The San Francisco Association of REALTORS® has compiled the general information contained in this document to

assist buyers and sellers of residential real property in Northern San Mateo County in gaining an understanding of

certain matters which can become issues in real property sale and purchase transactions, and to foster informed

decisions. In many cases, the information relates to matters which can affect the desirability of the property or the

property´s use or value. In others, the information relates to the obligations of buyers and sellers in real property sale

and purchase transactions. Not every matter will be applicable to every transaction.

This document is not meant to be a complete source of information on all matters which can become issues in real

property sale and purchase transactions. For that reason, it is strongly recommended that buyers and sellers use the

utmost care and diligence in reviewing and investigating all matters which may be relevant to any transaction. It

should be understood that the San Francisco Association of REALTORS® neither guarantees nor warrants the

accuracy of the information contained in this document. Further, it makes no representation regarding the adequacy

of any information contained in this document as it relates to any specific transaction.

Buyers and sellers are urged to verify and confirm the accuracy, applicability, legal effect and/or tax consequences of

the information contained in this document. If they have any legal and/or tax questions, buyers and sellers are urged

to consult with a qualified attorney and/or certified public accountant. Real estate brokers and agents are qualified to

advise on real estate transactions, not legal and tax matters.

© 2007 San Francisco Association of REALTORS®

Rev.10/01/07 Page 2 of 38

TABLE OF CONTENTS

The Purchase Contract and Confidentiality Requirements

The Real Property Sale and Purchase Contract 4

Confidentiality Requirements 5

Title and Possession

Taking Title 5

Seller Occupancy Agreements 6

Financing and Insurance

Purchase Financing 6

Obtaining Homeowner´s Insurance 7

Insurance for Condominiums 8

Earthquake Insurance 8

Involuntary Unemployment Insurance 9

Escrowed Funds, Fees and Costs, Title Insurance

"Good Funds" 10

Escrow Fees and Costs 10

Title Insurance 10

Taxes

Transfer Taxes 11

California Real Property Tax Reassessment 11

Mello-Roos Act 12

FIRPTA 12

California Withholding 13

Dispute Resolution and Damages

Mediation and Arbitration 13

Liquidated Damages 14

Size and Location of Real Property

Square Footage and Lot Size 15

Boundary Lines and Encroachments 15

Authorized Use of Property and Code Compliance

Zoning Restrictions 15

Reports of Residential Building Record 16

Non-Permitted or Non-Conforming Rooms, Additions or Alterations 16

Retrofitting 17

Condominiums and Other Common Interest Subdivisions 17

Tenancy-in-Common 18

Coastal Commission 19

Conservancy Limitations 19

Americans with Disabilities Act 19

Condition of Real Property

Transfer Disclosure Statement 20

Inspection of Physical Conditions 20

Structural Pest Control Inspections 22

Geological Inspections 22

Homeowner´s Guide to Earthquake Safety 23

Seismic Hazard Zones 23

Natural Hazard Zones 24

Environmental Hazards 24

Lead-Based Paint 25

Mold 26

Flood Hazard Areas 27

Sewers and Waste Disposal Systems 27

Electromagnetic Fields 27

Ordinances and Statutes

Water Heaters 27

Smoke Detectors 28

Required Inspections 28

Voluntary Residential Inspection Program 29

Roofing Materials 29

Rev.10/01/07 Page 3 of 38

Spark Arresters 29

Methamphetamine Lab Clean-Up Order Disclosure 29

Security Bars 30

Locks 30

Automatic Garage Doors 31

Pools and Spas 31

Ordnance Locations 31

Neighborhood Conditions

Neighborhoods 31

Commute Traffic 31

Noise in General 32

Hospitals and Fire Stations 32

Airport Noise 32

Views and Outlooks 33

Odors 33

Landfill 33

Residential Care Facilities 33

Golf Courses 34

Megan´s Law 34

Miscellaneous

Lockboxes 34

Home Warranty Plans 35

Homeowners´ Associations 35

Public Schools 35

Water Shortages (Rationing) 36

Sewer Services Charges 36

Fire Hazards 36

Private Roads 36

Probate Sales 36

Court Confirmation 37

Short Payoff 37

Referrals 37

Rev.10/01/07 Page 4 of 38

THE PURCHASE CONTRACT AND CONFIDENTIALITY REQUIREMENTS

The terms and conditions of every real property sale and purchase transaction are determined by the real

