What You Must Know When Buying a Home

Rachel L. Gerstein
Email: [email protected]

Rachel Gerstein applies the advice from Finding The Uncommon Deal to home buying in California


Differences in California – I focused my comments mostly on the differences in purchasing real estate in California than in other places.


1. California is primarily an escrow state.


CHAPTER 10 is totally different for California buyers and sellers
a) Making the Offer – the Buyer’s Broker will write up and present the offer to the Seller’s  broker. . . and may or may not present the offer in person
b) Hiring an Attorney – for complex, large deals,
c) Contract Deposit – usually no more than 3%
d) The Real Estate Closing – no physical exchange of documents or funds. . . no meeting at the attorney’s office – all the funds are distributed before the actual day of closing- day or recording. . . via wire or cashier’s check(s)


Closing is just an exchange of funds and a transfer of keys upon confirmation of recording from the county recorder’s office


2. Standard Purchase Agreements is combined with joint escrow instructions . . . see attached. . . CAR Form ‘California Residential Purchase Agreement and Joint Escrow Instructions ‘


3. In California, all purchase contacts are presented to the Sellers through his Broker with a Deposit. Deposit is normally 3% for most real estate transactions – there is a transfer from buyer to escrow company – seller’s attorney does not hold the funds. . .

The total down payment only needs to be put into escrow before closing – usually the lender will request to see all funds in escrow before the lender will forward their closing funds


This varies greatly from your discussion on page 24 ‘The Down Payment. . .” Depending on the deal, the seller will want to see evidence of a sizable down payment 10-20% – but, that money would never be put into escrow until the closing.


In California, the entire amount of buyer’s down payment is never at risk . . . just the 3% deposit, unless the seller has negotiated a higher amount . . .or amount that is released out of escrow – before closing .


4. Liquidated Damages – see attached purchase agreement – seller cannot keep more than 3% of purchase price –

*** Releases of funds (any funds for that matter) from escrow require mutual, signed release instructions from buyer and seller, judicial decision or arbitration award.

*** In all contracts Mediation/Arbitration of Disputes – highly encouraged. . .


5. Page 48 – Real Estate Brokers: The Guardians of Real Estate

Buyer needs to educate him or herself . . .on the who is really paying the brokerage commission. . .on paper, it looks like it is the seller who is paying 5-6% of the purchase price. . . to both buyer’s broker and seller’s broker. In reality, the buyers is also subsidizing a part of the broker’s commission in a higher purchase price


Brothers that share the commission with buyers old saying ‘ Buyers are Liars’- – – the Buyer says they only want Spanish-style in the hills and they purchase Modern home in the flats. . . need to see all listings. . . in all the area they are interested in.


Page 49 – I disagree with that paragraph . . . a buyer (in reality) is always paying for a part of the broker’s commission . . .the buyer can always demand a rebate from their broker’s commission and get a credit at closing or a reduction in purchase price. . . The buyer must have this conversation with their broker prior to starting to work with the broker. . .


This is all the more true when a seller is going to work with one broker for both their sale of their home and the purchase of their new home or vice versa. In this case, the seller has the opportunity to negotiate the commission on both sides of the transaction – the sale and the purchase of their new home. .

I think there should be a discussion of discount brokers or brokers like www .RedFin.com  that rebate a portion of the brokerage commission back to the buyer as a closing credit.


** This is very important buyers could earn at least $7,000 – $30,000 back at closing. . . very popular in Los Angeles and other areas. . .not from what I can tell in nyc. . . but, coming. . .


6. Mention of Unique Tax situations –

California’s Proposition 13 is the holy grail in California real estate. . .Property taxes are set at the market value at time of transfer of ownership and remain relatively constant through the buyer’s ownership of their home.


Under Proposition 13, the annual real estate tax on a parcel of property is limited to 1% of its assessed value. This “assessed value,” may be increased only by a maximum of 2% per year, until and unless the property undergoes a change in ownership. At the time of the change in ownership the low assessed value may be reassessed to full current market value which will produce a new base year value for the property, but future assessments are likewise restricted to the 2% annual maximum increase of the new base year value. (wikepedia)


7.  Other comments – Mortgage Interest deductions, property tax deductions


General Questions – not just related to the State of California


Page 28 – reduction of open credit limit amount from loan amount. . . have not found to be true in practice. . .


Page 37 –  The condominium unit – Given the housing crisis and a reduction in lender’s option –  many lenders have restrictions on lending for new condominium projects and may want to see, in many cases, at least 60% of the condominium units in escrow or sold, to give a buyer a mortgage in that particular building


Buyer be aware of percentage of owner-occupied versus developer or renter-occupied – a low percentage of owner-occupied residences will make it difficult for the prospective buyer to get a loan.


both factors (% sold/escrow in new condominium) and owner-occupied will greatly affect  a buyer’s ability to get a loan and in the end, the transferability of the unit, and overall market value.


Page 89 the Engineer – Inspections –


Page 91, Termite Inspection (In California, difference between Section 1 and Section 2 work) – Section 1 is damage caused by termite damage, Section 2 is work that n


Page 98 – Note- What should a buyer do if the home does not appraise for the Purchase Price?


A discussion on this topic?


Usually there is a contingency in the purchase agreement, but, may warrant a discussion on the buyer’s options. . .


Chapter 11 – The Inspection


In California, hot topics of focus for the home inspector (in addition to all the ones you mentioned) are previous earthquake damage and signs of structural stress or damage to the foundation of the property. . . these are very costly repairs, and most certainly, a deal killer,


Testing of the drainage system, and mold continue to be items of great focus. . .


p.100 – bottom – *** Should make a mention most home inspectors only do visual inspections and do not investigate the history of the home from date of first occupancy. All buyers should go to their city hall or recorder’s office any pull all permits and any work done on the property to see what, if anything, has been done on the property –


pages 105-106 – some discussion of the  back and forth after the home inspection what the seller will pay for or not, and what the seller repair or not,  or parties go their separate way.. . .


Chapter 13 – In California, a majority of buyers do not use attorney’s . . . escrow state. . .


Page 135 Home insurance is mandatory if you have a loan on your property


** California Fair Plan


** Buyers be ware that areas hit by fires and flooding, earthquake, private insurance companies usually  pull out of the area. . . state (California Fair Plan) comes in, very costly insurance that covers much less than private insurance –


** RAW – Ready, Able, Willing buyer – Seller wants out of deal. . . seller may still be responsible to pay broker commission. . .


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