertising like custom means better, but “custom” is limiting. It limits the buyer’s choices and it limits the seller’s opportunities. “Custom cabinets,” “custom window coverings,” “custom fresco depicting interpretative dance moves performed by small woodland creatures and mystical garden gnomes” – these are all beautiful things. They are beautiful, that is, to the person who ordered them.

Custom just means that is was made to order – for one person’s own liking. And that’s why we stage homes.

The idea behind staging is to neutralize. Everyone likes a family room. Not everyone digs a family room with an Elvis motif (and I’m talking about the old Elvis in the jumpsuit, not the young one – he’s OK).

Everyone loves his or her children (well, most everyone, and only when they aren’t dropping their cell phones in the toilet, but I digress). The point is that not everyone loves your children – at least not enough to appreciate their likenesses displayed on every square inch of drywall. While you are thinking “Aw!” your buyer is thinking Spackle. And they get distracted, now having been reminded that they need to order a new computer to replace the one into which their own daughter poured a Venti peppermint mocha. Sorry. I digress again.

Some things can’t be staged away, of course. You loved the builder-option maple cabinets but your buyer fancies the Euro white. Your buyer dreams of a walk-in pantry, and your garage looks like a Costco distribution center because you don’t have one of those guys. In these cases, you have two choices. You can be patient or you can set your price accordingly.

As for the other stuff, the “fixable” stuff, just remember that every personalization, whether it is a religious artifact, personal photos, a bold paint scheme, or a bookcase filled with all back issues of Kitten Taxidermy Weekly, speaks to your buyer. It says, “Not my house.” Neutrality, on the other hand, will appeal to the greatest number of buyers – buyers who will be able to imagine themselves making your home theirs.  And that, after all, it the whole idea.

Obamacare and That Scary Real Estate Tax (revisited)

Here we go again.

A client who is interested in selling her property recently told me about a conversation she had with her neighbor. Her neighbor warned that she had better sell by the end of December. “Or what?” I asked? “The hostages die?”

No. Apparently, according to her neighbor, she would owe approximately $5 million in taxes if she closed escrow after the first of the year – because of ObamaCare.

This seems like a good time to dust off an old post on the topic.

Much has admittedly been written about the Affordable Health Care Act or, more specifically, about the part of the Affordable Health Care Act involving a Medicare Tax on certain real estate transactions. And if you are planning to sell your home in 2014, you can probably ignore the warnings to head for the nearest underground bunker.

For those fuzzy on the details, here is a little primer. (Keep in mind that we are talking about primary residences only. For investment properties, it’s a bit more complicated.)

Effective January 1, 2013, there will be a new 3.8% tax assessed when a property is sold.

  1. The 3.8% tax will only apply to “high income” taxpayers, defined as single filers with an Adjusted Gross Income of more than $200,000 or married couples filing jointly with an Adjusted Gross Income (AGI) of more than $250,000.
  2. The existing primary home exclusions will remain ($250,000/$500,000 for single and married filing jointly respectively). The new 3.8% tax will apply only to gains that exceed these numbers.
  3. For the squeakers, those close to the AGI limits, there is this. The tax is NOT imposed on the total AGI, nor is it imposed solely on the investment income. The tax will be determined based on the LESSER of (1) net gain (over the current exclusions) OR (2) the excess of AGI over the $200,000/$250,000 AGI thresholds.

Clear as mud? Let’s try some examples. For ease, let’s assume the taxpayer in our examples is married and filing jointly.

  • Your AGI is $5. The gain on the sale of your home is $500,000.  No 3.8% tax.
  • Your AGI is $5,000,000,000. The gain on the sale of your home is $500,000. No 3.8% tax for you.
  • Your AGI is $251,000. The gain on the sale of your home is $600,000, which is $100,000 above the $500,000 exclusion. (Note that I took lots of math in college.) You will be taxed 3.8% of $100,000 (the net gain over the $500,000 exclusion), or $3,800.
  • Your AGI is $Warren Buffett. The gain on the sale of your home is $600,000, which is $100,000 above the $500,000 exclusion. You will be taxed 3.8% of $100,000 (the net gain over the $500,000 exclusion), or $3,800. (And, may I suggest, this is the kind of problem you like to have.)

Now, here is where it gets tricky, and this applies to the folks hovering near the AGI limits.

  • Your AGI is $5. The gain on the sale of your home is $600,000, which is $100,000 above the $500,000 exclusion. The 3.8% tax will be calculated base on the lesser of the $100,000 gain OR the excess over the AGI limit. In this case, the new AGI is $5 plus $100,000, or $100,005, which is less than the $250,000 limit. Oh, happy day!  No 3.8% tax for you.
  • Your AGI is $240,000. The gain on the sale of your home is $550,000, which is $50,000 above the $500,000 exclusion. In this case, the new AGI is $240,000 plus $50,000, or $290,000, which makes the excess equal to $40,000. You will be taxed 3.8% of $40,000 (because $40,000 is less than $50,000, duh), or $1,520.
  • Your AGI is $0. The gain on the sale of your home is $1,000,000, which is $500,000 above the $500,000 exclusion. In this case, the new AGI is $500,000, which makes the excess equal to $250,000. You will be taxed 3.8% of $250,000, or $9,500.

To summarize, the Medicare tax will apply only to high income earners and only after the current primary home exemptions. And, keep in mind that the gain on your home is calculated by subtracting your cost basis from your sale price. The cost basis is not what you paid for it but the adjusted cost after taking into account the escrow, title, and other real estate fees you paid when you bought and sold, not to mention the cost of the new water heater you had installed in 1993.

There will be a test later.

(As always, remember that, as of this writing, I do not hold a Juris Doctorate degree. Consult your attorney or CPA. Use only as directed. Patent pending. Keep away from children. And so on.)

 

 

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Office Location

  • San Diego Castles Realty
  • 12265 Scripps Poway Parkway, Suite 115
  • Poway, CA 92064
  • P: 858.530.2374
  • F: 858.876.1701
  • E: info (at) sandiegocastles.com
  • CA BRE# 01853496

Broker Information

  • Kris Berg, Broker
  • CA BRE #01241572