FINANCING AND INSURANCE
Arranging for Financing - Delays in the processing of a loan application can affect the buyer's ability to close the purchase transaction on time. Such delays often can be avoided If the buyer prequalifies for a loan.

Arranging for financing for the purchase of real property can be a complicated and time-consuming process. The process begins with the completion of a loan application which provides the lender with information concerning the borrower's assets, employment history and annual income. While the information in the application is being verified, an appraisal of the property usually will be undertaken by a State licensed or certified appraiser to determine its value. The appraisal is important because it must support the amount of the loan being requested. Once the information in the application has been verified and an appraisal of the property has been completed, a committee of the lender will meet to determine whether the loan can be approved.

Each lender maintains its own qualification requirements and before an application can be approved, the borrower must meet those requirements. If conventional financing cannot be arranged, it is possible that
some buyers will be able to qualify for a low-income loan available from any of a variety of different sources. Regardless of whether financing is conventional or nonconventional, buyers and sellers should be aware that delays in the processing of loan applications can occur and that these delays can affect the ability of the buyer to close escrow on the agreed upon date. Buyers often can avoid such delays by selecting a bank or mortgage loan broker as soon as the search for real property begins and prequalifying for a loan.

It is the buyer's obligation to obtain financing, not the real estate broker's, and time is of the essence in this regard.

Obtaining Homeowner's Insurance - Buyers should apply for homeowner's insurance as soon as their offer to purchase has been accepted.

For years, insurers offering homeowners insurance in California have been reluctant to insure certain prospective homeowners due to their loss history or the loss history of the property they are purchasing. Reports abound that insurance premiums have become especially costly and that policies now contain unfavorable restrictions, as well as limits and exclusions they did not contain previously.

Many insurers have announced that while they will renew existing policies, they will not write new ones, In a few instances, insurers have indicated that they are contemplating withdrawing from the California insurance market altogether.

Because of the difficulty likely to be experienced by buyers in obtaining homeowner's insurance, buyers are urged to investigate the availability of and to apply for such insurance as soon as their offer to purchase has been accepted. Buyers should be aware that their inability to obtain homeowner's insurance might affect their ability to obtain mortgage financing for the property.

Sellers, on the other hand, should be aware that if obtaining financing is a contingency of the purchase contract, the buyer may be able to cancel the contract in the event the financing contingency remains in effect and insurance is unavailable, since most lenders require insurance coverage.

Some purchase contracts require the buyer to either remove the financing contingency within a certain time or cancel the contract. If the buyer does not have insurance, this will put him or her in the difficult position of choosing cancellation or risking loss of the contract deposit if insurance cannot be obtained. If the parties are operating under such a contract provision, the seller and/or the buyer could consider whether they each wish to agree to extend, in writing, the date for the removal of the financing contingency to allow additional time for the buyer to obtain insurance.

Another option is for the buyer to make the contract contingent on the obtaining of insurance so the provision operates separately from the financing contingency.

Any buyer or seller who has questions regarding homeowner's insurance should refer them to a qualified insurance broker.

Insurance for Condominiums - The Federal Home Loan Mortgage Corporation imposes a surcharge on all condominium loans which it buys.

The Federal Home Loan Mortgage Corporation (Freddie Mac) imposes a surcharge on all loans for condominium units in California which it buys. The surcharge is equivalent to one percent of the unpaid principal balance of the loan. The surcharge, however, can be reduced or waived under certain circumstances. These circumstances include the existence of earthquake insurance coverage for the condominium unit as well as the complex in which the unit is located and/or a favorable evaluation of the physical characteristics of the unit and the complex using a risk assessment system developed by Risk Management Solutions, Inc. (RMS) of Menlo Park.

Freddie Mac was created by Congress in 1970 to increase the availability of mortgage credit for the financing of housing. It does this by buying mortgages from lenders nationwide and packaging them as securities for resale to investors.

Homeowners' associations for condominium complexes generally buy insurance covering structural damage to the complexes on behalf of all of the owners. The owners themselves usually are responsible for insuring the contents of their units. Bur even when homeowners' associations obtain earthquake insurance; they often fail to set aside sufficient funds to cover the high deductible-typically 10 percent of the insured value of the property.

Anyone purchasing a condominium unit should be aware that if the homeowners' association for the complex in which the unit is located has not obtained earthquake insurance coverage or prefunded the deductible for an earthquake insurance policy, owners of units in the complex could be assessed to provide fund necessary to make repairs to the complex in the event an earthquake causes damage to the complex. In addition, it should be kept in mind that if the owner of any unit fails to pay such an assessment, the homeowners' association may have a right to foreclose against that owner's unit.

ESCROWED FUNDS, FEES AND COSTS,-TITLE INSURANCE
"Good Funds" - The nature o f funds deposited in escrow will determine when they may be disbursed.

