The DeLeon Insight - March 2023

Market Conditions By City

Average Sale Price

Price/Square Foot Ratio

Source: MLSListings, Inc., as of February 7, 2023

Criteria: Single Family Residential

Atherton Los Altos Los Altos Hills Menlo Park Mountain View Palo Alto Portola Valley Redwood City Sunnyvale Woodside

BEWARE OF Buyer/Broker Representation Agreements

By Michael Repka, Esq.

In an ideal world, real estate agents would provide so much expertise and knowledge, and be so attentive and responsive, that their clients would want to work with them. However, recently there has been a push by some agents to get their clients to sign a legally binding agreement that mandates the buyer work with them if they buy any home in a particular area, or an otherwise identified property over an extended period of time. In other words, by signing this type of form the potential buyer relinquishes, or materially limits, their ability to switch buyer’s agents even if they are not satisfied with the agent’s performance.

Buyers that sign these agreements may be required to pay the agent their full commission, even if the buyer is unsatisfied with the agent’s services or responsiveness and they purchase a home through another agent.

Similarly, these buyers may be obligated to pay the agent their full commission if the transaction does not close due to a buyer’s default, which would be in addition to any amount the buyer would owe to the seller, such as liquidated damages.

Further, the potential buyer could be obligated to pay their agent directly if the amount that the seller is paying to the agent is not satisfactory to the agent and is less than the amount indicated in the buyer/broker representation agreement.

An additional downside to signing this type of agreement stems from the fact that many of that agent’s clients may have declined to sign the same agreement; therefore, the agent may have an incentive to prioritize the clients that did not sign the agreement because

those clients would be free to switch agents if they are not satisfied. Whereas, by the agreement’s terms, the potential buyers that did sign the agreement would not have that option.

What makes the situation worse is that many buyers may not even realize what they are signing or that this agreement is entirely voluntary.

If this type of agreement is used, the agent should present this document at the first meeting, explain exactly what it means, and that it is voluntary. However, many agents know that most clients would not sign this agreement if they fully understood what they were signing, especially if the buyer has spoken with an attorney.

There is also material risk that some unscrupulous agents could mix in this type of agreement when the client is signing other papers, such as when putting in an offer or when signing more innocuous documents such as the “Disclosure Regarding Real Estate Agency Relationship.” Despite an agent’s duty under Standards of Practice 9-2* to explain all documents sent for electronic signature, some agents might be tempted to mix this agreement into a number of documents sent via DocuSign.

In this area, there are two main types of forms used: the California Association of Realtors® (“C.A.R.) forms and the Peninsula Regional Data Service (“PRDS”) forms. Both organizations offer similar forms that bind the buyer to pay commission to the agent and possibly add to the commission paid by the seller; however, there are material differences between the two forms. For example, the C.A.R. form offers the option of nonexclusive representation and provides the buyer with the right to cancel the agreement with 30 days’ notice, although the buyer may be obligated to pay commission for a significant period of time even after the 30-day period expires. The PRDS form is, by its terms, exclusive and irrevocable.

Without question, there are a lot of very good real estate agents that look out for their clients and truly put the clients’ best interest first. Unfortunately, there are others that use tactics that seem to go against these principles. Some of these tactics include: (1) long listing agreements (often 3 months or longer); (2) “pocket listings” that permit the agent a period of exclusivity to show their clients or their office’s clients with limited exposure or competition; and, of course, (3) buyer/ broker representation agreements.

In practice, I have found that stronger agents who offer more services tend to have the shortest listing agreements and elect not to make their buyers contractually bind themselves into working with them.

It is in the client’s best interest to speak with an attorney before signing any buyer/broker agreement or listing agreement.

At DeLeon Realty, we will reimburse our sellers up to $1,500 out of our commission for a consultation with an attorney of their choosing to go over the contents of our listing agreement, which is only 39 days long (beginning on the day the property is placed on the MLS). For the reasons mentioned above, Ken DeLeon and his team of buyer’s agent do not ask their clients to sign buyer/ broker representation agreements. We believe that we have to earn our clients’ loyalty.

