Buyer Agency

In the state of California, real estate agency is governed by California Civil Code Section 2079.16. It defines buyer agency as:

BUYER’S AGENT
A selling agent can, with a Buyer’s consent, agree to act as agent for the Buyer only. In these situations, the agent is not the Seller’s agent, even if by agreement the agent may receive compensation for services rendered, either in full or in part from the Seller. An agent acting only for a Buyer has the following affirmative obligations:

To the Buyer: A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Buyer.

To the Buyer and the Seller:
(a) Diligent exercise of reasonable skill and care in performance of the agent’s duties.
(b) A duty of honest and fair dealing and good faith.
(c) A duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the parties.

An agent is not obligated to reveal to either party any confidential information obtained from the other party that does not involve the affirmative duties set forth above.

This definition usually trips people up because the first three words are “A selling agent” which immediately makes people think there is a relationship to the seller. Those of you that graduated from Agency 101 will remember that selling agent refers to the agent that brings the offer, which is the buyer’s agent.

The civil code clearly spells out something that often confuses people about buyer agency, which is this: Even if compensation comes from the seller, the buyer’s agent has the fiduciary duty to the buyer. Not to the seller. 

What is “fiduciary duty?” The fine folks at uslegal.com have a great definition of fiduciary duty:

A fiduciary duty is an obligation to act in the best interest of another party. For instance, a corporation’s board member has a fiduciary duty to the shareholders, a trustee has a fiduciary duty to the trust’s beneficiaries, and an attorney has a fiduciary duty to a client.

A fiduciary obligation exists whenever the relationship with the client involves a special trust, confidence, and reliance on the fiduciary to exercise his discretion or expertise in acting for the client. The fiduciary must knowingly accept that trust and confidence to exercise his expertise and discretion to act on the client’s behalf.

When one person does agree to act for another in a fiduciary relationship, the law forbids the fiduciary from acting in any manner adverse or contrary to the interests of the client, or from acting for his own benefit in relation to the subject matter. The client is entitled to the best efforts of the fiduciary on his behalf and the fiduciary must exercise all of the skill, care and diligence at his disposal when acting on behalf of the client. A person acting in a fiduciary capacity is held to a high standard of honesty and full disclosure in regard to the client and must not obtain a personal benefit at the expense of the client.

So the highest duty in the transaction where I am bound solely by buyer agency  - the duty to exercise my discretion and expertise on behalf of a client who has placed their special trust, confidence, and reliance on me – is only to the buyer in buyer agency. 

That being said, the law does not completely relieve me of any obligations to the seller. I am still bound to:

  1. be honest
  2. deal fairly and in good faith
  3. exercise reasonable skill and care, and
  4. disclose all material facts about the property

to both the buyer and seller. 

So that’s a summary of Buyer Agency. Helpful, or too much legal gibberish?

Remember: Agency is a legal topic. I am not an attorney, nor do I have any plans to become one. If you are seeking legal advice about agency, consult a qualified attorney. If you do not understand the agency relationships in your specific situation, do not rely upon this article to clear things up. Consult an attorney! Whatever you do, don’t just take the blog posts you stumble across from an internet search as the gospel truth.

Pre-Paid Interest Explained

Closing costs. They just seem to add up, and up, and up. One of the items that buyers find on their estimated settlement statement is a line item described as “pre-paid interest.”

Understanding this closing cost gets a lot easier when you remember one important concept: rent is paid in advance, mortgage payments are paid in arrears. For example, if you rent a home, the rent payment you make the 1st day of the month is the cost of renting that home for that month. If you make a March 1 payment, it is to cover the month of March.

If you own a home, the same payment that you make on March 1 would be for the interest that accumulated in February and any principal you are paying down. Mortgage payments look back, rent looks forward, and this is where the pre-paid interest closing cost comes from.

Closing early in the month of March increases pre-paid interest

Take two hypothetical closing dates. One is early in the month – let’s say March 7 (calendar above). The other is late in the month – let’s say March 28 (calendar below).  Both of these homes will have their first mortgage payment due on May 1. The May 1st payment will cover all of the interest that accumulated in the month of April.

Pre-paid interest is the difference between the day when you actually borrowed the funds to buy your home and the interest included in your first mortgage payment. If you close early in the month, you will pre-pay the interest for that entire month, because the first mortgage payment will include the interest for the following month. If you close late in the month, you are only pre-paying several days worth of interest, so the amount is lower.