property purchase contract. In the contract, the seller agrees to sell and a buyer agrees to buy real property

pursuant to the contract´s provisions. Generally, the seller and the buyer accept those provisions by signing

the contract in the acceptance section (or when the last of any counter-offers has been signed by the receiving

party without any changes and a signed copy of that counter-offer is received by the issuing party). When

both parties have accepted the contract, the contract becomes a legal binding document and creates

obligations on the part of both parties to act and perform in the manner specified in the document.

A common misconception is that any standard real property purchase contract will work in every situation.

In fact, nothing could be farther from the truth. Purchase contracts are often developed for a particular

market area and may not be appropriate for use outside that market area. But most standard real property

purchase contracts are adaptable and sellers and buyers may add, modify or delete any provision they wish.

However, any additions, modifications or deletions must be lawful, agreed upon and signed by both parties.

Although real property purchase contracts can vary widely, most commonly used forms of agreement contain

sections dealing with the following subjects:

• The names of the parties to the contract;

• A description of the property;

• The amount of the purchase price;

• The amounts of the deposit and the down payment;

• The method of payment;

• The escrow holder and its location;

• Financing terms, if any;

• Obtaining a preliminary title report and insurance;

• Fixtures (included and excluded);

• Personal property (included and excluded);

• Physical and geological inspections;

• Inspection, financing, title and other conditions of performance that must be satisfied within a

specified period of time to avoid termination of the contract (commonly referred to as

"contingencies");

• Warranties and any exceptions;

• The closing date; and

• Physical possession.

It is essential that every buyer and every seller carefully read any contract pertaining to the sale and purchase

of real property in its entirety and understand the obligations that are being assumed before accepting its

provisions by signing it.

The above is provided for informational purposes only to provide buyers and sellers of residential real

property with basic, general information about real property sale and purchase contracts. It should be

viewed as a starting point only. It is not intended to be a complete summary of important information

regarding purchase contracts. Buyers and sellers are urged to consult with a qualified real estate attorney if

they desire any legal advice or have any questions, such as whether a particular contract is appropriate for use

in a specific transaction. A real estate broker or agent (referred to in this document as a "real estate broker" or

Rev.10/01/07 Page 5 of 38

"broker") can advise on real estate transactions only and is not qualified to give legal advice or answer

questions concerning matters of law.

When a buyer makes an offer to purchase there is a possibility that the seller or seller´s representatives may

not treat the existence, terms or conditions of the offer as confidential unless confidentiality is required by

law, regulation, or by any confidentiality agreement between the parties. Likewise, for a seller making a

counter-offer there is a possibility that the buyer or buyer´s representatives may not treat the existence, terms

or conditions of the counter-offer as confidential unless confidentiality is required by law, regulation, or by

any confidentiality agreement between the parties.

Generally, the existence, terms or conditions of such an offer or counter-offer (or any contract that is formed)

are not considered to be confidential under California law unless there is a preexisting confidentiality

agreement in effect. Accordingly, a buyer or seller seeking confidentiality in this regard should inquire as to

whether there is a standard form of confidentiality agreement available that can be reviewed and considered

or, alternatively, the party should engage a qualified attorney to draft one. And, where there is such a

standard form of confidentiality agreement available, if either party wishes to make any changes to it or has

any questions, the party should engage a qualified attorney.

TITLE AND POSSESSION

Title to real property may be taken as a sole or concurrent owner. Concurrent ownership involves ownership

by two or more persons and includes tenancy-in-common, joint tenancy and community property.

As a sole owner, one person alone enjoys the benefits of real property and is subject to the accompanying

burdens, such as the payment of taxes. A sole owner is free to dispose of real property at will, and normally

only a sole owner´s signature is required on the deed of conveyance. In fact, even after marriage, a husband

or wife may continue to own real (and personal) property separately from the other spouse under certain

circumstances.