Special rules govern when escrowed funds can be disbursed by tide insurance or controlled escrow companies. Under these rules, funds may be disbursed:

• On the same day as deposited if the funds are deposited in cash or by electronic transfer ("wired funds");
• On the next business day if the funds are deposited by certified check; or
• On the day the funds must be made available to depositors for withdrawal (up to seven days) if the funds are deposited by any other type of instrument, including a personal or business check.

If it is important for an escrow to close on a certain date, the transfer of funds must be made well enough in advance of close of escrow to ensure the availability of the funds under the above-described rules.

Escrow Fees and Costs - Funds deposited in escrow will not necessarily be released automatically when an escrow is canceled.

In real property purchase and sale transactions, time almost always is of the essence. This means that the successful completion of every transaction depends on the timely performance of various acts described in the purchase contract. Such acts include obtaining inspections and arranging financing on the buyer's part, and making appropriate disclosures on the seller's part. If these acts are not performed on time, the contract is subject to being terminated or canceled by giving appropriate notice, or it may be deemed terminated or cancelled automatically by its terms, along with the escrow, depending upon how it was drafted, and the facts and circumstances surrounding the transaction. In the event a party is in breach, the other party may be entitled to remedies, which can include liquidated damages. (Please see Liquidated Damages)

In the event a purchase contract and/or escrow is terminated or: canceled, or a contract is not performed due to breach, funds deposited in escrow or other trust fund accounts may not be released automatically, even when the liquidated damages clause in the purchase contract has been initialed by both the buyer and the seller. Fees and costs may be owing to title, escrow, inspection and other companies which provided services during the escrow period. These fees and costs may be subject to being paid from the above-described funds. Usually, funds deposited in escrow will not be released without the written consent of the buyer and the seller, or a court order. For that reason, if either parry does not give this consent, there could be a delay in the funds being disbursed or a need for mediation, arbitration or court proceedings.

Title Insurance - The choice of a policy of title insurance can have significant legal consequences and should be discussed with a qualified real estate attorney.

A title insurance policy is a contract indemnifying the owner of real property, as well as the lender, against loss arising out of the following matters in existence at the date the policy becomes effective (if they are not covered by exceptions in the policy): recorded liens or encumbrances; defects in title; and lack of access t9 and from the land.

There are several types of title policies which vary in cost, extent of coverage and terms. Policies written by the California Land Title Association (CLTA) and the American Land Tide Association (ALTA) are the policies which have established preeminence in California. The three title policies generally used by owners of residential real property are the CL T A standard coverage policy, the AL T A residential policy and the AL T A owner's policy.

The type of policy to be issued, its coverage and the advisability of endorsements (which provide broader coverage than the policy itself) are matters to be discussed by the buyer and the seller, their attorneys and the title company. Decisions concerning these matters can have significant legal consequences.

TAXES

Transfer Taxes - All counties and many cities impose a tax on the sale of real property. The matter of who pays the tax usually is dictated by custom.

All counties in California impose a tax of .0011 0 percent on the purchase price of real property whenever it changes hands. In addition, cities may increase the tax rate to generate additional local revenue. Some cities, such as San Francisco, have adopted tiered rates. San Francisco's rates, for the categories of property described, are as follows:

• Properties selling for between $100.01 and $250,000 - $5 for each $1,000 of property value or portion thereof;
• Properties selling for between $250,000.01 and $999,999.99 - $6.80 for each $1,000 of property value or portion thereof; and
• Properties selling for $1 million or more - $7.50 for each $1,000 of property value or portion thereof.

Since most transfer tax ordinances do not specify whether the tax is to be paid by the buyer or the seller, the custom which prevails in the jurisdiction in which the real property is located usually dictates whom will pay the tax. In San Francisco, it is the custom for the seller to pay the tax.

California Real Property Tax Reassessment - Real property is reassessed upon change of ownership and, in certain circumstances, the construction of improvements. The new assessed value is equivalent to the purchase price and is subject to being increased by as much as two percent each year.

Buyers are advised that each county in the State collects an annual ad valorem tax on real property. The tax is payable in two installments, one due on November 1 and delinquent after December 10, and the second due on the following February 1 and delinquent after April 10.

Under Proposition 13, passed by California voters in 1976, the ad valorem tax rate is set at one percent of the full cash (or assessed) value of real property. This limitation, however, does not apply to special assessments levied for the purpose of paying the interest and redemption charges on bonded indebtedness approved by county voters. The assessed value of real property also is subject to being increased by as much as two percent each year, or by a larger amount, upon change of ownership.

