Real Estate Contract Norms

I am yet to see a single real estate deal that is identical to another. It is amazing how many little things change from deal to deal. Nevertheless, there are certain real estate norms that all parties should be aware of. They are not all followed on every deal but it is good to be aware of them as a starting point for negotiations. Also, please be aware that these real estate norms apply to California only. Real estate transactions are very different across the country.  Some of this may apply to your location and some of it may not.

Home Warranty - It is customary for the seller to purchase a home warranty plan for the buyer. Notable exceptions are when trying to purchase a bank owned property or a short sale. In these cases I would not suggest trying to write this into your deal because you will most likely be facing a lot of competition from other buyers.

Escrow Fee - It is traditional that the escrow fee be split 50/50 by the buyer and seller. This is one of the real estate norms that I see followed most frequently. If you are ever in a deal where this is not the case you should make sure that you are being compensated in some other way.

Title Policy - The title policy is normally paid for by the seller. Every now and then you will see a deal where a seller will try to have the buyer pay for half of this fee. If you agree to that as a buyer, you should know that you are giving in on a very established norm so you should make sure that the deal is good enough to validate the cost.

Transfer Fees and Taxes - In California it is customary that all transfer fees and taxes are paid for by the seller. This includes city and county fees, HOA doc prep and transfer fees, and any community enhancement fees or transfer fees. That last item is the one that sees the most contention of any tax or transfer fees. The reason being that they are not seen as often and so people don't always lump them into this category.

A good example of this is the Santaluz enhancement fee. Santaluz is a gated golf course community here in San Diego that has its own private transfer fee upon any sale. The amount is for .25% of the sales price. Officially, this is a seller's responsibility by more than just custom. The reason being that it is a fee that every Santaluz seller should know they will have to pay upon the sale of their home as per the CC&R's of the community. If the buyer pays it then they will most likely be subjected to paying it twice, as they will face it again when they sell in the future. However, because it is not a fee that people are overly familiar with, you will see some seller's try to pawn off half the fee on the buyer. Be aware.

Initial Deposit - The contractual norm is that the initial deposit, also known as the earnest money deposit, be 3% of the sales price. The reason behind this number is that it matches the maximum amount of liability a buyer can carry as per the liquidated damages clause, assuming that clause is initialed by both parties, which it normally is.

Notice To Perform - One of the best buyer protections is the notice to perform. The contractual norm in California is for this to be a 24 hour period of time. However, many agents do try and extend this time frame when negotiating on behalf of a buyer. You will often see this extended to 48 or even 72 hours. I would categorize anything beyond 72 hours to be well outside the norm and should be looked at closely to see why the buyer needs so much notice.

Contingencies - There are a number of different contingencies with different time frames that are generally used. However, the three most important contingencies are probably loan, appraisal, and buyer investigations. By default, the California purchase agreement sets these time frames at 17 days and that is accepted by the norm. However, you will see times when sellers try to shorten the real estate contingencies set forth in the contract. As a buyer you should be very careful of accepting this if you are not comfortable with the proposed time frames, especially when it comes to your loan contingency. Never accept less time than your lender is telling you that they are going to need.

Other times you will actually see the buyer reduce the amount of time allowed for contingencies. Buyers will do this to help them negotiate a better price because it makes their offer appear strong. If you are buying with cash or your lender is certain they can perform in less time, then it can be a good idea to reduce the amount of days you need for your contingencies as it will probably yield you a better price on the home.

I am curious to know how some of this is differs in other states or possibly even in other areas of California far from San Diego. Share your comments below.

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