*National Association of Realtors® Code of Ethics and Standards of Practice

Friend or Foe in a Shifting Market? LIQUIDATED DAMAGES

By Colette Thomason, Esq.

A shifting market reveals various issues as time goes on, such as an increase in buyers developing cold feet and breaching their purchase agreements. These buyer cancellations have led to an additional factor sellers must now consider: How much loss will a seller suffer compared to how much can be collected from a buyer.

In a seller’s ideal world, if a buyer were to cancel a contract at, for example, $6.5 million and the home then sells to another buyer for only $5.8 million, the delta of $700,000 (plus carrying costs and attorney’s fees) would magically transfer from the breaching buyer’s bank account into the seller’s bank account the moment the sale closed. In reality, the amount of damages a seller can collect from a buyer is often limited by what is called “liquidated damages,” which can fall far short of actual damages in a declining market due to a state statute. A real estate purchase contract with a liquidated damages clause typically limits the amount of damages a seller can collect from a buyer to 3% of the purchase price, no matter the amount of damage a seller actually suffers. California law deems this 3% reasonable, and a higher percentage typically an unlawful penalty. In the above example, instead of a seller receiving $700,000 in damages, the seller could receive only $195,000 in damages. Not an ideal world for a seller.

Liquidated damages (or limited damages) benefit a buyer in a declining market but they are not mandatory. They can be negotiated just like any other term in a contract. It sounds simple until we realize a beneficial contractual term requires bargaining power, and such power is shifting. If a seller wants the benefit of unlimited damages, they risk losing a buyer before a deal is made. If a seller agrees to liquidated damages, they risk the buyer later cancelling, and then a diminished sales price; after all, homes that are pending for some time and then placed back on the market face the stigma of being considered a “rejected home.” Throw in tech layoffs and higher interest rates, and the result can be a significant loss. How should sellers weigh these risks? How are agents explaining this analysis to their sellers (or buyers) – do they even try?

Keep in mind the initial decision of whether or not to limit damages rests with the buyer when they submit an offer to a seller. A buyer can either initial the provision or leave it blank. If a seller then disagrees with the liquidated damages provision, they will need to counter that offer which is the legal equivalent of rejecting the offer. The buyer could quit negotiating and walk away.

Alternatively, a seller could write into their offer instructions that they prefer no liquidated damages, as they could instruct a buyer to exclude a certain fixture from the sale or to include a seller-occupancy period after closing. Assuming a buyer or their agent reads those instructions, they may get scared off from making an offer altogether or they may feel the bargaining power is in their hands, so they submit an offer on their own terms, not the seller’s.

An aggressive seller may think of this as a litmus test: If a buyer is serious about the home, then why should a buyer care about damages at all? Better to lose the buyer now than lose a buyer after a lengthy escrow period. As a real estate attorney who finds joy in protecting my client’s rights, liquidated damages provisions are not my

friend in this market. I want my seller clients to have the ability to recover the amount of damages they actually suffer and to be made whole. However, I also know that sellers want to sell their homes with as many potential buyers and offers as possible. They do not want to scare buyers away, nor do they want to alarm buyer agents who have probably never heard of a seller refusing to accept liquidated damages. Sellers also do not want to gamble what is often their retirement plan on whether their bargaining power is stronger than that of a buyer in this market.

I can’t help but think, though, how committed a buyer would look if they submitted an offer without liquidated damages all on their own. Once we confirmed that it was not an oversight by the buyer’s agent, Michael and Audrey would explain to our sellers that there is a unique strength in that particular offer from a confident buyer that sets it apart from the others.