Buyers should be aware that the assessed value of real property is adjusted upon change of ownership to an amount equal to the purchase price of the property. Also, under certain circumstances, the construction of new improvements to an existing property can trigger an adjustment to the assessed value of the property. The real property tax due annually can be determined by multiplying the assessed value of the real property by the real property tax rate for the county in which the property is located. In San Francisco, the tax rate for fiscal year 2003-2004 is 1.107 percent and subject to change for fiscal year 2004-2005. After change of ownership, a supplemental tax bill may be issued to collect taxes owing for the current tax year based on the difference between the previous and the new assessed values of the property. The seller is responsible for the payment of taxes due prior to close of escrow and the buyer is responsible for the payment of taxes due after close of escrow, including any supplemental tax bill(s).

Since the assessed value of real property cannot exceed the market value, State law provides a way to challenge the assessed value when the market value declines. For questions regarding ad valorem taxes, buyers and sellers should contact the assessor's office at 415-55'4-5516, and a qualified real estate or tax attorney and I or certified public accountant.

Mello-Roos Act - Sellers, in certain circumstances, must make a good faith effort to obtain a Mello-Roos tax levy disclosure notice from each agency levying a Mello-Roos tax and provide a copy to the buyer.

Real property can be subject to continuing tax levies under the Mello-Roos Act. Such levies are used to finance certain designated public services arid capital facilities. Among the services and facilities typically financed through "Mello-Roos districts" are police and fire protection services, ambulance and paramedic services, parks, elementary and secondary schools, libraries, museums and cultural facilities.

Upon the sale of residential real property improved with one to four dwelling units subject to Mello-Roos tax levies, the seller is required to make a good faith effort to obtain a tax levy disclosure notice (a "Notice of Special Tax") from each agency levying a Mello-Roos tax. If such a notice is available, the seller must provide a copy of it to the buyer. The notice must specify, among other things, the maximum tax which can be levied by the agency.

Most real property in San Francisco is subject to Mello-Roos tax levies.

Effective January 1, 2002, the seller of any property subject to a continuing assessment to secure bonds issued pursuant to the Improvement Bond Act of 1915 (legislation which allows local governments to issue bonds to fund various projects) must make a good faith effort to obtain and deliver to the buyer a notice of such assessment. The notice of assessment must be combined with any notices relating to Mello-Roos tax levies, to the extent feasible.

FIRPTA - Buyers must withhold and transmit to the IRS 10 percent of the purchase price of real property if the seller is a nonresident alien individual or a foreign corporation.

The Foreign Investment in Real Property Tax Act (FIRPTA) requires the buyer to withhold 10 percent of the gross purchase price of real property, and report and transmit the amount withheld to the Internal Revenue Service if the seller is a "foreign person" (i.e., a nonresident alien individual or a foreign corporation). No withholding is required if any of the following applies:

• The seller furnishes the buyer with a "non-foreign affidavit";
• The real property is acquired for use by the buyer as the buyer's residence and sells for no more than $300,000; or
• The transaction is a "non-recognition transaction" for the seller and the seller furnishes the buyer with a notice to that effect.

Failure of the buyer to withhold 10 percent of the purchase price of real property when required can expose the buyer to personal liability to the IRS for the tax. A buyer can avoid personal liability for the tax by having the seller complete and sign an affidavit of nonforeign status so long as the seller is an individual arid the buyer has no knowledge that the affidavit is false. Pursuant to Internal Revenue Code Section 1445 (b) (2), the affidavit must provide, under penalty of perjury, the seller's "United States taxpayer identification number and that the [seller] is not a foreign person."

Buyers and sellers are urged to review and discuss the requirements of FIRPT A with a qualified real estate or tax attorney and/or certified public accountant to determine their applicability to any specific real property purchase and sale transaction.

California Withholding - Buyers must withhold and transmit to the State Franchise Tax Board 3 1/3 percent of the purchase price of investment real property as a prepayment toward State income taxes due from the seller, unless an exemption applies.

Generally, under the California Foreign Investment in Real Property Act (CAL FIRPTA), a buyer must withhold and transmit to the State Franchise Tax Board funds equal to 3 1/3 percent of the gross purchase price of investment real property as a prepayment toward the State income taxes due from the seller as a result of the transaction, unless an exemption applies. There are several exemptions including but not limited to an exemption where the purchase price of the property does not exceed $100,000, the property is sold at a loss for California income tax purposes, the property is a part of an Internal Revenue Section 1031 Exchange or the property is the seller's principal residence.

Buyers and sellers are urged to review and discuss all tax matters, including but not limited to State withholding requirements, with a qualified real estate or tax attorney and/or certified public accountant to determine their applicability to any specific real property purchase and sale transaction.

DISPUTE RESOLUTION AND DAMAGES

Mediation and Arbitration - Many real property purchase contracts contain optional or mandatory mediation and/or arbitration provisions. Only a qualified attorney is competent to give legal advice regarding the advantages and disadvantages of mediation and arbitration.