A tenancy-in-common exists where two or more persons are owners of an undivided interest in real

property. Generally, each owner (or tenant-in-common) has a right to possession of the entire property and

no owner may exclude any other owner from any portion of the property or claim any portion for himself or

herself alone, unless otherwise provided in a written agreement. Additionally, unless a written agreement

provides otherwise, any tenant-in-common is free to sell, convey or mortgage the tenant´s interest in the

property as he or she sees fit, and the new owner simply takes his or her place as a tenant-in-common with

Joint tenancy exists where two or more persons are joint and equal owners of the same undivided interest in

real property (in other words, each joint tenant equally owns the real property as a whole, as opposed to

owning a percentage interest only). The most important characteristic of joint tenancy is the right of

survivorship. It means that if one joint tenant dies, the surviving joint tenant immediately becomes the sole

owner.

Community property basically consists of all property, other than separate property, acquired by a husband

and wife or either of them during a valid marriage.

Rev.10/01/07 Page 6 of 38

The manner in which title to real property is held can significantly affect the rights and liabilities of the

owner(s). And those rights and liabilities are subject to being changed by state and local government. For

these and other reasons, buyers are urged to consult with a qualified real estate attorney to determine what

form of ownership best fits their needs.

Sometimes, as an accommodation, a seller will seek to remain in possession of real property after the close of

escrow. In most instances, this occurs where the seller needs time for the escrow for a new home to close.

To avoid any misunderstandings, it is recommended that buyers and sellers enter into a special agreement or

addendum to their existing sale and purchase contract spelling out such key terms as the length of the seller´s

occupancy, the amount of the security deposit, the existence of homeowner´s insurance and the like.

Additionally, in recognition of State landlord-tenant laws and San Francisco´s Rent Ordinance, special

attention should be given to structuring the relationship strictly as one in which the seller remains in

possession as a mere guest for 29 days or less and does not pay rent.

The San Francisco Association of REALTORS® publishes a special form for use in this regard entitled,

"Contract Addendum-Seller to Occupy After Close of Escrow." It covers many of the issues that have arisen

in recent years in regard to sellers occupying real property after the close of escrow. But questions of a legal

nature regarding the use of this form and the appropriate handling of a seller´s occupancy, including but not

limited to whether to accept payments from the seller as a guest or allow the seller to remain in possession for

30 days or more, should be referred to a qualified real estate attorney knowledgeable regarding San Francisco

real property issues.

FINANCING AND INSURANCE

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 credit, 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 an 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.

Typically, a bank or mortgage loan broker will indicate likely approval of the application by the issuance of a

letter containing a conditional "loan commitment." The letter usually will state conditions that must be

satisfied in order for the loan to be funded. Until each of these conditions is satisfied, the loan may be

declined by the lender. Care should be exercised by the buyer in deciding when to release any financing

contingency in the purchase contract based upon such a "loan commitment." The buyer who releases the

financing contingency based upon such a "loan commitment" risks being forced to breach the contract and

the loss of all deposits if the conditions for the loan cannot later be fully met.

Each lender maintains its own qualification requirements and before an application can be approved, the

borrower must meet those requirements.

Rev.10/01/07 Page 7 of 38

If conventional financing cannot be arranged, it is possible that some buyers will be able to qualify for a lowincome

loan available from any of a variety of different sources. However, such loans often carry higher

interest rates, points and other terms that are more financially burdensome than would be found in a

conventional loan.

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 local office of a

bank or local mortgage loan broker as soon as the search for real property begins and "prequalifying" for a

loan, subject to the lender´s approval of the financing conditions of the real property sale and purchase

contract.

regard.

Further, it is the buyer´s obligation, not the real estate broker´s, to make all decisions regarding the type of

financing to obtain. It is up to the buyer to carefully evaluate his or her personal financial condition and

ability to perform all of a loan´s provisions during the entire term of the loan (typically 30 years). In this

regard, buyers are cautioned to fully consider their ability to perform with respect to "interest only" and

adjustable rate loans that convert to a fully amortized loan with adjusted interest rates within three years or

less from their original funding date. And caution is especially suggested with respect to loans that are due in

less than 30 years, such as in 7-10 years from funding, or that have interest rates that adjust frequently, have

Funds.