Closing late in the month of March reduces pre-paid interest

The early March closing has higher pre-paid interest charges (and thus, higher closing costs) but also a longer time period between the close of escrow and when the first mortgage payment is due (March 7 –> May 1). The late-in-the-month closing has lower pre-paid interest charges, but also a shorter time period between closing and the 1st mortgage payment (March 28 –> May 1).

How is the daily amount actually determined? Regardless of the number of days in the month, closing costs are always based on a 30 day month (including property taxes, HOA dues, etc.). Take the interest paid for a 30 day month, divide by 30, and that is your daily pre-paid interest amount.

If you found this article helpful, be sure to check out our homebuyer’s guide.

Agency 101

Agency in a real estate transaction spells out who the brokers are responsible to. It’s an important (but confusing) topic, so I wanted to take some time to explain it. I’ve written in the past about agency and dual-agency. This article is going to focus on the basics of agency.

Here’s the most important thing I can tell you about agency: Who pays the commission has nothing to do with agency. Yes, in San Francisco the entire real estate commission is normally paid by the seller. The commission is then split between the buyer’s agent and seller’s agent, usually equally although sometimes not. However, just because the commission comes from the seller’s funds does not mean that the buyer’s agent is in any way responsible or owes any duty to the seller.

A Visual Guide to Real Estate Agency

Let’s start by clearing up some confusing terminology:

  • buyer’s agent and the selling agent are the same person. They represent the buyer in a real estate transaction.
  • The seller’s agent is also often referred to as the listing agent. They represent the seller in a real estate transaction
  • People often confuse “selling agent” with “seller’s agent” – don’t be that person! The selling agent is the agent who brought the offer to purchase the home. Unless the deal is being double-popped, the selling agent is a different person than the seller’s agent  (listing agent).
The second most confusing issue is that your legal agent is not your real estate agent.
  • Your legal agent is the brokerage where your personal real estate agent hangs their license.
  • Your real estate agent is – obviously – the person you have daily (hourly?) contact with when finding and purchasing your home.
  • Agency relationships are based upon who your legal agent is, not who your personal real estate agent is.
For example, Britton and I hang our licenses at Zephyr Real Estate. If we meet you and start writing offer’s on your behalf as a buyer’s agent then we are your real estate agents and Zephyr Real Estate is your your legal agent. Why does this matter? Consider these situations:
  • You find a house that you love. It is being sold by Ms. Mona Lisa of Coldwell Banker. In this situation, my relationship to you is governed by buyer agency because Zephyr Real Estate represents the buyer and Coldwell Banker represent the seller.
  • You find another house that you love. It is being sold by Mona Lisa who has now gone to work for Zephyr Real Estate. In this situation, my relationship to you is governed by dual agency because Zephyr Real Estate is the legal agent of both the buyer and the seller. It does not matter if Ms. Mona Lisa and I have ever met. It doesn’t matter if I know the sellers or not. It doesn’t matter if Ms. Mona Lisa is in the same office or a different Zephyr office. Because the legal agent is the same for both sides, it is a dual agency transaction.
  • You find another house that you love. It is being sold by Britton and me. This is (obviously) also dual agency, and this particular type of dual agency is sometimes called double-popping, or being on both sides of a transaction.

California law allows for three types of agency in a real estate transaction: buyer agency, seller agency, and dual agency. I will explore what the duties are for each of these types of agency in the coming days!

Important Disclosure: Agency is a legal topic. I am not an attorney, nor do I have any plans to become one. If you are seeking legal advice about agency, consult a qualified attorney. If you do not understand the agency relationships in your specific situation, do not rely upon this article to clear things up. Consult an attorney! Whatever you do, don’t just take the blog posts you stumble across from an internet search as the gospel truth. 

Mona Lisa image in the above graphic is used under a CC license - http://graffitiwatcher.deviantart.com/art/Mona-Lisa-173833666

How About That Apple?

105 Midcrest Way in Midtown Terrace was on the market for $799,000 last fall. It received multiple offers (I know this because I represented buyers that were outbid) and closed for $808,000 on September 2, 2011.

105 Midcrest in Midtown Terrace

While I don’t remember the exact details, there were reports on the property that showed some dry rot and water issues – nothing off the charts, but if I recall it had to do with the east wall (the one you can see in the picture) as well as some of the patios that were over living space (also seen in the picture).

The property didn’t show badly, but it was vacant and didn’t show extremely well, either.

105 Midcrest went back on the market this spring, and closed on 3/22/2012 for $1,020,000 which was over the asking price of $999,000.

As far as I can tell, no work was done to the property with permits between last September and the most recent sale (I checked the online permit and complaint database with DBI). Looking at the pictures from the fall and spring sales, there doesn’t appear to have been any work done on the kitchens or bathrooms, and the carpet and flooring appears to be unchanged as well. It does look like some tidying was done to the yard areas, but that is the only difference I can see.