Despite efforts that may be made to avoid them, disputes can sometimes arise in connection with real property purchase transactions. If a dispute involves a significant issue and the parties are unwilling to come to an agreement concerning how it should be resolved, the filing of a lawsuit may seem to be the only remedy available.

In order to provide buyers and sellers of real property with a less formalized and often less costly form of dispute resolution, many real property purchase contracts contain optional or mandatory mediation and/or arbitration provisions. Mandatory mediation clauses often provide that a parry that fails or refuses to mediate loses the right to later obtain its attorney's fees in arbitration or court proceeding. Only a qualified attorney is competent to give legal advice regarding the advantages and disadvantages of mediation and arbitration.

Mediation is a non-binding process by which the parties to a dispute come together with a professionally trained and experienced mediator who assists them in attempting to resolve their dispute by negotiating a mutually acceptable settlement. The result of a successful mediation is a written settlement agreement which when properly prepared and signed by all the parties to the dispute should be legally enforceable. The settlement agreement is a document that should be reviewed by a qualified attorney since it can have a broad scope and affect important legal rights. If mediation is unsuccessful, the parties are left to pursue other forms of dispute resolution, such as arbitration or litigation.

The cost of mediation can vary depending on the mediator selected and the amount of time allocated for the mediation. Mediation fees can be as little as a few hundred dollars, divided equally between, the parties, or they can involve an initial filing fee of several hundred dollars plus a substantial hourly fee for the mediator.

Arbitration is a binding process by which the parties to a dispute (either by themselves or through their' attorneys) submit the dispute to a neutral arbitrator for resolution. Agreement to submit disputes to arbitration is effected when both the buyer and the seller initial the "Arbitration of Disputes" provision contained in most purchase contracts. By agreeing to arbitrate disputes, the parties give up their right to have the dispute litigated in a court of law before a jury. Once the decision of an arbitrator is rendered, it generally is not appealable and immediately subject to full legal enforcement.

The disputes subject to arbitration include only those arising out of matters described in the "Arbitration of Disputes" provision of the purchase contract. Buyers and sellers should read this provision carefully to determine which types of actions are included. While the only parties who are obligated to submit disputes to arbitration 'are those who actually initial the "Arbitration of Disputes" provision, some purchase contracts provide that if the buyer and the seller agree to arbitration, the provision extends to either or both brokers involved in the transaction, provided either or both brokers have agreed to such arbitration prior to or within a reasonable time after the dispute arises.

Buyers and sellers are urged to consult with a qualified real estate attorney before initialing the "Arbitration of Disputes" provision of any purchase contract. The legal profession is divided concerning the relative merits of a jury trial as opposed to alternative forms of dispute resolution, such as arbitration. Buyers and sellers are urged to give careful consideration to the consequences of giving up their rights to a jury trial before electing to arbitrate instead.

Liquidated Damages - Most real property purchase contracts contain liquidated damages clauses which, if initialed, set the maximum amount of damages a seller may recover if the contract is breached.

Whenever a buyer fails to perform a material obligation agreed to in a real property purchase contract, the buyer is deemed to have breached the contract. Most contracts contain a provision which allows the buyer and the seller to agree in advance on the maximum amount of damages (so-called "liquidated damages") a seller may recover through litigation if the contract is breached by the buyer. This limit is usually three percent (3%) of the purchase price.

For the liquidated damages provision of a purchase contract to become effective, it must be initialed by both the buyer and the seller. For any increased deposits to be subject to the provision, a separate, statutory liquidated damages form also must be signed. Initialing or signing a liquidated damages provision or form is not a guarantee that the seller will recover liquidated damages. If the buyer disputes the provision, the seller still must prove in a court of law or in arbitration, among other things, that the contract was breached by the buyer.

Generally, the liquidated damages provision in most purchase agreements, when initialed by both the buyer and the seller, has no effect on the damages the buyer may recover from the seller if the seller breaches the contract. Buyers and sellers are urged to discuss any questions they may have regarding liquidated damages provisions with a qualified real estate attorney.

SIZE AND LOCATION OF REAL PROPERTY

Square Footage/Lot Size - Buyers who require accurate square footage and lot size information should retain the services of qualified professionals to have the improvements measured and the property surveyed.

Representations sometimes are made by the seller concerning the square footage of the improvements and/or the lot size of real property. Such representations should be considered approximations only. It also should be understood that any representations regarding square footage or lot size made by the broker are based on information obtained from the seller or from public records and that the accuracy of the information provided cannot be guaranteed. Brokers do not independently verify the square footage and/or the lot size of properties they list and/or sell. If a buyer requires accurate square footage information, he or she should retain the services of a qualified appraiser or other professional to have the improvements measured. Similarly, if a buyer requires' accurate lot size information, the buyer should retain the services of a qualified professional surveyor to have the property surveyed.