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 potential difficulty 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

can further this process by making certain that there is a provision in the purchase contract requiring the

seller to provide a "CLUE" (Comprehensive Loss Underwriting Exchange) report. Buyers also should order

a CLUE report on themselves. Such reports are compiled from a commercial database that tracks the loss

history for persons and properties for the past five years. The information in the reports greatly influences

an insurance company´s decision whether to issue homeowner´s insurance to a person or for a property.

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. To reduce the likelihood of that

occurring, the seller may elect to provide the buyer with a disclosure of any known insurance claims made

against the property during the seller´s ownership.

Rev.10/01/07 Page 8 of 38

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 would be 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. Real estate brokers are not qualified to give opinions in this regard.

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. But 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

funds 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.

Earthquakes can cause extensive damage to real property and loss of personal possessions. Obtaining

earthquake insurance is a way to mitigate the losses caused by earthquakes.

Insurance companies used to provide earthquake insurance as an endorsement to homeowners insurance

policies. However, after the Northridge Earthquake on January 17, 1994 it became much more difficult and

expensive to obtain earthquake insurance.

Under California Insurance Code Section 10081, insurance companies that provide homeowners policies

and policies for qualifying condominiums and apartments must also offer earthquake insurance coverage.

Rev.10/01/07 Page 9 of 38

Some insurance companies no longer offer homeowners policies at all in order to avoid offering earthquake

insurance.

The mandatory offer of earthquake insurance must be made in writing, describe the coverage amounts, list

the deductibles, and state the policy premium. (Cal. Ins. Code Section 10083.) The law prohibits an

insurer from canceling, rejecting, or refusing to renew a residential property policy because the homeowner

has accepted the offer of earthquake coverage. (Cal. Ins. Code Section 10086.5.)

Under California law, at a minimum, an offer of earthquake insurance coverage must include the following:

(1) Dwelling coverage (essentially the cost to rebuild the structure on the property)

(2) Contents coverage

(3) Additional living expenses ("ALE")

The maximum deductible that an insurer can charge is 15% of the policy dwelling coverage. (Cal. Ins. Code

Section 10089(b).) However, it is possible to purchase earthquake insurance with a lower deductible of

10% of the dwelling coverage.

Many private insurance companies provide their required earthquake insurance through the California

Earthquake Authority ("CEA"), a publicly managed, privately funded organization created by the California

www.earthquakeauthority.com. The CEA also can be contacted by telephone at 877-797-4300.

Earthquake insurance through the CEA is available with limits up to $100,000 in contents coverage and

$15,000 for ALE. In addition, a policyholder can purchase the lower deductible of 10%. Condominium

owners and renters are not eligible for the lower deductible but can purchase the higher limits for contents

and ALE coverages.

The CEA is not the only way to obtain earthquake insurance in California. There are a few private

others. Please see your private insurance broker for further information about the available coverages and

costs.

Whether or not to buy earthquake insurance is an important decision for every homeowner to make. It is

recommended that every homeowner review the CEA web site and speak with CEA representatives and a

knowledgeable local insurance broker before making that decision.

Some insurance companies may offer policies of insurance under which a specified number of mortgage

payments will be made to an institutional lender in the event the borrower becomes involuntarily

unemployed. Loss of employment can be unexpected and devastating financially. Involuntary

unemployment insurance, where available, can provide some peace of mind and an important financial safety

net. For these reasons, it is suggested that buyers consider whether or not they wish to obtain this form of

insurance.

Rev.10/01/07 Page 10 of 38

ESCROWED FUNDS, FEES AND COSTS, TITLE INSURANCE

Special rules govern when escrowed funds can be disbursed by title 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.

In real property sale and purchase 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 purchase

contract is subject to being terminated or canceled by giving appropriate notice, or it may be deemed

terminated or canceled 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

In the event a purchase contract and/or escrow is terminated or canceled, or a contract is not performed due

to a 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 party does not give this consent, there could be a delay

in the funds being disbursed or a need for mediation, arbitration or court proceedings.

