Buying a California Condo

A step-by-step overview

Long-time California homeowners may be able to remember a time when the purchase of a property required little more than the exchange of a check and a handshake. Those days are long gone. California law has formalized the process; today’s buyers and sellers engage in a complex and heavily documented series of steps designed to protect the interests of all of the parties involved in the transaction.
First-time buyers, and those from outside California, may find that the procedures and terminology are unfamiliar. This brief overview of the steps involved in the purchase of a California condominium begins once the buyers have found the condo they hope to purchase.

Writing the offer. The seller has established an “asking” price for their condo and the buyer must now make an offer to purchase, in writing. Depending on current market conditions—how many buyers are competing for similar properties, whether prices are rising or falling—and other factors, including the buyer’s own resources, the buyer may want to offer an amount that is lower than, equal to, or even higher than the seller’s asking price.

The offer is written on a Residential Purchase Agreement form that has been standardized by the California Association of Realtors® (C.A.R.). In addition to identifying the property and the buyer, the document specifies the amount the buyer is willing to pay; the deposit amount; the proposed financing terms; who pays which fees; disclosure requirements; any personal property specifically included (such as stove and other kitchen appliances, lighting fixtures, carpeting, etc.); loan commitment date; any contingencies, including inspections; information regarding the pro-rating of real estate taxes and other bills; and closing and occupancy dates. Plus, the offer carries an expiration date and time, meaning that if the seller fails to respond to the offer within that specified period, the buyer’s offer is no longer valid.

Initial deposit. The buyer’s written offer is accompanied by an initial deposit, known as a “good-faith” deposit or “earnest money.” The amount should be enough to indicate that the buyer is serious about the offer—usually from 3 to 5 percent of the purchase price—and is made as a personal check or cashier’s check. If the seller accepts the buyer’s offer, the deposit is applied to the purchase; if the offer is not accepted, the deposit is refunded to the buyer. However, if the offer is accepted and the buyer later decides not to go through with the purchase for reasons other than those allowed by the contract, that amount may be awarded to the seller.

Negotiation and counter-offers. Depending on market conditions, the seller may look at the buyer’s offer immediately, or may designate a specific date when any offers received will be considered. In some cases, the seller may accept the buyer’s offer as it is written. Sometimes—especially if the buyer has made what is known as a “low-ball” offer—the seller will reject the offer entirely. However, in most cases, the seller makes a counter-offer. The seller’s counter may propose changes to any of the specific terms in the buyer’s offer. There may be several back-and-forth counter-offers as the terms of the sale and purchase are negotiated. Negotiations are generally conducted by the Realtors for the seller and buyer, each representing their client’s interests and attempting to secure the most favorable terms without the emotion that can arise if the seller and buyer meet face to face.

Agreement and inspections. Once the seller and buyer have agreed on the terms of the purchase and signed the purchase agreement, a number of activities are set into motion. Whether or not inspections are specified as contingencies in the buyer’s offer, it is always to the buyer’s best interest to have the property examined by licensed inspectors. (The buyer’s agent can recommend qualified inspectors and arrange appointments.) The buyer generally pays for these inspections and typically either the buyer or their Realtor is present to observe and ask questions during the inspections. Inspections made on a condominium are somewhat different from those made on a house, but generally include what is called a “physical” inspection and a pest inspection.

Inspectors look for signs of wear and damage and can highlight areas of potential expense for the buyer. In some cases, the offer to purchase may be contingent upon the buyer’s approval of the results of the inspections. If the buyer’s offer has inspection contingencies and the inspection results are not satisfactory to the buyer, the buyer may decide not to proceed with the purchase or may return to the negotiating table, asking the seller to make the necessary repairs or to lower the price enough to cover repair costs.

Loan application. During preliminary meetings with the lender, the buyer has provided much of the information the lender needs, but once an agreement is signed, an actual application must be initiated, negotiated, and signed. Within three days after the loan application is received, the lender must provide the borrower with a "good faith estimate" of the total amount due at closing, as well as a copy of Settlement Costs: A HUD Guide.

Closing costs, which, according to Fannie Mae, generally amount to 3 to 6 percent of the sales price, are typically made up of escrow fees, property taxes, interest, loan origination fees, recording fees, first premium of mortgage insurance, title insurance, loan discount points, first payment to escrow account, homeowner's insurance policy, and any documentation preparation fees.

Appraisal. Although some buyers make “all-cash” purchases, most buyers borrow money to purchase their home. In making a loan to a buyer, the lender assumes a certain amount of risk, so it’s not surprising that the lender asks for some assurances that the property is worth the money the buyer is borrowing. That assurance comes in the form of an appraisal. A licensed appraiser will prepare a written appraisal for the lender, taking into consideration the condition and location of the property as well as the selling prices of other similar properties that have sold recently.

If the condo appraises at or above the purchase price, the transaction moves forward; if the appraisal is lower than expected, the buyer must make some important decisions. For example, the buyer has been pre-approved by the lender for a purchase up to $575,000. The buyer offers $575,000 for a condo, but the condo appraises at only $535,000. At that point, even though the buyer has been approved for a higher loan amount, the lender will only make a loan of $535,000. It’s up to the buyer to either come up with the additional $40,000 cash, to renegotiate terms with the seller, or to cancel the purchase.

