The DeLeon Insight - January 2023

Market Conditions By City

$10,000,000

Average Sale Price

$5,000,000

$0

$6,000,000 Los Altos Los Altos Hills Menlo Park Mountain View Palo Alto Portola Valley

$7,000,000 City Sunnyvale

Atherton

Average sale price for single-family homes from 1/2021 to 12/2021, compared to the period from 1/2022 to 12/2022.

$8,000,000 Los Altos Los Altos Hills Menlo Park Mountain View Palo Alto Portola Valley

Price per square foot ratio for single-family homes from 1/2021 to 12/2021, compared to the period from 1/2022 to 12/2022.

Redwood

$9,000,000 City Sunnyvale

1/2021 - 12/2021 1/2022 - 12/2022

Woodside $0 $500 $1,000 $1,500 $2,000 $2,500 Atherton

Price/Square Foot Ratio

Redwood

1/2021 - 12/2021

1/2022 - 12/2022

SELECTING THE BEST BUYER’S AGENT FOR A CHANGING MARKET

By Michael Repka

Over the past twenty years, the real estate industry has changed dramatically. In the 1980s and well into the 1990s, real estate agents had access to proprietary information about which homes were available for sale and easy access to historical pricing information. This information was difficult for ordinary buyers to obtain unless they were working with a local agent. In many areas, this created what some would argue was a quasi-monopoly that benefited the real estate industry.

The agent’s ability to network and gain early access to information on upcoming listings became paramount. As a result, buyers tended to work with a very well-established agent that was well-connected to a particular market.

The Internet changed everything. Beginning in the late 1990s, the consumer began to get more access to information. This included information about homes that were available, and data on past transactions. Much to the chagrin of very old-school agents, it has now become clear that the best way to achieve maximum exposure for these listings is to put them on the MLS, which syndicates to all of the online services such as Zillow, Redfin, Realtor.com, MLS Listings.com, Trulia, and most brokerages’ company websites. Generally, "off-market" sales benefit buyers due to reduced competition, which is to the detriment of sellers.

One additional consideration that comes from added exposure is that listing agents often receive offers from agents with whom they are relatively, or completely, unfamiliar. Therefore, the buyer’s agent’s ability to project trustworthiness, competence, reliability and organization can, and does, materially impact the likelihood of getting the offer accepted.

From the client’s perspective, an agent’s ability to sift through the mountains of data available and focus it on the clients’ needs has gained import. Analytical agents have gained the upper hand in this market.

More recently, the dramatic increase in interest rates and banking products shifted the buyer’s focus towards agents that are well connected and knowledgeable in the area of finance and lending. Similarly, the supply chain challenges and the unavailability of contractors has added new value to technical lending knowledge and connections, as well as pull with local contractors.

That leaves the multi-million-dollar question: How should a buyer interview and select an agent in this market?

A significant portion of most people’s net worth is in their home, yet many are surprisingly casual about how they select an agent to represent them in a transaction. While some do research and make a strategic decision, others simply turn to someone they know that has a real estate license or “that nice agent” they met at an open house.

Although this cavalier attitude towards selecting representation is unfortunate, it is not surprising. Selecting the right agent is not always easy — many clients do not know what questions to ask or how to get straight answers. Additionally, many large brokerages and independent training companies give agents “scripts” to rehearse, and rehearse they do. Much like a career politician skilled in the art of sticking to practiced talking points, many real estate agents sound very convincing. They have mastered the art of reframing or redirecting questions that may expose their professional weaknesses towards their areas of strength.

As a very high-volume listing agent, I see a dramatic difference in the quality of agents submitting offers on my listings. Without question, working with an experienced, reliable, and trustworthy agent can have a significant impact on whether you get the home and even how much you have to pay. Additionally, some agents’ inexperience with basic lending knowledge will put their client, or my seller’s transaction, in jeopardy.

In this edition of The DeLeon Insight, we look at finding an agent to represent a buyer. In the next edition, we will delve into selecting a listing agent.

Finding the Right Buyer’s Agent

The most important part of finding the right agent is introspective: the client has to determine what they need or want. This includes the area, price range, type of home, as well as personal needs. First-time buyers will need a knowledgeable agent that can guide them through the process, yet will also want someone with a considerable amount of time and patience. If someone wants to buy in Palo Alto, it’s important to find an agent who really knows the area and won’t be tied up running around the entire Peninsula (or Bay Area) showing other client’s homes.