Generally, 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 as of the date the policy becomes effective (if they

are not excluded or covered by exceptions in the policy): recorded liens or encumbrances; defects in title; and

lack of access to 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 Title 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 CLTA standard coverage policy, the ALTA residential policy and the

ALTA owner´s policy. CLTA policies generally are considered to offer the least coverage.

Rev.10/01/07 Page 11 of 38

Typically, before issuing title insurance, the title insurance company will issue a "Preliminary Title Report"

or "Preliminary Report." Buyers should carefully review this report, especially its exceptions and exclusions

to coverage. But they should also understand that this report does not represent a guarantee by the title

insurance company as to all important liens and other recorded documents affecting title to the real property

being purchased. Instead, the report is only the basis upon which the title insurance company will consider

issuing title insurance. Buyers nonetheless should consider requesting the title insurance company to

provide copies of all recorded documents referenced in the report´s exceptions so that they can review and

approve or disapprove them before any title contingencies in the purchase contract expire.

Any questions regarding the type of policy to be issued, its coverage, the exclusions to coverage, and the

advisability of endorsements (which provide broader coverage than the policy itself) or the exceptions listed

in the Preliminary Title Report should be discussed with the title company and a qualified real estate

attorney. Decisions concerning these matters can have significant legal consequences.

TAXES

All counties in California impose a tax of at least .00110 percent on the purchase price of real property

whenever the property changes hands. In addition, cities may increase the tax rate to generate additional local

revenue. The City of San Mateo, for example, imposes an additional tax of $5.00 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.

Annually, each county in the State collects an 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 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 for any property can be calculated by multiplying the assessed value of the

property by the real property tax rate for the county in which the property is located. In San Mateo county,

the tax rate for fiscal year 2006-07 is 1 percent but special charges are added by many municipalities there.

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

Rev.10/01/07 Page 12 of 38

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 fair 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 San Mateo county assessor´s office at 650-363-4500 and the

municipality where the property in question is located. They should also contact a qualified real estate or tax

attorney and/or certified public accountant. Real estate brokers are not qualified to give opinions in this

regard.

Real property can be subject to continuing tax levies under the Mello-Roos Act. Such levies are used to

finance certain designated public services and 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.

In connection with 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 prospective 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 real 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 prospective 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.

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 IRS 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 an affidavit of nonforeign status;

• 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 and

Rev.10/01/07 Page 13 of 38

the buyer has no knowledge that the affidavit is false. Pursuant to Internal Revenue Code Section 1445 (b)

(2), the affidavit, under penalty of perjury, must provide the seller´s United States taxpayer identification

number and declare that the seller is not a foreign person.

Buyers and sellers are urged to review and discuss the requirements of FIRPTA with a qualified real estate or

tax attorney and/or certified public accountant to determine their applicability to any specific real property

sale and purchase transaction. Real estate brokers are not qualified to give opinions in this regard.

Generally, under the California Foreign Investment in Real Property Tax 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,

transactions 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.

Additionally, a non-exempt seller may, as an alternative, elect to withhold from the sales proceeds an amount

certified under penalty of perjury to be equal to the maximum California personal or corporate tax rate,

which is currently 9.3 percent for individuals, multiplied by the anticipated recognized gain on the

transferred property. There are penalties for underestimating this amount.

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 sale and purchase transaction. Real estate brokers

are not qualified to give opinions in this regard.

DISPUTE RESOLUTION AND DAMAGES

Despite efforts that may be made to avoid them, disputes can sometimes arise in connection with real

property sale and 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 sale and purchase contracts contain optional or mandatory mediation

and/or arbitration provisions. Mandatory mediation clauses often provide that if a party fails or refuses to

mediate, that party loses the right to later obtain its attorney´s fees in an 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 its scope can affect

Rev.10/01/07 Page 14 of 38

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. A binding agreement to submit disputes

to arbitration is effected when both the buyer and the seller initial the "Arbitration of Disputes" provision

contained in most residential real property sale and 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 is 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. Further, under most residential real property sale and

purchase contracts, the brokers are not obligated to arbitrate any of these described matters. Buyers and

sellers should read this provision carefully to determine which types of actions are included. 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.