Boundary Lines - If the boundary lines of a property are questionable. the buyer should retain the services of a qualified professional to have the property surveyed.

Existing fences, walls, trees and other naturally occurring or man-made barriers or markers mayor may not define the legal boundary lines of real property. If such boundary lines are material to either the decision to purchase or the amount to be paid for the property, the buyer should retain the services of a professional surveyor to determine the boundary lines of the property.

Buyers should understand that, without a survey, a typical title insurance policy. will not cover such matters as discrepancies, conflicts in boundary lines, shortage in area, encroachments, or any other facts which a correct survey would disclose and which are riot shown by the public records." Further, they should understand that real estate brokers do not independently verify the boundary lines of properties they list and/or sell. Accordingly, buyers should rely solely upon their own independent investigation of the boundary lines of the property, or upon a survey by a professional surveyor.

AUTHORIZED USE OF PROPERTY, CODE COMPLIANCE

Zoning Restrictions - It is the buyer's responsibility to contact the local planning agency to confirm the authorized Use of the property.

Certain municipalities require sellers of teal property to provide buyers with copies of various public reports, prior to close of escrow, for the purpose of making buyers aware of the restrictions which apply to the use of the real property being purchased. Properties can be subject to special use permits, variances occupancy limitations and/or other zoning restrictions. Buyers should not assume that the apparent use of a property is the use authorized by law, or that the information contained in a public report is necessarily accurate. It is their responsibility to contact the zoning administrator of the local planning agency for the jurisdiction in which the property is located to confirm the authorized use of the property and whether the property is subject to any special use permits, etc. and, if so, the duration of those permits. Zoning laws can be changed and buyers should not assume that they will remain the same after they purchase specific property.

Report of Residential Building Record - The "3R report", among other things, sets forth the permits which have been issued for construction on the property.

Prior to the transfer of residential real property, many municipalities require" the seller or the seller's broker to obtain and deliver to the buyer a report of residential building record ("3R report") prepared by the code enforcement agency for the jurisdiction in which the property is located. The report sets forth the existing authorized occupancy or use of the property, as well as other information, including any permits which have been issued for construction on the property. It does not warrant that any repairs or alterations made to the property comply with applicable code requirements.

Buyers of residential real property in San Francisco should be aware that the information in reports of residential building record are derived from historic records and may not be accurate for various reasons. For instance, while most of the city's historic records are now computerized, many were originally hand written. Hand written records are notorious for being incomplete (because they can be so easily misplaced). And, whether computerized or hand written, it should be understood that errors can always occur when information is transferred by any person from one medium (the original document) to another medium (the historic record).

For the foregoing reasons, buyers of residential real property in San Francisco should not rely on information contained in Reports of Residential Building Record. They should be aware that properties may have rooms or additions where there is no record of a permit ever having been issued for their construction. Such rooms or additions mayor may not have been constructed with a permit. If a room or addition was constructed without a permit, the city and county may require the owner to remove it.

It should be understood that real estate brokers, under the law, are not under an. Obligation to confirm the accuracy of information contained in public records such as Reports of Residential Building Record. For that reason, it is the buyer's responsibility to investigate the completeness and accuracy of Reports of Residential Building Record and make informed decisions based on their investigations. Buyers seeking advice in this regard should consult with a qualified contractor, architect or other professional.

Non-Permitted or Non-Conforming Rooms, Additions or Alterations - Improvements and/or alterations made without permits may be non-conforming and, if discovered by local code enforcement agencies ,may have to be removed.

Buyers are advised that any real property may contain rooms, additions and/or alterations for which appropriate building permits and certificates of completion were not obtained. Such rooms, additions and/or alterations may be non-conforming and it may not be possible to legalize them because of zoning and/or code restrictions. It is not possible for the broker to know whether rooms, additions and/or alterations have been made to the property without permits. In many cases, even the current owner cannot provide reliable information regarding these matters. Consequently, buyers are strongly advised to investigate possible nonconforming improvements or alterations and to seek the advice of a qualified contractor, architect or other professional.

Buyers should be aware that if local code enforcement agencies discover the existence of rooms, additions and/or alterations for which permits were not obtained, they may assess penalties against the current owner and require such improvements and/or alterations to be closed off, removed or made to comply with current code requirements. Buyers also should be aware that laws relating to nonconforming rooms, additions and/or alterations are subject to change and that in San Francisco any such changes are likely to favor tenants and maintenance of the city's residential rental stock.

Retrofitting - It is customary for the cost of retrofitting work required by local ordinances and State statutes to be assumed by the seller.