Similarly, many well-known agents focus on listings, which can make up over 75% of their annual sales. Query whether these agents will have the time or motivation to tour properties for you. This problem is so pronounced that I only work with sellers, whereas Ken DeLeon, the founder of our company, focuses exclusively on his buyers. This way, all of our clients get the time and attention they deserve.

While buyers usually see the benefit associated with using an agent who knows the particular area very well, they often underestimate some of the other advantages to working with a well-known agent. A savvy agent’s reputation will help when it comes to getting an offer accepted, and their experience will help when it comes to anticipating problems or answering questions. At the same time, no one wants to work with an agent who is more focused on other clients. Thus, someone looking for a $600,000 condo may have trouble getting attention from an agent busy with people buying $5 million homes.

Once a client knows what they want, they can focus on finding the right agent for their personal circumstances, with a few easy-to-follow steps:

Compile a List of Potential Agents

This is often the hardest part. Certainly, asking friends and family members who bought similar homes is a good starting point, but everyone’s needs are different. Discerning buyers may also look for agents with a significant market share in their target area, good Yelp ratings, and numerous positive reviews on electronic bulletin boards (such as The Parents' Club of Palo Alto and Menlo Park or “PAMP”). One of the best alternatives may be asking related professionals, such as escrow officers and real estate attorneys, for suggestions. Given the high cost of advertising, agents tend to focus advertising expenditures on areas they know well.

Interview at Least Three Agents

Clients should be open about the fact that they are interviewing other agents, and they should always interview several—preferably from different agencies.

Be Specific in Your Questions

Consider putting together a questionnaire and ask the prospective agents to respond in writing and with specificity. It is better if the client gets the answers before they disclose what they desire so that the information is less “tailored.” Some of the questions you may want to include are:

• When did you get your California real estate license?

• How many transactions have you done (in your

desired area) in each of the past 5 years?

• What percentage has been representing buyers?

• What is the average price of a home you sold over the past year?

• Please provide an MLS printout of all of your sales over the past 5 years (this is an easy request)

• What degrees have you earned, when and from which schools?

• What did you do before entering real estate?

• Do you have any real estate certifications (e.g., working with seniors, foreign investors, distressed properties, green buyers, etc.)?

• Are you a real estate salesperson or a real estate broker?

• Do you have any legal training or training in negotiation?

• Do you have any support staff that can help with the transaction and if so, what role do they play in the process?

Most homebuyers in California do not use a real estate attorney, so it is critical that they have a good agent that is willing to provide comprehensive and unbiased advice. There is a very wide range when it comes to the competency of real estate agents. A little extra time in the selection process can save a lot of headaches down the road.

DEFERRING (AND POSSIBLY REDUCING) CAPITAL GAINS TAXES THROUGH SELLER FINANCING

By Michael Repka, Esq.

There is no real doubt that prices have been softening (a euphemism for dropping) in Silicon Valley, which has many people worrying about their significant built-up home equity that was an integral part of their retirement plan. Concurrently, many people have more geographic flexibility that would permit them to work remotely thanks to creative work arrangements and Zoom-type platforms.

Thus, the “right” answer for some might be to sell now and move to a more affordable place, which is a trend that we have seen with many of our recent sellers. Others find that they are locked in their home because of a trifecta of golden handcuffs: (1) onerous tax that would be due on the sale due to all of the built-in capital gains, both state and federal; (2) a loss of Prop 13-protected property tax rates; and (3) dramatically higher interest rates on their purchase. This article will address these concerns in reverse order.

The higher rates are actually a mixed blessing. While they have cooled demand in much of the country, they also give cash buyers a significant advantage over people that require financing. Given that most of the people that are considering selling their dramatically appreciated Silicon Valley home have a relatively small mortgage, and each dollar goes much further in most

other parts of the country, many buyers can pay cash for their new home. Thus, they can strike a good deal because they are far less affected by the higher rates.

Long-term homeowners generally enjoy much lower property taxes in California thanks to Prop 13, which fixes the property at one percent of the purchase price (plus an additional amount to cover the interest on some government issued bonds) and caps any annual increase to two (2%) percent per year unless there has been a change in ownership or substantial rebuild of the property. This benefit is lost when a homeowner sells their home. Fortunately, many clients find this hurts less than they anticipated because of the lower property values in other states, coupled with low overall tax rates in many states.