Whenever a buyer fails to perform a material obligation agreed to in a real property sale and purchase

contract, the buyer is deemed to have breached the contract. Most residential purchase 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. And even if the seller proves a

breach, the buyer still can seek a return of the funds, or some portion of them, by challenging the

"reasonableness" of the amount. Thus, for example, if within six months after the buyer defaults the seller

can sell the property to another party for the same amount, the buyer may be entitled to a return of the

deposit less any offsets for the seller´s carrying costs (e.g., interest on loans secured by the property, etc.).

Generally, the liquidated damages provision in most residential purchase contracts, 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. Real estate brokers are not qualified to

give opinions in this regard.

Rev.10/01/07 Page 15 of 38

SIZE AND LOCATION OF REAL PROPERTY

Representations sometimes are made by the seller or in marketing materials, the multiple listing service or in

property tax records concerning the square footage of the improvements on and/or the lot size of the real

property being purchased. Such representations should be considered approximations only. It also should

be understood that generally any representations regarding square footage or lot size made by the broker are

often based on information obtained from the seller, such as old appraisal reports, or from public property

tax records and that the accuracy of the information provided is unverified and not reliable. Brokers do not

independently verify the square footage and/or lot size of properties they list and/or sell. If a buyer requires

accurate square footage information, he or she should have the improvements measured by a qualified

appraiser or other professional before removing any inspection contingencies. Similarly, if a buyer requires

accurate lot size information, the buyer should have the property surveyed by a professional surveyor before

removing any inspection contingencies.

Existing fences, walls, trees and other naturally occurring or man-made barriers or markers may or may not

define the legal boundary lines of real property. Fences and the like may appear to be on a property but

actually be located on an adjacent property (and hence "encroach") or vice versa. Additionally, public right

of way easements with accompanying rights to use a property may be recorded but not identified in a title

report, marked by a sign posted on the property or actually known to the seller or brokers.

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 not 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 or search the public records in that regard. Accordingly, if boundary lines are material in any way

to the value or desirability of a given property or the buyer´s decision to purchase or the purchase price, the

buyer should have the property surveyed by a professional surveyor before removing any inspection

contingencies to determine the correct boundary lines of the property and the existence and extent of any

encroachments.

AUTHORIZED USE OF PROPERTY AND CODE COMPLIANCE

Certain municipalities, require sellers of real 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 municipality where the property they may purchase 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.

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Zoning laws can be changed and buyers should not assume that they will remain the same after they

purchase a specific property.

If the intended use of the property being purchased is different than the current use (such as using

residential property for mixed or commercial use), it is the buyer´s responsibility to conduct appropriate

investigations to determine whether the intended use will be permitted. Buyers should complete any such

investigation before removing any inspection contingencies in the purchase contract for the property being

purchased.

Buyers should engage a qualified real estate attorney for assistance in this regard. Brokers, under the law,

generally are not obligated to inspect public records.

Prior to the transfer of residential real property, many municipalities, including those in Northern San

Mateo County, 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 permits issued for construction on the property. It does not warrant

that any repairs or alterations made to the property comply with applicable code requirements. And, it

excludes any plumbing or electrical permits which have been issued. In Daly City, contact the Building

Buyers of residential real property in Northern San Mateo County should be aware that the information

contained in "3R" reports may not be accurate for various reasons. Real estate brokers, under the law,

generally are not under an obligation to confirm the accuracy of information contained in public records,

including "3R" reports. For that reason, it is the buyer´s responsibility to investigate the completeness and

this regard, buyers should engage a qualified contractor, architect or other professional.

Buyers should satisfy themselves as to the information contained in the "3R" report before removing any

inspection contingencies in their sale and purchase contract.

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. Real estate brokers, under the law, generally are not under an obligation to inspect

public records. For this reason, they are not generally in a position 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, particularly where the improvements or

alterations were made before the current owner purchased the property. Consequently, buyers are urged to

investigate possible nonconforming improvements or alterations and to seek the advice of a qualified

contractor, architect or other professional before removing any inspection contingencies.

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

Rev.10/01/07 Page 17 of 38

and require such improvements and/or alterations to be closed off, removed or made to comply with current

code requirements.