Certain local ordinances and State statutes require residential "real property to be retrofitted with various devices and/or improvements before it Can be sold. If any such ordinance or statute requires the installation of smoke detectors, impact hazard glazing, water conservation devices or other devices and/or improvements, it is customary for the cost of the retrofitting work to be assumed by the seller. If the retrofitting work must be inspected by city or county agencies or other professionals, it is the seller's responsibility to arrange for the required inspections and to obtain any required compliance reports and to give appropriate notification(s) to the buyer and/or required governmental agencies. Notwithstanding the foregoing, if any laws require the installation of automatic fire extinguishing equipment at the property, it is customary for the cost of such' equipment and its installation to be assumed by the buyer.

Condominiums and Other Common Interest Subdivisions - Buyers are solely responsible for reviewing and evaluating documents provided by a homeowners' association relative to the purchase of real property in a subdivision or incorporated area.

Real property 'located in. common interest subdivisions, commonly" known as condominiums, and in incorporated areas, typically is subject to certain covenants, conditions and restrictions (CC&Rs). The CC&Rs, which impose limitations on the use of property, are administered by a homeowners' association. Such associations Usually collect dues from property owners residing in these areas. to provide funds to maintain so-called "common areas". By law, such associations must provide buyers of properties within their jurisdictions with the following documents, as well as any addenda, amendments or revisions thereto:

• Covenants, conditions and restrictions (CC&Rs);
• Bylaws;
• Articles of incorporation (if the homeowners' association is incorporated);
• Rules and regulations and other governing documents;
• Statement of residency restriction based on age (if applicable);
• Statement of assessments and fees, including any unpaid charges which may become alien against the property; and .
• Most recent' financial statement distributed, as required by law, including a pro forma operating budget and a reserves study.

Buyers are solely responsible for reviewing and evaluating all such documents relative to the purchase of real property in any subdivision or incorporated area. Particular attention should be given to the financial statement provided by the homeowners' association to determine the adequacy of reserves for repairs and replacements. It also is suggested that buyers both review the insurance policy of the homeowners' association to determine whether it is adequate to cover any and all risks of loss and request information regarding any past lawsuits or settlements pertaining to the common areas or physical condition of the property.

Any questions concerning the aforementioned documents should be referred to a qualified attorney.

Tenancy-in-Common - There are risks in owning real property with others and relying on them to fulfill their obligations.

Tenancy-in-common (TIC) is a form of real property ownership which has been used as a means by which individuals can acquire and own an undivided interest in residential real property improved with two or more units for the purpose of individually occupying one of the units.

Unlike condominiums, residential real, property owned as a TIC generally is not legally subdivided. Typically, an unrecorded agreement between the owners is used to assign the exclusive use and occupancy of each unit to a particular owner.

All forms of concurrent ownership involve the risks of sharing the use of a property with others and relying on them to fulfill their obligations to each other. TIC owners share, major obligations such as mortgages, property taxes, and building maintenance and management. If a TIC owner fails to make a monthly payment arid a mortgage default results, the lender could foreclose on the entire property, causing all of the other owners, to lose their residences and possibly their equity. Concurrent owners are generally considered by law to be agents for one another with the power to bind other concurrent owners to contractual and other lawful obligations.

Before entering into TIC ownership, buyers are urged to consult with a qualified real estate attorney knowledgeable regarding San Francisco real property issues and to review all aspects of the TIC, including, but not limited to, all agreements, the background and qualifications of potential concurrent owners, whether the individual interests of concurrent owners can later be sold and, if so, whether there are any rights of first refusal or other requirements, the condition of the property, the type of financing available, whether the real property is capable of being converted to condominiums, the potential cost of conversion and whether the property as a whole can be sold.

Tenants-in-common should have a dear and comprehensive agreement setting forth the rights and liabilities of the parties, including, but not limited to, the following: financial obligations of the concurrent owners, use of the property, management of the property, repairs, rules governing usage, decision-making procedures, the action to be taken in the event of a concurrent owner's default, death, bankruptcy or incapacity, sale of a concurrent owner's interest, and dispute resolution. Buyers should be aware that because TICs represent undivided interests in real property, they may be harder to sell than other properties and their value may be adversely affected.

CONDITION OF REAL PROPERTY

Transfer Disclosure Statement - Sellers of residential real property with one to four dwelling units must provide the buyer with a transfer disclosure statement (the "TDS") regarding the property.

In most circumstances, the seller of residential real property improved with one to four dwelling units is required, as soon as practicable before transfer of title, to provide the buyer with a completed disclosure form called a Transfer Disclosure Statement (TDS) regarding the property. This requirement is applicable even in cases where the property is sold in "as is" condition.

If the disclosures in the form, or any material amendment thereto, are provided o the buyer after execution of the offer to purchase, the buyer has three days after personal delivery or the form (five days if the form is delivered by mail) to terminate his or her offer to purchase. However, in circumstances where the disclosures are provided to the buyer prior to preparation of the offer to purchase, the buyer has no right to terminate the offer.

