In California, the year 2019 wrapped up with no less than 437,500 home sales, per data from the First Tuesday Journal. And with ManageCasa reporting the media home selling price in the state as $615,090 in March 2020, it's pretty clear that sellers in the Golden State have everything to gain, in spite of the real estate market's ups and downs. Before that lucrative sale is final, though, home sellers have plenty of checklist items to cross off, from the nuts and bolts of the selling process, like appraisal and open houses, to the many legal requirements the state imposes to protect home buyers.
Gearing Up to Sell
The decision to sell a home can't be understated — it may very well be one of the biggest financial transactions, if not the biggest, of the home seller's life. But still, it's just the beginning of the selling process. Once that monumental decision is made, the seller must decide whether to hire a real estate seller's agent, which is commonplace, a real estate lawyer, or to try to navigate the home sale process themselves.
The Movoto Foundation estimates the average real estate agent's commission-based rates at around 2 to 7 percent of the home's final sale price at 2020 rates. On the other hand, legal services vary widely as needed, generally paid on an hourly basis. As of March 2020, Thumbtack estimates the average hourly cost of a real estate lawyer in central Los Angeles at $250 to $265 per hour, just for example.
Appraisal and Pricing
An appraisal service helps the seller determine a sale price for the home based on of-the-moment market trends, current local home values, recent sales, public records, curb appeal and the condition and features of the property. A walk-through and appraisal in California at 2020 prices costs anywhere from $350 to $750 Movoto estimates, largely dependent on the type of property as well as the property's value. From the seller's end, it's important to settle on a price that takes all the numerous closing costs into account.
Marketing the Home
Unless they've opted for the uncommon, and often more precarious, DIY route, the seller's real estate agent lists the home for sale in the Multiple Listing Service (MLS), a database that maintains up-to-date information about properties on the market. It usually costs a flat rate to list on the MLS, which the seller may be responsible for if they decide to go the for-sale-by-owner (FSBO) route.
Once the home is listed on the MLS, the real estate agent and the seller employ all kinds of familiar marketing practices to attract potential buyers, such as taking plenty of photos or videos, posting physical fliers and brochures, and creating online classifieds on sites like Zillow, Trulia, Realtor.com and Redfin. Mass emails or custom websites come into play, as well as showing the home in-person with a series of open houses. For the latter, a professional stager can help prepare the home for sale, declutter it and make visual improvements to increase appeal and, in theory, boost the home's price based on a good first impression.
Getting an Offer
Now the home seller and the real estate agent hope to receive a few offers from potential buyers. Redfin estimates that if the home is priced well, it's normal for an offer to roll in about 30 to 45 days after putting it on the market. There's more to choosing an offer than just picking the biggest number, though. Some prospective buyers will include contingencies with their offers, like requesting that the seller pays all closing costs or that the home be made ready for move in by an expedited date. These are, of course, informal requests at the time of the offer and can be freely negotiated between the parties.
In addition to the proposed offer price, which, of course, is not always the asking price, and contingencies, sellers will want a letter from the buyer's mortgage lender, proving that they've been pre-approved for a loan. If the buyer encounters funding-related delays, the seller may choose to reject the offer and move on. Once the offer is accepted, it's customary for the buyer to deposit "earnest money," about 1 to 5 percent of the home's purchase price, into an escrow account of the seller's broker as a gesture of good faith.
In the Interest of Full Disclosure
In the Grape State, sellers are legally required to disclose in writing any details about the property that may affect a home buyer's intent to purchase or the amount they're willing to pay. These disclosures, or "material facts," are a broad requirement, which encourages many sellers to err on the side of disclosing too much rather than too little, lest they face serious penalties for failing to mention significant issues. If a serious issue arises down the line that the seller was aware of, but failed to disclose, the seller may be sued and potentially held responsible for anything from repaying the buyer's losses to refunding the sale price of the home.
While disclosures are a common practice throughout many states, California's requirements are far more strict than most. By comparison, federal law requires sellers to disclose only the presence of lead paint. Not so in California, where some common material facts that must be disclosed range from obvious to esoteric, including:
- Known defects.
- Condition of the roof, plumbing, wiring, electrical systems and appliances.
- Deaths that have occurred on the property within the past three years, or beyond if the death was related to the location of the home or a defect in the home itself.
- Regular neighborhood nuisances, like a neighbor's barking dog or proximity to metro rail tracks.
- Any notable neighbors that may affect the buyer's choice, such as proximity to jails or registered sex offenders.
- Any potential susceptibility to natural hazards, such as earthquakes, fires or floods (disclosed in a companion Natural Hazard Disclosure Statement).
Handling Home Titles
A title is basically a collection of rights that determines who has the legal interest in a property, recorded in a document called a deed. Title insurance protects the buyer and the mortgage lender against losses from complications affecting the ownership of the property when the title is transferred, such as existing liens or encumbrances. While other types of insurance protect against future actions, title insurance is a one-time policy purchase that covers the parties against claims based on past events. California home sellers are required to use a title company during the sale process, which often acts as both agent and title insurance company.