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 borne by the buyer.

Real property located in common interest subdivisions, commonly known as condominiums, 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 HOA. 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 generally must provide buyers of properties within their jurisdictions with certain documents, as

well as any addenda, amendments or revisions thereto, including but not limited to:

• CC&Rs;

• Bylaws;

• Articles of incorporation (if the HOA 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 a lien against

the property;

• Most recent financial statement distributed, as required by law, including a pro forma operating

budget and a reserves study;

• Lien assessment and enforcement policy statement;

• Summary of HOA insurance coverages; and,

• Preliminary list of defects for any construction defect lawsuit or if the case settled a list of the defects

that will be corrected or replaced, a good faith estimate as to when the corrections or replacements

will occur and the status of any claimed defects that are not on the correction or replacement list.

Buyers are solely responsible for inspecting and evaluating all such documents relative to the sale and

purchase of real property in any subdivision. Buyers should not release any contingencies in this regard

Rev.10/01/07 Page 18 of 38

until they are fully satisfied with the information provided in the documents. Particular attention should be

given to the financial statement provided by the HOA to determine the adequacy of reserves for repairs and

replacements. It also is strongly advised that buyers both review the insurance policies of the HOA to

determine whether it is adequate to cover any and all risks of loss, and request information and documents

regarding any past lawsuits or settlements pertaining to the common areas or physical condition of the

property. And, finally, it is suggested that buyers review all minutes for the HOA that can be obtained from

the seller, or otherwise, as they may provide information regarding the physical condition of the property or

other matters of importance. Any questions concerning the aforementioned documents should be referred to

a qualified real estate attorney.

Tenancy-in-common ("TIC") is a form of real property ownership where two or more persons are owners of

undivided interests in the property. Typically, TICs are formed when two or more persons purchase a

multi-unit residential rental building for the purpose of individually occupying each unit as a primary

residence.

Unlike condominiums, residential real property owned as a TIC generally is not subdivided. For that

reason, there is no ownership of a particular unit as is the case with a condominium. Instead, with TIC

ownership there usually is an unrecorded written agreement signed by all of the co-owners that assigns the

exclusive use and occupancy of a particular part of the property, commonly known by a unit number or

address, to a particular owner. If there is no such agreement in place, each co-owner can occupy any area in

the real property.

All forms of co-ownership involve the risks of sharing the use of a property with others and relying on them

to fulfill their obligations to each other. Owners of TIC interests share major obligations such as mortgages,

property taxes, and building maintenance and management. If an owner of a TIC interest fails to make a

monthly payment due to unemployment, divorce or other reason and a mortgage default results, the lender

could foreclose on the entire property. This could lead to all of the other owners losing their residences and

possibly their equity. Judgment liens and bankruptcies of a TIC owner also can lead to the lender´s

declaring a default on the loan secured by the entire property. Careful attention should be given to reserve

accounts and other measures designed to address such matters. The best way to minimize these risks is by a

well-drafted TIC agreement.

Loans for the sale and refinancing of residential real property owned as a TIC can be more costly and

difficult than for condominiums, which can affect the value and desirability of a TIC interest. This is due,

among other things, to the risk to the lender that one TIC owner may default and the other TIC owners may

not be able to satisfy the shared debt.

It is strongly recommended that tenants-in-common have a clear, comprehensive and updated written TIC

agreement signed by each of the co-owners setting forth the rights and liabilities of the parties, including,

but not limited to, the following: financial obligations of the co-owners, use of the property, management of

the property, repairs, decision-making procedures, the action to be taken in the event of a co-owner´s default,

death, divorce, bankruptcy or incapacity, sale of a concurrent owner´s interest, and dispute resolution.

Buyers should be wary of older TICs that may be operating under agreements that do not address all

important issues and thus should be amended, revised or replaced.

Before entering into TIC ownership, buyers are urged to consult with a qualified real estate attorney

knowledgeable regarding local real property issues to review all aspects of the TIC, including, but not

limited to, all existing or proposed agreements, the background and qualifications of potential and actual coowners,

the management of the TIC property, the existence of any reserve accounts, whether the individual

interests of co-owners can later be sold and, if so, whether there are any rights of first refusal or other

requirements, the existence and extent of any rights to inspect the condition of the property, the type of

Rev.10/01/07 Page 19 of 38

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.