By far, the most significant consequence of a sale of highly-appreciated property is the high capital gains tax rates. In the past, many Silicon Valley sellers considered converting their property to a rental property for a couple of years in order to qualify for the deferral of income tax under Internal Revenue Code Section 1031. However, this strategy is far less appealing during a declining market because the tax savings may be more than offset by the drop in prices.

Possible Tax Savings Opportunity — Seller Financing

Long-term homeowners that have large built-in capital gains and a low outstanding mortgage amount may want to consider enticing buyers with the possibility of seller financing, provided the buyers are well-qualified and they are investing sufficient equity in the form of a large down payment. Based on the current interest rate environment, it is likely that we will see an increasing use of this tool over the next few years.

Currently there is a large gap between the mortgage rates and savings rates. Therefore, a homeowner could lend pre-tax money at a lower rate than the prevailing rates at a bank, but still enjoy a rate of return that is significantly higher than FDIC-insured bank products. Plus, this would make the home more attractive to many buyers, thus attracting more interest and offers.

In addition to possibly attracting more offers, and thus increasing the likelihood of a higher price, there are also significant tax benefits to the seller. Namely, seller financing generally qualifies for “Installment Sale” treatment under Internal Revenue Code (“IRC”) § 453. Under this provision, the seller would be taxed pro-rata as the money comes in. For example, if the seller received 40 percent of the sales price in year one, they would only pay tax on 40 percent of the gain. They would then collect interest on the remaining 60 percent

(pre-tax dollars) and recognize the additional capital gains tax only as the future payments are received. For taxpayers that are not already in the highest tax bracket, this also gives them the ability to take advantage of the lower tax brackets multiple times. This is particularly useful for people that are approaching retirement or expect their income to decrease over the years.

However, this can be a risky strategy if not properly implemented. The seller would be acting as a creditor, so they need to make sure that the buyer has a sufficient down payment and good credit. Additionally, they must comply with all state and federal laws, such as the DoddFrank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), amongst others. At DeLeon Realty, and through the Law Offices of Michael J. Repka, we have both the legal expertise and market savvy to properly advise clients on the sophisticated pros and cons of seller financing. As mortgage rates are forecast to remain elevated for some time, call DeLeon Realty to see how you can utilize seller financing for greater returns and less taxes.1

1 This article contains a general overview of seller financing. We recommend that a seller or buyer consult with their own tax and legal professionals to obtain details and advice for their unique situation. Legal counsel for seller financing may be provided to DeLeon Realty sellers through the Law Offices of Michael J. Repka.

EIGHT LISTING TRAPS TO AVOID

By Michael Repka

Many sellers enter into a listing agreement feeling very optimistic and a high level of trust in their listing agent. However, there may be devils lurking in the details of the agreement that the sellers are being asked to sign. Many sellers erroneously conclude that they can sign the “standard form” listing agreements published by the California Association of Realtors (“CAR”) or Peninsula Regional Data Service (“PRDS”) without review. These agreements are written by the Realtor® community and contain many provisions which should be carefully considered, either by the sellers or, ideally, by their attorney. After careful consideration of the “standard form,” the sellers should prepare a comprehensive addendum spelling out the precise nature of the agreement and making sure that both sides are treated fairly. Below are eight areas to consider when selecting a listing agent.

Approach to Conflicts of Interest

When an individual agent represents both buyers and sellers, it is inevitable that one of their buyers may be interested in one of their listings. This is particularly true because many buyers find homes on their own, and approach the listing agent because they feel they will either get a better price or a portion of the commission rebated back to them if they go through the listing agent. Therefore, the sellers should have a detailed conversation with the agent about how situations will be handled if either the listing agent, or another agent in their office, represents the buyer.

DeLeon Realty prohibits its agents from working on, or taking any money from, both sides of any transaction. In fact, DeLeon Realty waives all buyer’s-side commission when any of its agents represent a buyer on a DeLeon listing. This is a brokerage-wide policy, and, to the best

of our knowledge, unique to us. So far, this client-centric policy has saved our clients over $16 million in the form of waived commission.