Did the September buyers get an amazing under-market deal last fall? Given the interest in the property (offer date, multiple offers) it seems hard to say they got a bargain. But given that – as far as I can tell – very little has changed with the property and it sold for $212,000 more after just seven months, what exactly is the lesson learned here? Has the market changed that much or did someone just pay way, way, way too much for a Midtown Terrace home?

What are your thoughts?

I’d Love an Edwardian Loft (NOT)!

Some lofts are beautiful. Conversion lofts, for example, offer some incredibly beautiful living spaces in San Francisco. Unfortunately, there were only so many abandoned warehouses that could be converted, so once developers ran out of historic buildings to convert, they got busy in the 1990’s and early 2000’s building some rather horrendous loft buildings.

Feeling Like an Edwardian... Loft?

Take the loft building pictured above (address not given out on request) which appears to be… an Edwardian loft!

Without wading too deep into the architectural arguments about what makes a Victorian a Victorian, an Edwardian an Ewardian, and so on and so-forth, let’s just roll with the following guide (from SF planning):

Period — Edwardian (1901-1910). Frequently, historic resources in San Francisco are referred to as “Edwardian,” in design and appearance. The term “Edwardian” was created to describe architecture produced in Great Britain and its colonies from 1901 to 1910, with the reign of Edward VII. Edwardian architecture encompasses a number of styles, with five main strands identified: Gothic Revival, Arts and Crafts, Neo-Georgian, Baroque Revival and the Beaux-Arts style. Interpreted in the United States and in San Francisco, the term “Edwardian” is often associated with multi-unit flats or apartment buildings constructed at the beginning of the 20th century.

And why do I object to this… Edwardian Loft?

  • Sorry, but I don’t think lofts were meant to have dentil mouldings.
  • While I’ll allow a bay window is acceptable in a loft, the slanted style of these bay windows just seems sad and half-hearted. While they work in an Italianate victorian, they don’t translate to a loft.
  • The decorative horizontal strips of wood between the window bays are… ugly.
  • Stucco, people, stucco!

So here’s my rather obvious advice: If you want an Edwardian, but an Edwardian. If you want a loft, buy a loft. But there is no such thing as the “best of both worlds” that combines an Edwardian with a loft.

 

Sometimes the Stupid is So Strong it Burns

Hey – I’ve got a great idea. How about you pay 40% over asking for a San Francisco home so that you can be next to an unpublished, privately run shuttle bus location that could be changed, re-routed, or cancelled at any time? Speculation about the impact shuttle stops have had on property values has been going on since at least 2008, but the meme seems to have recently gone national.

Shuttle Bus Stups from SFCTA Strategic Analysis Report, published 2009.

I’m a big fan of mass transit (particularly for other people), and am glad to see private companies step up to provide it for their employees when local and regional transit agencies can’t (or are unwilling or unable to) meet a legitimate need that benefits the public.

My concern is with the wisdom of making a substantial investment in a property either solely (or primarily) based on proximity to a private service that is un-published and subject to change at any time.

Would you buy a house based solely on it’s proximity to a coffee shop where you have a major crush on the hottie who makes your latte each morning?

Would you buy a house because you love the color of the house three doors down?

Would you buy a house because you love the quality of the fruit and produce sold by an unlicensed street vendor on a nearby corner?

– Me

The legal status of private buses using public stops hasn’t even been figured out (although the SF County Transit Authority did publish – in 2009 – a Strategic Analysis Report looking at the Role of Shuttle Services in San Francisco), and while it is highly unlikely that the city will kick the private shuttles out of the public stops, who is to say that they don’t change which stops may be used? Or start charging fees that cause private companies to eliminate some stops or reconfigure their shuttle routes?

There are no guarantees in life, and it can be argued that public bus stops and muni lines are also subject to change (although I’d argue that the higher the investment in infrastructure, the less likely a change is – for example, a bus stop is a whole lot more likely to be relocated than a muni-light rail line or a BART station).

I don’t mean to sound like the cranky old man yelling at the kids to get off my lawn, but real estate is a substantial investment with significant transaction costs (yes, my commission, but also things like transfer tax, title insurance, escrow fees, insurance, and inspections to name just a few).

Make a smart decision. Focus on the fundamentals, and in my opinion shuttle stop proximity isn’t a fundamental. Thoughts?

PS – Bonus points if you can (correctly) answer how to distinguish the Google buses from the Apple buses…