Buyers should be aware that because TICs represent undivided interests in real property, they may be

harder to sell and finance than other properties and their value may be adversely affected.

The San Francisco Association of REALTORS® publishes a special disclosure form for TIC transactions.

The form is entitled, "Tenancy-in-Common (TIC) Disclosure." Buyers and sellers are urged to review this

disclosure before entering into any transaction involving a TIC interest.

The California Coastal Commission was created by the voters in 1972 for the purpose of preserving and

providing public access to the California coastline. The jurisdiction of the commission extends to all real

property located within a specified distance of the coastline. Buyers of real property located within the

commission´s jurisdiction should understand that modifications and/or additions to any improvements and

any new construction may be subject to the commission´s approval.

In order to preserve properties deemed to be historically and/or architecturally significant, certain

governmental agencies have been vested with authority to place limitations on the manner in which they may

be used and their appearance modified. Buyers should be aware that wide latitude is allowed these

governmental agencies in designating properties historical and/or architectural landmarks. Even in cases

where a particular property is not so designated, it can be located in an historical district and subject to the

same limitations that apply to individually designated properties.

Buyers should determine whether any property they are purchasing is subject to conservancy limitations. In

addition, they should always be aware that certain properties may be designated historical and/or

architectural landmarks and limitations placed on their use and the extent to which their appearance may be

modified.

The ADA prohibits discrimination against individuals on the basis of disability. It requires entities which

operate "public accommodations" and "commercial facilities" to remove, design, construct or alter the

buildings they occupy in compliance with specific accessibility guidelines issued by the U.S. Department of

Justice.

Almost all commercial buildings are covered by the ADA. Residential buildings typically are not covered

but may be subject to its provisions if used for certain purposes. For example, if part of a private residence

is used for business purposes, that portion of the residence may be covered by the Act.

The ADA may require, among other things, buildings to be made readily accessible to the disabled.

Different requirements apply to new construction, alterations to existing buildings, and the removal of

barriers in existing buildings. Compliance with the ADA may require significant expenditures. Monetary

and injunctive remedies may be incurred if the building is not in compliance.

Rev.10/01/07 Page 20 of 38

Brokers do not have the technical expertise to either determine whether a building is in compliance with

ADA requirements or advise buyers and sellers concerning the requirements of the ADA. For that reason,

the parties to any real property sale and purchase transaction are advised to consult a qualified attorney,

contractor, architect, engineer or other qualified professional to determine the degree to which the ADA

impacts a particular property, if at all. Real estate brokers are not qualified to give opinions in this regard.

CONDITION OF REAL 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 Real Estate Transfer Disclosure Statement regarding the property. This requirement is applicable

even in cases where the property is sold in an "as is" condition.

If the disclosures in the TDS, or any material amendment thereto, are provided to the buyer after execution

of the offer to purchase, the buyer has three days after personal delivery of the TDS (five days if the TDS 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 reasonably competent

and diligent visual inspection of the accessible areas of the property) in a document other than the TDS.

Neither the seller nor the broker(s) is/are liable for any error or inaccuracy in the TDS, provided the seller

or the broker(s) had no personal knowledge of the error or inaccuracy, it was based on information provided

by a public agency or in a report prepared by certain specified professionals, and the seller or the broker(s)

used ordinary care in providing the information.

When more than one broker is involved in the real property sale and purchase transaction, the one who has

obtained the offer to purchase is responsible for delivery of the TDS to the buyer.

Certain real property transfers are exempt from the requirement that the seller provide the buyer with a

Transfer Disclosure Statement regarding the property, including transfers 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.

Every buyer should be aware that under Section 2079.5 of the California Civil Code, he or she is charged

with the "duty to exercise reasonable care to protect himself or herself, including (with respect to) those facts

which are known to or within the diligent attention and observation of the buyer...."

Buyers should be aware that the present condition and useful life of the various components of the

improvements 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