The TDS is divided into four sections - one to identify supplements, one for the seller to complete, one for the broker representing the seller to complete, and one for the, broker representing the buyer to complete. Under the law, however, brokers are allowed to make their disclosures (the result of a visual inspection of the accessible areas of the property) in a document other than the TDS.

Neither the seller nor the broker is liable for any error or inaccuracy in the TDS, provided the seller or the broker had no personal knowledge of the error or inaccuracy, it was based on information provided by a public agency or report prepared by certain specified professionals, and the seller or the broker used ordinary care in providing the information.

When more than one broker is involved in the transaction, the one who has obtained the offer to purchase is responsible for delivery of the TDS to the buyer.

Inspection of' Physical Conditions - Buyers are strongly advised to obtain inspections by contractors, engineers, architects and/or other such qualified professionals of any property being purchased.

Buyers should be aware that under Section 2079.5 of the California Civil Code, they are charged with the responsibility of exercising reasonable care to protect themselves by investigating those matters relating to the condition of any real property they are purchasing which are known to them or within their diligent attention and observation.

Buyers should be aware that the present condition and useful life of the various components of the improvement on real property will vary and can only be determined through inspections by appropriate contractors, engineers, architects and/or other such qualified professionals. Even new construction can contain construction defects and, for that reason, should be inspected by such experts to determine the quality of construction and the materials used.

As a general rule, the physical condition of land and improvements offered for sale is not guaranteed by the seller' except as specifically set forth in writing in the purchase contract. No guarantees regarding the physical condition of the land and improvements are made by the broker. The seller and the broker are required by law, however, to disclose to the buyer all material facts, known to them, which may affect the value or desirability of the land and improvements. In addition, a broker involved in the sale of residential real property improved with one to four dwelling units must conduct "a reasonably competent and diligent visual inspection of the property offered for sale and disclose to the prospective buyer all facts materially affecting the value or desirability of the property that such an investigation would reveal." A broker's duty to inspect does not extend to areas that are reasonably and normally inaccessible," areas outside the site of the property, or public records or permits affecting the tide or use of the property.

Buyers are strongly advised to obtain inspections by contractors, engineers, architects and/or other such, qualified professionals of any real property being purchased. The inspections should include, but not be limited to, structural elements, plumbing, heating, air conditioning, electrical and mechanical systems, built in appliances, and the presence of hazardous or toxic substances (including asbestos and lead-based paint). Brokers are not qualified to conduct such inspections. A buyer may elect to purchase a property without the benefit of such inspections but it is strongly recommended that he or she not do so. The following are some of the items to which buyers should give particular attention:

• The Roof - Buyers are advised to have inspections to determine, the condition and useful life of the roof, including all penetrations of the roofs surface, such as chimneys and skylights, as well as gutters" drains, etc. Although there may be no indication in the TDS that the roof leaks, that is no guarantee that with the next rain storm leaks will not develop. Roofs do not last indefinitely. They are exposed to the punishing effects of heat, cold and water and even the most soundly constructed roof will leak eventually.
• Heating System - Buyers are advised to have inspections to determine the condition of the heating system, particularly its internal parts, as well as the heating ducts which distribute heat throughout the improvements.
• Water Intrusion - Buyers are advised to have inspections to determine the susceptibility of the improvements to water intrusion. Such intrusion can cause damage to the improvements and/or personal property. Specific areas of concern are the foundation, garage, basement, crawl spaces, dead spaces, as well as all living areas. Buyers should carefully check the seller's TDS for notations relating to the presence of water and particularly whether the property can be subject to seeping, flooding or running water during seasonal rains.
• Sidewalk Repair - Buyers are advised that the maintenance of public sidewalks adjacent to any real property is the responsibility of the property owner. For that reason, sidewalks should be inspected regularly for cracking, settling or other hazardous conditions.
• Foundation -Buyers are advised to have inspections of the foundation, particularly in older homes.
• Structural Pest Control Inspections - Structural pest control inspections are part of most real estate purchase and sale transaction.

Structural pest control inspections are ordered for most improved real property being sold. The inspection must be performed by a company registered with the State Structural Pest Control Board. The purpose of the inspection is to discover the absence or presence of wood-destroying pests or organisms. The conditions found as the result of an inspection are described in a report prepared by the pest control inspection company, and must be in writing and given to the person requesting the inspection. If requested, structural pest control inspectors must delineate between evident infestation and potential infestation, in a two-tiered report. The report also must be filed with. the Structural Pest Control Board before any registered company may commence work to correct conditions found as the result of an inspection.

The work recommended in a structural pest control inspection report may be done by the company preparing the report or the parties may use another contractor, or do the work themselves. After pest control work has been completed by a registered pest control company, a notice of work completed must he filed with the Structural Pest Control Board. If the parties elect to do the work themselves, they should make sure all applicable permits are obtained and that a structural pest control certification is issued upon completion of the work.