Non-Disclosed Referral Fees

Unfortunately, some agents say that they will not represent a buyer on their own listing; however, they do take substantial referral fees if they send that potential buyer to another agent in their office. They argue that, under California law, there is no requirement that these internal referral fees be disclosed to the sellers prior to their acceptance of the offers. Therefore, the sellers may be receiving biased advice, yet have no idea that the listing agent is making more money if one offer is accepted vis-à-vis another. To protect themselves, sellers should include in an addendum a requirement that all referral fees be disclosed or, ideally, the listing agent (and/or their entire office) should waive all commission if their buyer is the one to purchase the property. After all, why should an agent or brokerage get a windfall just because the buyer found the property without an agent.

Lack of Specificity in the Listing Agreement

Sellers have more bargaining power to negotiate the terms of the listing agreement before signing on the dotted line. The language included in the common “standard form” listing agreements used by most local agents provides incredible latitude to the listing agents in deciding what marketing, if any, they will provide for the property. Typically, these forms provide that the listing agents can advertise and market the property in any medium selected by him/her unless otherwise instructed in writing by the seller. As such, the addendum to the listing agreement should include a comprehensive breakdown of exactly what marketing the listing agent will provide, such as what DeLeon

Realty provides, including the size and frequency of any ads, the number of TV commercials, the type of home brochure, a sample of the home’s video, the scope of international marketing, and any other relevant media techniques that will be implemented to sell the house. Putting a home on the Multiple Listing Service (“MLS”), which syndicates it out to other internet sites, should be obvious and the bare minimum. The addendum to the listing agreement should specify exactly what the agent will do beyond the minimum. In other words, what steps will the listing agent take to bring in a broader group of potential buyers from different areas. This is particularly important in this environment of dramatically higher interest rates, which cause many buyers to consider homes in different areas or price points than those that they were originally targeting.

Unquantifiable or Vague Promises

Sellers should beware of any agents that make statements such as, “I will market aggressively,” “I will turn over every stone until I find the buyer,” or “I have a secret list of potential buyers who will buy your house.” Similarly, sellers should be cautious of agents who claim to have a buyer whom they will bring as soon as the sellers sign the listing agreement. If these claims were true, they should be specifically identified in terms that can be measured.

Long Listing Agreements

Once the sellers have signed a listing agreement, they are bound to pay commission throughout the entire length of the agreement unless they can prove that the listing agent has not lived up to contractual requirements. Before signing the listing agreement, sellers should negotiate for a shorter duration listing agreement (e.g., no more than 45 days after the home hits the market) rather than let the listing agent bind them to a 90-day or 180-day listing agreement. If the property has not sold during the listing period, the seller may elect to extend the agreement if they are pleased with the overall efforts and the quality of work exhibited by the listing agent. Sellers, however, should not be contractually bound for many months to an agent that falls short of the client’s expectations.

Seller Costs

Listing agents should make a financial investment in the listings. Nowadays, many agents will pay for staging, property inspection, and pest inspection fees if required by the sellers at the time the listing agreement is signed.

Not only does this relieve the sellers of some costs, it also makes sure that the listing agent is fully vested in the result. Before signing the listing agreement, the seller should ask the listing agent for pictures of other homes that the agent has staged so that the seller can ascertain the quality of the design and furnishings. It is important for the sellers to know that their home will be staged by a high-end stager with the appropriate style of inventory for their property.

Focus on Brokerage Rather Than Agent

Some agents will attempt to distract the sellers from their limited amount of volume or experience by touting the combined volume of all of the independent contractor agents in their office rather than their individual statistics. It is important to note that most brokerages utilize independent contractors that are granted permission to use the brokerage’s name and branding for marketing purposes, and the office’s conference room for meetings. These agents are not employees and they generally have no financial stake in the other agents’ sales results. Therefore, the seller is really only going to get the attention of the individual agent with whom they work and very little, if any, collaboration from other agents in their office.

Paying Out of Escrow

The addendum to the listing agreement should specifically identify items that the listing agent will pay during the listing period. Occasionally, the listing agents will agree to pay for certain items with a provision that they will be reimbursed by the sellers out of escrow or, conversely, the sellers must pay for certain items upfront and the agent will reimburse them out of their commission at close of escrow, assuming that there is a close of escrow while that agent has the listing. Neither of these approaches is the same as the agent paying for the expenses themselves and not being reimbursed by the sellers. Therefore, the sellers should be very careful to ensure that their understanding is documented in the listing agreement.