The title company conducts a public title record search to ensure that the seller is the property's sole owner. Lenders may require title insurance before they finance a home buyer's loan, and the buyer and seller often settle on a title company together, although the federal Real Estate Settlement Procedures Act says that the seller may not require a buyer to use any particular title insurance company as a condition of the sale. California sellers can negotiate with their buyers to figure out who will pay for title insurance, though payment often boils down to local custom; Southern California sellers usually pay for title insurance, while it's normal for Northern California buyers to pay. It's not uncommon to split the costs, however.
Hiring an Escrow Agent
In addition to the title company, California buyers and sellers typically use an escrow agent to moderate the sale of the home. Once the buyer deposits the funds and the seller deposits the deed in escrow, the escrow company is in charge of holding both until it's certain that all conditions of the escrow have been sufficiently satisfied. Once that's sorted, the escrow agent facilitates the transfer of the deed to the buyer and the money to the seller.
Again, custom often dictates this aspect of home selling in California. In SoCal, it's more popular to employ an independent escrow company, while in NorCal, it's common for the title company to also take on the role of escrow agent. Also similar to the titling situation, the seller and the buyer are able to work out costs among themselves, though the Real Estate Settlement Procedures Act prohibits the seller from forcing any specific escrow company onto the buyer.
Home Seller's Paperwork Checklist
It's a given that selling a house, whether in California or Cambodia, requires a whole lot of paperwork. Some of the key paperwork required to sell a home in California ties back into those material facts and titling requirements, including such documents as:
- Transfer Disclosure Statement: Commonly called a TDS, this document contains known material facts, as well as a detailed and accurate description of the condition of the property, including its ceiling, driveways, entryways, fencing, floor, foundation, insulation, plumbing, roofing, sidewalks, windows, wiring and more.
- Natural Hazards Report: A companion to the TDS that details any natural disaster risks for the home.
Preliminary Title Report:
The title company issues the PTR based on its search of title records. This document serves as the basis for the title insurance policy.
Statements of Compliance: These records confirm that essential features, such as smoke detectors and plumbing systems, are up to par with current California building codes and standards.
Repair records: Any records documenting major repairs throughout the home's history or even minor repairs and remodels in recent years, as well as proof of inspections from local standards agencies.
* Copies of everything: If the home for sale is under the umbrella of a local homeowners' association or falls under other local covenants, conditions and restrictions (CC&Rs), the seller typically needs to provide copies of all of these documents.
Sealing the Deal
Once the home is sold, the deed and all related documents of the sale are transferred from the seller to the buyer. Upon the transfer of real estate from seller to buyer in California, a notice of change of ownership must be filed with the local county recorder's office. Finally, the buyer's funds are disbursed to the seller. At this point, the seller still has some work to do and bills to pay.
Common closing costs include, but aren't limited to, fees to couriers and homeowner's associations for document transfers; the stager's fee; a few hundred dollars worth of title search fees; escrow fees of a few thousand dollars; notary fees; home warranty fees; and even a 2.5 to 3 percent fee to the buyer's agent as compensation for bringing the buyer to the sale. If the home was sold FSBO, MLS fees can total about $300, or 2 percent of the total sale price. Of course, the seller will also have to pay off the remaining amount owed on the mortgage before receiving any proceeds from the home's sale.
Transfer Tax in California
Feelings of relief and elation aside, the seller still isn't done with the deal after the title is transferred to the buyer and closing costs are covered. When the change of ownership is filed with the county recorder, the county – and, in some cases, the city – collects a real estate transfer tax. Here comes that familiar refrain: Who ultimately pays this tax is open to negotiation between the home seller and the home buyer. Industry standards in Southern California typically stick the seller with the costs, while the buyer usually pays the transfer tax in Northern California.
No matter who foots the bill, most counties in California charge a transfer tax of about 0.11 percent, as of early 2020. That amounts to $1.10 for every $1,000 of the sales price, but city taxes can significantly add to the total. For instance, the cities of Alameda, El Cerrito and Emeryville tack on an extra $12 per $1,000 of the sale price, while Los Angeles and Culver City each tax $1,000 at $4.50. However, the vast majority of cities across the state impose a transfer tax rate of only about 55 cents per $1,000 — still substantial, but chump change compared to that laundry list of closing costs the seller has already waded through.
- First Tuesday Journal: California Home Sales Volume Lays Low
- ManageCasa: California Housing Market Report and Predictions 2020
- Nolo: Selling a Home in California? Key Legal Requirements
- Coleman Advisory Services: California Local Government Finance Almanac: California City and Property Transfer Tax Rates
- Movoto Foundation: Sell Your Own Home in California: The Smart Seller's Checklist
- Haus: The Documents You'll Need to Sell Your House
- Osborne Homes: California: The Essential Steps for Best Results
- Redfin: How to Sell Your Home Without an Agent
- The Edie Israel Team, Coldwell Banker: When Selling a House in California, What Do You Have to Dislose?
- Home Bay: How Much Are Seller Closing Costs in California?
- Coldwell Banker: The Different Types of Agents
- Ramsey Solutions: What Is Earnest Money?
- Thumbtack: 2020 Average Real Estate Lawyer Fees (With Price Factors)