A structural pest control certification is a written statement by a registered pest control company attesting to the presence or absence of wood-destroying pests or organisms, describing work recommended in a structural pest control inspection report and indicating which recommendations, if any, have been completed at the time of certification. A copy of the inspection report and the notice of work completed, if any, must be attached to the certification.

Most real property purchase contracts require a termite inspection and contain provisions which provide several options to the buyer and seller concerning how the cost of any pest control repairs will be handled. This cost can be substantial and it is important that both the buyer and the seller have an understanding of the manner in which the option which is chosen will operate.

Any person may request from the Structural Pest Control Board, upon payment of a fee currently set at $2 per address, a certified copy of any inspection report and completion notice filed on a particular property during the preceding two years by any pest control inspection company. The address of the board is Suite 3, 1422 Howe Avenue, Sacramento, California 95825.

Geological Inspections - Buyers are encouraged to have any property they are purchasing inspected by a qualified geologist.

California is known throughout the world for its natural beauty. But the State's dramatic coastlines and rugged mountain ranges bear witness to a turbulent geological past. Many of the geological forces which have shaped California's landscape are still active today and anyone purchasing property in California should understand that these forces still can pose risks to land and improvements (and to those who reside in them), particularly where the property is located on hillsides, near creeks or other bodies of water, or in other high risk areas. The condition of the soil and the underlying bedrock on which improvements are constructed can greatly influence the manner in which the improvements will react to geological changes. The fact that improvements have been constructed on level ground is no guarantee that they will not be affected by geological events.

Brokers are not geological experts and cannot advise buyers regarding the manner in which properties may be affected by geological changes. Buyers are encouraged to have any property they are purchasing inspected by a qualified geologist.

Homeowner's Guide to Earthquake Safety - Sellers of residential real property with one to four dwelling units constructed before January 1, 1960, of conventional light frame wood construction, are required by 'law to deliver to the buyer, before transfer of title, a copy of the "Homeowner Guide to Earthquake Safety".

California is a seismically active area. A building, depending on its location, construction type and age, may be vulnerable to damage or collapse in the event of a significant seismic event. Buyers of real property should be aware that such an event could cause damage to public facilities and seriously disrupt public services. The availability of electricity, water and gas could be affected and transportation could be disrupted or made impossible for varying periods of time.

Sellers of residential real property improved with one to four dwelling units constructed before January 1, 1960; of conventional light frame wood construction, are required bylaw to deliver to the buyer, before transfer of title, a copy of the "Homeowner's Guide to Earthquake Safety". Furthermore, the seller must complete an earthquake hazards. disclosure form found on the inside back cover of the guide (or prepare a separate statement) identifying specific deficiencies (such as the absence of anchor bolts, the existence of unreinforced masonry walls, or a hot water heater which is not strapped or braced) within the actual knowledge of the seller. The homeowner's guide and the completed earthquake hazards disclosure form (or other statement) must be delivered to the buyer as soon as practicable before transfer of title. A broker's responsibility under the law is limited to providing the seller with a copy of the guide.

In addition, sellers of precast concrete, reinforced or unreinforced masonry buildings with wood frame floors or roofs constructed before January 1, 1975, are required by law to deliver to the buyer a copy of the "Commercial Property Owner's Guide to Earthquake Safety".

Exemptions from the requirements set forth above are basically the same as those relating to providing other general disclosure documents. (such as the TDS) in real property purchase and sale transactions, e.g., the transfer is made pursuant to a court order or from one co-owner to one or more other co-owners, or to a spouse, child, grandchild or further descendent, with an added exemption in cases where the buyer agrees in writing that the property will be demolished within one year of the date of transfer.

Buyers of unreinforced masonry buildings (UMBs) are advised that the owner' of any such building who has actual knowledge that the' building is located in a "Seismic Zone 4" (an area where the likelihood of a damaging earthquake is the highest) must post a sign at the entrance to the building stating that the building is constructed of unreinforced masonry and may be unsafe in an earthquake. There is no obligation to post the notice, however, in cases where the walls of the building are non-load bearing with steel or concrete frames.

Buyers further are advised that if the owner of a UMB does not bring the building into compliance with applicable retrofit standards within five years from the date of actual or constructive notice that the building is located in a Seismic Zone 4, he or she is not eligible for any State assistance program for earthquake damage until all other applicants have been paid.

More than half of California is in a Seismic Zone 4, including the entire western half of the State.

Seismic Hazards Zones - Sellers of real property in a seismic hazards zone (or their agents) are required to disclose the fact that the property is located in such a zone to prospective buyers.

The Division of Mines and Geology of the California Department of Conservation has responsibility for identifying areas of the State where there may be a significant potential for liquefaction, earthquake-induced