Although it does involve some additional cost, many sellers would benefit from having an independent residential real estate attorney review the listing agreement and the related addendum prior to signing. Additionally, the sellers should request a written printout of all of the listing agent’s sales in the area to ensure that the sellers accurately understand the listing agent’s sales volume and experience.

THE BEAUTY OF CARMEL AND PEBBLE BEACH – YOUR NEXT SECOND HOME?

By Ken DeLeon

During this slow season around the holidays, our CEO, Michael Repka, and I flew the DeLeon turbo-prop airplane around the western United States to meet top agents in some of the destinations our clients are moving to the most, such as Austin, San Antonio, Santa Fe, and Scottsdale. Through research, personally interviewing the top agents, and spending time in these cities, we can give our clients informed and unbiased recommendations to the best agent in each area for their particular needs. While I have enjoyed learning about different regions’ housing markets and how much tax savings one would enjoy when moving there, I still think that my favorite region in the world, and where I will eventually retire, is the Carmel/Pebble Beach area. This region, where I have happily owned a beach house for over ten years, provides an unbeatable combination of stunning natural beauty with the proximity of being only a short drive away from everything Silicon Valley has to offer.

I would love to introduce my clients and readers to the many benefits of living in the Carmel/Pebble Beach area, which is an ideal second-home location and eventually

a great place to retire. The many reasons to purchase a home in this area include its unparalleled natural beauty, vibrant art scene, its many diverse and enjoyable festivals and events, and a renowned cuisine culture. Plus, buying a vacation home long before one is ready to retire gives years of appreciation and the probability of significant property tax savings thanks to Prop 13.

The relaxing natural beauty of this region belies the multitude of events and offerings this area provides. The area plays host to the PGA’s Pebble Beach ProAm tournament where pros, local amateurs, and celebrities play together on the legendary Pebble Beach golf course, ranked the best public golf course in America for the last 50 years. Pebble Beach is also host to Concours d’Elegance, my favorite event in the Bay Area and arguably the best car show in the world, featuring century-old classics showcased by the ocean. Other annual attractions include the Monterey Jazz Festival and Pebble Beach Food & Wine, a delight for epicureans who can also dine at a Michelin-starred restaurant in Carmel.

Carmel

California arguably enjoys the most natural beauty of any of the continental states, and within California, Carmel is the town with the most untrammeled beachfront beauty. Condé Nast agrees, recently ranking Carmel as one of the most beautiful towns in America and the only town in California to make the short list. Carmel is a stunning hybrid of the raw, natural beauty of Big Sur intersecting with a very charming downtown brimming with quaint, European architecture lined with galleries and boutiques. The expansive Carmel Beach, fittingly located at the end of Ocean Avenue, is both a beachgoer’s and dog lover’s paradise. The wide stretch of sand and beautiful blue-green waters provide a stunning vista to enjoy while walking on the path along the appropriately named Scenic Avenue. The beachfront homes are a delightful mix of distinct styles ranging from contemporary homes with walls of glass, to Frank Lloyd Wright’s only oceanfront house, which is designed like a ship; in fact, its prow literally breaks the waves during high tide.

Carmel’s lifestyle attracts many celebrities, including former Mayor Clint Eastwood, and Brad Pitt, who just paid $40 million to buy a historic oceanfront home. Carmel and Big Sur have a strong literary and artistic history, with authors including Jack London, Robert

Louis Stevenson, Sinclair Lewis, and Henry Miller, as well as artists such as Ansel Adams, Salvador Dali and more recently, Thomas Kinkade, the famed “Painter of Light," all having spent time there.

Carmel Valley

Although not as famous as Carmel or Pebble Beach, Carmel Valley provides an ideally balmy Mediterranean climate where Carmel’s coastal fog burns off and residents enjoy a great lifestyle, sans ocean views, at a relatively affordable price. At less than half the cost of Carmel, a beautiful home can be purchased in the Valley with relaxing views of a golf course for $2-3 million. Carmel Valley has a charming downtown, while the wineries dotted throughout the Valley provide enjoyable and intimate tastings reminiscent of Napa 20 years ago. Continued on next page

SIMPLE IMPROVEMENTS THAT BUYERS NOTICE

By Michael Repka

It is amazing how a few little things can materially improve a home’s appeal to buyers. Over the years, our team of amazing designers, licensed contractors, and handymen never ceased to amaze me with some of their low or no cost improvements to our listings that really made a difference on the home’s ultimate selling price. Some examples include:

Epoxying Garage Floors—Given that many people use their garage as storage space, or even a flexibleuse playroom or gym, an inexpensive cleaning and epoxy coating of the garage floor can make the space much more appealing. Additionally, this tough finish can be parked on for those that still use a garage for cars. On many occasions, DeLeon Realty was able to complete this process at no extra cost to our sellers.

