Preliminary Title Notice: Things to Know

I often joke that every page in a disclosure package represents a lawsuit. I assure you that the next document in our look at a typical disclosure package, the “Notice to Buyers and Sellers Regarding Preliminary Title Reports (possible re-sale restrictions for San Francisco Affordable Housing Programs)” originated with a lawsuit. Let’s just call it the “Notice Regarding Preliminary Title Reports” document.

// This post is a part of our series: Your Guide to a San Francisco Disclosure Package //

The Notice Regarding Preliminary Title Reports is a *general* disclosure.

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A law-enforcement official purchased a condominium home (with a buyer’s agent representing them) and paid market rate for the residence. So what’s the problem?

The problem came about when they sold it, and discovered that the home was a “Below Market Rate” (aka Inclusionary Housing Program) condominium, which is a property with deed restrictions that limit the price at which it can lawfully be sold and also sets requirements the buyer must meet to be eligible to purchase the property. Needless to say, the market rate paid by the seller was far above the “below market rate” they discovered they could sell it for.

Below Market Rate homes – because they have numerous documents recorded against the property record – typically have preliminary title reports with a rather long list of exceptions (these exceptions being all of the documents that place the home in the BMR program). And sometimes the exceptions are pretty clear, and sometimes they make reference to maps with 4-point type. It’s always the 4-point type you’ve got to look out for, right?

So the moral of the story is this: understand the exceptions that are listed on your preliminary title report, and don’t sign off on the prelim until you are certain you understand all of the documents referenced in the list of exceptions. Because otherwise, you might just have paid market rate for a below market rate home!

SFAR Publishes Advisory about Prop G in SF

Prop G in SF, if you aren’t familiar with it, is a November 2014 ballot measure that will, if passed:

increase the total transfer tax for transfers occurring after December 31, 2014 (the specified “effective date” in the proposition is January 1, 2015) regardless of whether the underlying purchase and sale agreement was entered into by the parties beforehand. Its proposed added tax would be as follows:

 For a sale during the 1st year of ownership: 24% of total gross sales price;

 For a sale during the 2nd year of ownership: 22% of total gross sales price;

 For a sale during the 3rd year of ownership: 20% of total gross sales price;

 For a sale during the 4th year of ownership: 18% of total gross sales price; and,

 For a sale during the 5th year of ownership: 14% of total gross sales price.

Properties held for 5 years or more prior to resale would not be subject to this additional tax.

If enacted, there would be few exemptions from this additional transfer tax

As you might imagine, we don’t support Prop G in SF and we will talk about why in the coming days and weeks. Now that we’ve shared our opinion, we’d love to hear yours. But we’d also remind everyone that in our experience, the best conversations are the most respectful ones. Although, as the real housewive’s franchise proves, trashy conversations are the funnest to watch.

 PropG_SFAR

SFAR, the San Francisco Association of Realtors, has published a new advisory form for buyers and sellers of real property (homes in all the various shapes and sizes this city imagines for them) in San Francisco. The form is available to members of the association, so if you are thinking of buying or selling in the city, please be sure to use someone qualified to represent your best interests. You should expect to see it in most disclosure packages in SF in the near future (or now).

Preliminary Title Report – What You Need to Know

The preliminary title report is an important document that provides a legal property description, information about current owners, and insight into the history of the property. It provides a record of any documents recorded against the property address in the public record including items like use restrictions, easements, or other matters of public record that may affect your ability to use and enjoy your property. A prelim title report is created in preparation for title insurance being issued. Title insurance, in a nutshell, is insurance that protects your ability to use and enjoy your property.

// This post is a part of our series: Your Guide to a San Francisco Disclosure Package //

The Preliminary Title Report is a *property specific* disclosure. It is a very important disclosure to review.

Title insurance is defined at Wikipedia as:

Title insurance is a form of insurance predominantly found in the United States which insures against financial loss from defects in title to real property. It is meant to protect an owner’s or a lender’s financial interest in real property against loss due to title defects, liens or other matters. It will defend against a lawsuit attacking the title as it is insured, or reimburse the insured for the actual monetary loss incurred, up to the dollar amount of insurance provided by the policy. The first title insurance company, the Law Property Assurance and Trust Society, was formed in Pennsylvania in 1853.

In California, if you are purchasing a home with a mortgage you will be expected to buy two policies – an owner policy that insures you (at your purchase price amount) and a lender policy that insures your lender (for the amount of the loan).

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Preliminary Title Report – Sample Page 1

Preliminary title reports are provided by the title company that is acting as the escrow agent for the transaction. The sample we are using in this example is for a single family listing we had at 119 Bridgeview in San Francisco. Page 1 identifies as the report as a preliminary title report, and includes information about the insurance company issuing title insurance as well as the date at which the title report was created.

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Preliminary Title Report – Sample Page 2

Every title report will identify the type of land purchase being made. It will almost always be a fee simple purchase. A title report will also identify the current owners and provide the legal description of the property. After all of that, it begins with the list of exceptions, which are items that title insurance will not cover. There are a list of very typical exceptions that we expect to see on a title report, and what we are looking for is anything that isn’t a “typical exception.”

On our sample page 2, the list of exceptions begins with property taxes – which are exceptions 1, 2, and 3 on the sample report we are reviewing. Property taxes are always an exception – you can never expect your title company to pay them for you or protect you from not paying them. In our case, item #1 is for the next tax year, item #2 is for the current tax year, and item #3 is for any supplemental tax bills issued.