When a buyer or seller asks their agent a difficult question, the answer is often “we don’t want to rock the boat, so let’s do what everyone else does” merely because the agent is not equipped to discuss the topic. At DeLeon Realty, Michael has in depth conversations with sellers so they understand the strengths, weaknesses, opportunities, and threats of certain contract provisions and of the market itself. The volume that both Ken and Michael, both California attorneys, do for buyers and sellers, respectively, means they know the market in real time, not based on last quarter’s statistics. Other agents do not have this benefit, much less the legal acumen, to explain to their clients what it means to offer, forego, insist on, or otherwise negotiate liquidated damages.

An unfortunate buyer cancellation can be severely worse when a seller wonders how they wound up with damages they cannot collect. Hopefully sellers take this into consideration when they accept an offer.

THINGS TO CONSIDER WHEN SELECTING A LISTING AGENT

By Michael Repka, Esq.

Choosing the right real estate agent to list your home is a big decision. Clients are often asked to enter into a long-term contract for the sale of their single largest asset with few specifics and no guarantees. Make no mistake, the “standard” listing contracts used by most agents in Silicon Valley are written from the point of view of the agent, not the sellers. In many states, sellers are protected by attorneys that require significant modifications to the contracts drafted by the real estate industry. However, in this area, few clients benefit from the protections that come from an attorney’s review and modification of listing contracts. That said, there are some key ways that homeowners can protect themselves when committing to work with a particular agent.

Background, Experience and Statistics

Experience matters. There are many moving parts to a listing, and it takes experience to anticipate issues and opportunities. An experienced agent will know how to prepare and market your property in a savvy manner, getting the best possible price. Plus, agents that handle a large number of listings each year often receive priority pricing and service from contractors and other professionals, resulting in a savings for the client.

All Realtors® have ready access to statistics and data and should be able to provide prospective sellers with their personal statistics such as:

• Number of homes sold in the area (ask for an MLS printout for the past 5 years)

• Average price per square foot

• Average days on the market

• Average price above or below the initial list price

House Preparation

The ability to see a home’s potential and make costeffective improvements is another benefit of listing with an experienced agent. With time and cost constraints in mind, an agent with a strong team and quality connections can give your property an advantage over listing with a less experienced agent. Asking for before and after pictures of homes that the agent has listed can help demonstrate an agent’s work firsthand.

Will They Double-End?

Under California law, the same individual agent is permitted to represent both the buyer and the seller on

the same real estate transaction; in real estate parlance this is called “double-ending.” Similarly, listing agents can take large “referral fees” from agents submitting offers, which can impair their objectivity. Both of these situations can lead to conflicts of interest and the potential for significant financial damages to the

client. Real estate attorneys are all too familiar with situations where double-ending listing agents violated their fiduciary duty to a client, either tempted by the lure of a double commission or an inability to anticipate complications. Although theoretically possible and certainly legal, it is difficult to imagine how an agent can zealously advocate for both clients while protecting confidential information. Thus, asking about an agent’s policy on double-ending is important and will enable the parties to enter the listing with their eyes wide open.

I recall one panel in which a manager from another real estate office proudly touted his office’s policy, which was that the listing agent must stop advising their client and switch to the buyer’s side as soon as they know one of their buyers is going to submit an offer. Under this system, the manager then steps in to review the offers with the sellers and advise them on how to proceed. While some sellers may feel abandoned by their agent and object to being advised by someone that doesn’t know the property, competing properties, or the seller’s situation, others may be willing to accept this solution because they like their agent and want them to get twice the commission.

At DeLeon Realty, we make sure the same individual agent is never advising both the buyer and seller on the same transaction. Also, the listing agent never receives any additional compensation based on which offer gets accepted. Furthermore, we have a company-wide policy that we don't take commission from both sides of any transaction. Since inception of this program, we have waived over $16 million in commission because we believe that double-ending often results in an unjustifiable conflict of interest.

Marketing

Most agents say that they “invest heavily” in marketing their listings, but what does that mean? An experienced agent should be willing and able to give a detailed plan, including:

• How many and what size ads will the agent run (and in which papers) to promote the property? Ads may seem expensive, but they are an effective tool in drumming up additional interest in the property. Generally, agents cover 100% of these costs, so some agents shy away.