Statutory disclosures. California law requires that sellers disclose any known defects in their property, in writing, as part of the purchase agreement. In addition to problems that may be revealed during inspections, disclosures must also cover matters that may not be immediately apparent to the inspector or buyer, such as a dog that barks excessively, a lawsuit that is pending, or a special assessment that will become due. The buyer should review the disclosures carefully with their Realtor.

Homeowners Association documentation. Once an offer is in hand, the buyer has an opportunity to review the critical documents of the condominium’s Homeowners Association (HOA). These include the Covenants, Conditions & Restrictions (CC&Rs), By-laws, Rules & Regulations, Articles of Incorporation, financial statements (for both operating and Reserve accounts), and copies of the minutes of meetings of the HOA and its Board of Directors for the past year. Within these documents will be information about what insurance policies are held by the HOA, which parking spaces are designated for the unit, and an assortment of architectural controls, such as restrictions on balcony décor or curtain colors. Again, the buyer should read these materials carefully, as they may have a direct impact on the buyer’s plans and finances.

Approval of contingencies. If there are any contingencies specified in the terms of the agreement, once the buyer is satisfied with the results of the contingencies, the transaction moves forward. In an extremely active market, transactions typically have few or no contingencies; in a slower market, contingencies are often included in the negotiations.

Escrow. In California, to protect the interests of both buyer and seller (and their respective Realtors) real estate transactions are managed through a neutral party—the escrow company. The signed purchase agreement contains directions—escrow instructions—that specify how escrow is to apportion the various fees and costs involved in the transaction. Once escrow has opened, the parties are fully committed to the purchase. An escrow officer, who maintains contact with the Realtors throughout the transaction, makes sure that the necessary documents are filed and signatures are secured and notarized. Escrow handles all of the financial details of the transaction, holds any deposits for the duration of the process, and distributes funds at the closing.

Title insurance. When a property changes hands, the lender and buyer must examine the property’s history to make sure that the buyer can legally take ownership of the property and understands any restrictions on that ownership. A title company prepares a preliminary title report, which shows the legal description of the property; easements of record; covenants, conditions and restrictions on the property; any existing liens, unpaid taxes, and/or judgments against the property; and the exact vested owner of record. When the sale of the property is final and the necessary documents are recorded, the title company will issue a policy of title insurance to the new lender and to the buyer showing clear title to the property.

Loan approval. Although, even before the negotiation started, the lender pre-approved the buyer for a loan, the lender must finalize all of the terms of the loan with the buyer before the loan can be funded. In addition to the appraisal and inspections, the lender will usually require proof of insurance before funding the loan. Usually within the final week of the escrow period, the buyer’s loan will be approved and the buyer will have to sign a number of loan documents. Typically (but not always), as part of the terms of the loan, the buyer will be expected to make a substantial down payment toward the purchase. The buyer should be sure that this down payment amount is liquid and available so that it can be deposited in escrow in plenty of time to avoid a delay in the closing.

Final walk-through. Once the necessary steps are completed, the buyer and their Realtor do a final walk-through of the property. This is to make sure that the condo has been left in substantially the condition it was in when the offer was made and that the seller has not damaged or removed anything that was supposed to be left for the buyer.

Close of escrow and possession. At last, the day comes when the buyer takes ownership of the condo. But before that can happen, the buyer has to make the agreed-upon down payment, arrange for closing costs, and sign an enormous number of legal documents. Identification, such as a driver’s license, will be required. At the close of escrow, the seller is paid, the seller's mortgage is paid off, along with any other liens on the property, and fees, including the Realtors’ commissions, are distributed by the escrow company. The deed will be recorded with the County Recorder and a copy of the Grant Deed will be mailed to the buyer for safekeeping. The buyer gets keys, garage-door openers, and a huge file of documents and now owns their condo!

A few final notes. Although at times the purchase process may seem excruciatingly slow, much is going on behind the scenes and time is of the essence. If buyers receive calls or requests for information or documents from their Realtor, lender, or escrow officer, a prompt reply can help assure a timely closing.

Even the simplest condominium purchase will generate a pile of documents at least an inch thick. These are binding, legal documents and should be read carefully by the buyer. The buyer’s real estate agent should be able to explain every step of the purchase process, define terms, and answer questions throughout the transaction. However, a Realtor is not an attorney or accountant; buyers who have questions about the legal or financial implications of a purchase should consult their attorney or tax professional.
To view PDF samples of the documents related to the purchase of a California condominium, click on the document names:

1. Disclosure Regarding Real Estate Agency Relationships: This form explains the fiduciary duties of the Seller’s Agent, Buyer’s Agent, and Agent Representing Both Parties, or Dual Agent.

2. Disclosure and Consent for Representation of More than One Buyer or Seller: This one-page form explains that a real estate broker may represent one or more buyers, sellers, or both, in a transaction.

3. California Residential Purchase Agreement and Joint Escrow Instructions: This 10-page form is used by the buyer to make the purchase offer to the seller. It describes in detail the terms, the contingencies (if any), the significant dates and times, and the responsibilities of the parties. 

4. Wood Destroying Pest Addendum and Allocation of Cost Addendum: This one-page document clarifies Purchase Agreement language on pest inspections.

5. Statewide Buyer and Seller Advisory: This 10-page document describes in detail certain concerns and responsibilities of property owners in California.

If you have any questions about buying or selling a condo or any other aspect of real estate in California, please contact us at Buying@LACondoLifestyles.com or 310-278-6033. This description of the buying process is, by necessity, abbreviated.