Touching Up Woodwork—Our design team comes equipped with multiple stains, markers, and fillers to dramatically improve the look and condition of wood cabinets and trim.

Cleaning Scuffs Off Walls—Oftentimes, rooms that first appear in need of all-new paint may only need to be cleaned up. This is particularly true if the walls were finished with eggshell, or other durable sheens. Before recommending painting, our team goes over the questionable areas with “Magic Erasers” and other cleaning solvents to reduce the amount of painting needed.

Painting—When painting is necessary, our designers will help with color selection and strategic choices about which rooms should be done. Often, the right artwork and accessories can neutralize marginal paint choices that may be too intense if left alone.

Tightening Loose Railings, Faucets, and Doors Buyers tend to extrapolate based upon what they touch. Making sure that everything is properly adjusted and tightened conveys a sense of quality to visitors.

Replacing Lightbulbs with Matching Warmth Lighting does wonders to enhance the look and feel of a home. Thus, it is important to ensure that all burnt out lightbulbs are replaced and that there is consistency in the type of lightbulbs used (both in terms of lumens and warmth).

Updating Outlets and Switches—For some homes, updating light switches and outlets can make the room feel more moden. Nowadays, it may be a rewarding, low-cost improvement to replace a few outlets with ones that also contain dual USB ports.

Replacing Antiquated Wall-Mounted TVs—Many homes have flush-mounted outlets and cable hookups, yet still have a wall mounted TV from 10 years ago. These thicker TVs tend to make the home feel dated. Sellers are often surprised by how inexpensive very thin TVs have become (provided you stay on the low end of the product lineup).

Defining Shrub Beds and Adding Mulch—Although extensive landscaping projects are generally not worth the cost right before selling, the same is not true for trimming shrubs, defining plant beds, and adding mulch. Additionally, we often “overseed” lawns early in the spring if we have a listing that is not coming on for a few months.

Adding Stepping Stones—Many homes have areas where foot traffic has beaten a path into the grass. These small areas can benefit from laying a few lowcost stepping stones, top soil and a couple handfuls of grass seed.

Naturally, many of these items are done just before we put a home on the market. However, homeowners that think they may want to sell in the future might consider getting started on some of these things now. Why not enjoy these improvements for a while before you sell?

MECHANIC’S LIENS COULD THROW A MONKEY WRENCH INTO YOUR SALE

By Michael Repka, Esq.

In the current turbulent real estate environment, there are many things that can derail a transaction: (1) buyers are more likely to get cold feet, even without a contingency; (2) buyers may no longer qualify for a mortgage at the currently prevailing rates; or (3) a neighbor may assert a claim, or raise an issue, to use the pending sale as leverage. However, one of the most frustrating developments can be the recordation or discovery of an unexpected lien, such as a mechanic’s lien. The purported lienholder may feel extra urgency because the home is on the market, or they may want to exert the extra pressure of a jeopardized sale to compel a payment or settlement.

What is a Mechanic’s Lien?

A mechanic’s lien is basically an enforcement mechanism afforded to licensed contractors (“Direct Contractors”), or, importantly, their sub-contractors, laborers, or suppliers of materials, to make sure they get paid. Once recorded, a mechanic’s lien functions to notify the world (including any potential purchasers) that the mechanic’s lien holder is due money. This is somewhat analogous to the way a home equity loan may be secured by a seconddeed-of-trust, which is recorded with the appropriate County Recorder’s Office to inform the world of the outstanding debt.

Who Can Get a Mechanic’s Lien?

When a homeowner hires a Direct Contractor, the homeowner runs the risk of facing a mechanic’s lien if they do not pay the Direct Contractor for the work that they did on the property. Sounds fair enough; however, the sub-contractors, laborers, or suppliers of materials on the project may also be able to file a mechanic’s lien

for the labor or materials they provided to the project. This creates a real (and often unforeseen) risk that the homeowner could pay the Direct Contractor in full, yet still face a significant liability if the Direct Contractor fails to pay their sub-contractors, laborers, or suppliers of materials. Naturally, the homeowners could pursue a civil action against the Direct Contractor, but that takes time and money and could jeopardize a potential sale. This is especially true if the seller and/or listing agent are inexperienced in dealing with these types of legal issues. Mechanic’s liens can also be problematic around the time that homeowners are selling because there is often work done to get a home ready for the market. Additionally, contractors are more likely to adhere to the strict timelines that apply to this area of law when they know that the home is being sold.