• What will the brochures look like? Professionally printed in full color? Two pages? Four pages? 28 pages?

• Which photographer will they use?

• Will the agent advertise the property on TV?

Television commercials are very powerful way to reach potential buyers that are not actively searching the MLS.

• Will there be a professional video tour (versus a photo-only virtual tour) and which videographer or production company will be utilized? Ask for samples.

• What will the property website look like?

• What is included in the agent’s online marketing campaign?

• What does the agent offer at open houses to increase attendance?

While these are only some of the potential marketing techniques, agents that are willing to answer these types of questions with specificity tend to invest more time and money in promoting their properties. Simply put, agents that give non-committal answers are less likely to get quality results.

Length of Listing Contract

Savvy sellers may want to avoid signing long-term listing contracts because some agents are less aggressive if they know that they have the seller locked in for an extended period of time. A shorter contract period, however, can serve as a motivating factor for the agent. In most circumstances, a properly prepared and marketed home in this area should sell within 45 days, so a healthy listing agreement term should be 45 or 60 days— the shorter the better for sellers. After all, if the sellers are truly satisfied with their agent’s performance and feel that they have lived up to all of their promises, the client can always extend the listing term. An agent with a shorter contract will have additional incentive to perform well to generate a sale or, at a minimum, earn that extension. It should be noted that DeLeon Realty listing agreements are only 39 days long and begin on the day the property comes on the MLS.

As with selecting a buyer’s agent, it is wise for the selling client to interview several agents before making a choice. Providing each agent with the same questions will enable the potential seller to better compare and contrast the agents in a neutral fashion. Don’t accept scripted or canned answers. This up-front time may seem like a hassle, but the dividends will more than pay off in money, time, and peace of mind.

Get Ahead of Spring Cleaning

By Serena Simoes and Cori Cluchey

Since introducing estate sales to our clients in 2021, they have boomed with popularity. These sales allow our clients to get a head start on the moving process, promote a more sustainable way of shopping, and leave with a little extra cash in their pocket.

And as people who have hosted many estate sales in our time with DeLeon Realty, we know firsthand how effective they can be and the work that must be done to ensure their success. In fact, we now have dedicated employees who assist with estate sales at no additional cost to our sellers.

If you think an estate sale may be right for you, here are a few tips to get you started:

always say that if it is “junk” to you but still in good condition, add it to your estate sale inventory— after all, one person’s junk may be another person’s treasure!

Items that we have found more difficult to sell are often large or too heavy. Bedframes, big couches, desks, etc., must be in superb condition at a great price point in order to reach any general interest.

Not everyone has a truck to transport the items from one place to another. Luckily, here at DeLeon Realty, our clients have access to our moving van which has been essential at our estate sales and is often the deciding factor if a shopper wishes to purchase a large item.

Organization is key

Getting started in your organizational process might be the hardest part. It’s important to be very distinct on what is for sale and what is not, and we often encourage people to physically move items for sale into a certain room in order to keep them separate. DeLeon Realty has many racks and shelving units available to make this process easier and more attractive.

What are good items to sell?

The short answer is that estate sale shoppers love browsing the entire home and looking at all available items that are in good-to-new condition. Furniture such as coffee tables, patio sets, side tables, lounge chairs, TV stands, dining sets, and ottomans do very well. But sometimes, the best finds are small. These items may include toys, jewelry, clothes, shoes, utensils, cooking ware, Christmas decor, tools, plants, and more. We

Another way to efficiently separate items is with color coding. Using neon-colored post-it notes or stickers can help you separate items by price. Create a price range you are comfortable with--but remember, people are looking for a good deal and items should be priced to sell. Lower prices will not only attract more people when you advertise, it will also maximize your success in clearing out the extra knick-knacks in your home. Higher priced items may be better left to an appropriate consignment center that specializes in that type of art, rug, or furniture.

Hosting the sale

Estate sales are usually cash-only, but we have learned that having an alternative payment method is always a good idea. This broadens your audience and invites

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