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Preliminary Title Report – Sample Page 1

Item 4 on the next page is the Mello Roos exception – in San Francisco we have a Mello Roos assessment to our taxes that was assessed after Loma Prieta. Below that, item #5 is another “typical exception” for San Francisco which is a sustainable financing program that was designed to allow people to make environmental upgrades to their home and finance them. However, the way the program was implemented creates an issue with getting loans that conform to national underwriting standards, and I’m not aware of the program actually being active or used because of the issues it creates.

Item 6 is for the covenants, conditions, and restrictions (CC&Rs) that have been recorded against the property and contains rules that affect what you can do with your home. A condo will always have CC&Rs, and many single family homes in SF are in neighborhoods that have neighborhood use restrictions. If we wanted to read a copy of the CC&Rs that affect this property (which we would, if we were the buyer), we could click on the blue link in the title report for the recorded copy.

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Preliminary Title Report – Sample Page 4

Items 7 and 8 on this sample preliminary title report are the current deeds of trust (mortgages) on the property. If you are making a purchase you want to be sure that the payoff amounts from the sale will be enough to fully payback the existing loans. If it won’t be enough, either the seller is doing a short sale or bringing money to the closing to make up the difference. If you are purchasing with financing, your mortgage(s) will replace the existing mortgage when your loans fund and the purchase closes.

That’s a very quick overview of a prelim title report. We’ve reviewed what title insurance is and what a typical preliminary title report and exceptions look like in San Francisco. We’ve seen a lot of interesting things on title reports over the years, and it is a very important document to review with your agent.

Underground Storage Tanks: What you Need to Know

The Underground Storage Tank Disclosure is a general disclosure document that contains background information explaining what an Underground Storage Tank (UST) is, and why you want to be aware of if the property you are considering purchasing might have a UST.

// This post is a part of our series: Your Guide to a San Francisco Disclosure Package. //

The Underground Storage Tank Disclosure is a *general* disclosure. The disclosure does not contain property specific information, but it does contain important information that you should read at your convenience. This disclosure is often provided in conjunction with an Underground Storage Tank Inspection, which we will discuss separately.

An Underground Storage Tank Disclosure Form used in San Francisco
An Underground Storage Tank Disclosure Form used in San Francisco

Underground Storage Tanks were typically used in San Francisco to store heating oil. While they are more common in older neighborhoods on the northern side of town, they have been found scattered across the city.

Our understanding of state law is that it requires the seller to remove and remediate an underground storage tank. However, there is no way to know if you have a UST unless you have an Underground Storage Tank inspection, which is typically a visual inspection performed at the exterior of the home (in other words, you don’t need to go inside to inspect for a tank) performed by a company that specializes in underground storage tank inspections.

As a buyer, you want to make sure that there is no underground storage tank, or that if there is a tank it is discovered before you are the property owner. These inspections make the most sense on single family homes. For recently built condominiums that had to excavate below ground as part of their construction process they would have mot likely discovered and removed any tanks during construction. That said, we’ve heard of one large condo building (it was previously a hospital, converted to condos) where a diligent buyer found USTs – and then the HOA had to have them removed!

 

 

What’s in a Typical San Francisco Disclosure Package?

At some point during the home buying process in San Francisco, you’ll most likely find a home that you like a lot. As in, you like it so much you could see yourself living there! In San Francisco, in strong seller’s markets, most of our property disclosures are provided to buyers prior to their submission of an offer. The disclosures are contained in a “Disclosure Package” which contains all of the various disclosure documents (almost always as a PDF file, when I first started they were paper… tons and tons of paper!). This is what people are talking about when they say they are “asking for disclosures” or are advised to “review disclosures prior to making an offer.”

A sample cover page from a San Francisco disclosure package.
A sample cover page from a San Francisco disclosure package.

The documents that are contained in a disclosure package vary based on the property type (condo, single family, tenancy-in-common), the type of sale (regular sale, short sale, trust sale, probate sale, bankruptcy sale, etc.), and several other variables (the age of the building, for example, affects whether or not some disclosures are required – examples would be lead-based paint and earthquake hazards disclosures). We are going to walk through a typical disclosure package for a single family home in San Francisco, explaining all of the documents as we go along.

To make all of this a little more concrete and a little less hypothetical, we are going to use the disclosure package for a recent listing of ours at 119 Bridgeview in the Silver Terrace neighborhood.

Below is the table of contents for the disclosure package – click on each document to learn more about it (and if the item doesn’t have a hyperlink, the article hasn’t yet been written. This is a work in progress for now!)

Disclosure packages generally start with a table of contents that potential buyers are asked to sign. Depending on the property and agents involved, you may be asked to return the entire disclosure package with your signatures, or just the cover page with an agreement to return a fully executed package upon acceptance of your offer.

For our purposes, I’m going to classify the documents into two categories: Property Specific and General Disclosures. The documents that are property specific are often the *most important* because they contain information that is specific to the property you are interested in. Documents that are general disclosures are still important, but provide more general information that is usually applicable to real estate transactions and may or may not apply to the specific home you are interested in purchasing. While it is important to review all disclosures, if you find yourself with limited time, our advice is to always start with the property specific disclosures.