Who Can File a Mechanic’s Lien?

Superficially, any person that does work on a property, or supplies materials, can file a mechanic’s lien. However, this rule is significantly limited by Cal. Bus. & Prof. Code § 7031, which restricts the application of this general rule by providing that no unlicensed individual doing work that requires a California contractor’s license may use a California court to collect monies owed, which includes via a mechanic’s lien.

What is Required to File a Mechanic's Lien?

First, the person seeking the mechanic’s lien must serve notice of their right to file (“Preliminary Notice”). It must be served on both the property owner and the Direct Contractor if the latter is not the one filing the lien. Additionally, there may be construction lenders that require notification. This notice must be served within

20 days of when the work commenced. If this notice is served late, then the lien will be limited to work done within 20 days of service.

There are some very detailed requirements regarding the way to serve this notice and the specific language that must be used, however one of the most important requirements is a description of the work to be done or the materials to be supplied.

Assuming that the Preliminary Notice was properly served, the party filing the mechanic’s lien must include the property owner’s name, address, the person that hired the contractor, the work performed, and the amount owed. Once again, there is some very specific language required under Cal. Civ. Code §8416.

The mechanic’s lien must be filed in the County Recorder’s Office where the property is located within 90 days of the last day that work was performed. This 90-day period can be reduced to 60 days if the owner files a Notice of Completion or Cessation to indicate that all work has stopped.

Again, there are many specific rules for filing and serving notice of a mechanic’s lien with which the lienholder must comply.

What Should a Homeowner Do to Protect Themselves from Inappropriate Liens?

• Work with vendors that are financially solvent, that you know well, and that enjoy a good reputation in the community. Your real estate agent or attorney

should be able to help guide you on the necessary vetting process.

• Know the contractor licensing status of all people working on the project and the interrelationship between the parties.

• Make sure you get a list of any subcontractors or material providers that are working under the Direct Contractor.

• Obtain confirmation that the subcontractors and material providers have been paid. Sometimes this is not possible because the Direct Contractor is going to pay the subcontractor and material providers out of the funds paid by the homeowner.

• Issue joint checks payable to both the Direct Contractor and the subcontractor or material provider, although some risk may still remain if the sub is induced to endorse the check without receiving full payment.

• Require lien releases compliant with the statute from the subcontractors or material providers before issuing the check to the Direct Contractor.

What to Do if Someone Improperly Files a Mechanic’s Lien

• Have an attorney investigate whether the lien is appropriate and all of the above mentioned requirements have been met. If not, the attorney should reach out to the lienholder and make sure that they understand their exposure for filing an invalid mechanic’s lien.

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Palo Alto

Median Sales Price & Price/Sq. Ft. Ratio

$0 $500 $1,000 $1,500 $2,000 $2,500 $0 $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000

Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22 Sep-22 Oct-22 Nov-22 Dec-22

Price/SqFt Ratio

Jan-22 Feb-22Mar-22 Apr-22May-22Jun-22 Jul-22Aug-22Sep-22Oct-22Nov-22 Dec-22 0 10 20 30 40 50

Mountain View Inventory # of New Listings

Palo Alto Inventory # of New Listings

Jan-22Feb-22Mar-22 Apr-22May-22Jun-22 Jul-22Aug-22Sep-22Oct-22Nov-22Dec-22 0 10 20 30 40 50 60 70

Jan-22Feb-22Mar-22 Apr-22May-22Jun-22 Jul-22Aug-22Sep-22Oct-22Nov-22 Dec-22

Portola Valley Median Sales Price & Price/Sq. Ft. Ratio

Portola Valley Inventory # of New Listings

Jan-22 Feb-22Mar-22 Apr-22May-22Jun-22 Jul-22Aug-22Sep-22Oct-22Nov-22 Dec-22

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Jan-22 Feb-22Mar-22 Apr-22May-22Jun-22 Jul-22Aug-22Sep-22Oct-22Nov-22 Dec-22