FAR/BAR 4/17 CONTRACT ISSUE

Imagine for a moment that you are working with a buyer. You find them a home. Buyer and seller agree on price and terms and go under contract. In this hypothetical your buyer also has to sell their current home, therefore you use the V. SALE OF BUYER’S PROPERTY addendum, which is the correct addendum to use. Your buyer inspects the property, timely applies for his or her loan, the property appraises and your buyer’s lender issues a Loan Approval which is delivered to the seller with one condition; that buyer sell their existing property. Buyer’s existing property is under contract with an ALL-CASH buyer and the inspection period on that contract has expired. The sale of buyer’s property is therefore, for the most part, a certainty. Movers have been scheduled. Everything is in order.

You then receive a letter from the seller’s attorney cancelling the current transaction and citing the buyer’s failure to provide a Loan Approval within the Loan Approval Period. You do some diligence and what appears to have occurred is that the seller received an ALL-CASH offer for $20,000.00 more than your current contract.

You are horrified. Your buyer’s plans are dashed. Can the seller do this? The answer is “yes”.

The above scenario is very real. Below is how this scenario may occur as well as a solution to prevent it from occurring:

Section 8(b)(i) of the contract reads: “Buyer shall make mortgage loan application for Financing within ___ (if left blank, then 5) days after Effective Date and use good faith and diligent effort to obtain approval of a loan meeting the Financing Terms (“Loan Approval”) and thereafter close this Contract.”

“Loan Approval which requires a condition related to the sale by Buyer of other property shall not be deemed Loan Approval for purposes of this subparagraph.” (Emphasis Added)

The underlined language above becomes problematic for a buyer who has obtained what they believe is “Loan Approval” (containing the condition requiring the sale of Buyer’s property) within the appropriate timeframe and has provided that “Loan Approval” or notice thereof to the Seller. What has been provided is not Loan Approval at all. The contract condition has not been satisfied. In that case, section 8(b)(v) of the contract states that “if Buyer fails to timely deliver either notice provided in Paragraph 8(b)(iii) or (iv), above, to Seller prior to the expiration of the Loan Approval Period, then Loan Approval shall be deemed waived, in which event this Contract will continue as if Loan Approval had been obtained, provided however, Seller may elect to terminate this Contract by delivering written notice to Buyer within 3 days after expiration of the Loan Approval Period.” (Emphasis Added)

Because what your buyer delivered to the seller does not qualify as Loan Approval, then, upon the expiration of the Loan Approval Period the Seller may elect to terminate the Contract.

SOLUTION:

Until such time as this scenario is rectified by the drafters of the FAR/BAR Contract, a simple solution is, when using the V. SALE OF BUYER’S PROPERTY addendum, add the following language to that rider: “If Paragraph 8(b) is checked in the Contract, the second sentence of Paragraph 8(b)(i) is deleted.” This insertion will allow the conditioned Loan Approval to meet the definition of Loan Approval. The condition requiring sale of buyer’s property remains unaffected pursuant to the addendum.

Agent Tip of the Week: March 8, 2017

As you may be aware, the changes to the FAR/BAR Residential Contract (both the “AS-IS as well as “NON-AS-IS” versions) will go into effect April 4, 2017.

While full redline versions are attached below:

Residential Contract For Sale And Purchase
“AS IS” Residential Contract For Sale And Purchase

The change which will have the most significant impact on your buyers and sellers is the modification to the Financing section.

Buyers will now be required to obtain a “Loan Approval” within 30 days from the Effective Date, unless otherwise stated. The newly defined term “Loan Approval” is a change from the current defined term, “Loan Commitment”. The issue with the newly defined term is that it is loosely defined in the contract as “approval of a loan meeting the Financing terms”. It is not unreasonable for one to interpret the term Loan Approval to mean “an unconditional approval”, however the contract does not define the term as such. Moreover, by virtue of the conditional language in Section 8(b)(vii), Loan Approval may be conditioned on, at a minimum, property related conditions as well as the appraisal. I anticipate that this issue will need to be clarified – and as the new version makes its rounds – it will. The takeaway here is that, regardless how the term is defined (Loan Approval or Loan Commitment) the buyer should have a candid discussion with their lender prior to the issuance of document which remotely resembles a Loan Approval. The discussion should be centered around the fact that once the Loan Approval is obtained “or deemed to have been obtained”, as the new version of the contract provides, and the buyer then fails to close, the buyer’s deposit could be at risk. Real estate agents and lenders should proceed cautiously with regard to this section of the contract and call upon real estate attorneys for counsel.

In addition to the above changes, the updated version of the contract allows a buyer to terminate the contract for inability to obtain the Loan Approval through expiration of the Loan Approval Period. This is a departure from the current version of the contract which limits a buyer’s ability to terminate the contract to a time period which is no later than 7 days prior to closing.

Agent Tip of the Week: Open Permits and Title Insurance

One of the hallmarks of Association Title Services is our Real Estate Agent Educational Enhancement Program. This program was developed for our loyal following of real estate agents who are continuously seeking to enhance their customer base through the educational enhancement offered by our attorneys. As part of our program, we present you with the “Agent Tip of the Week” and hope you find it valuable.

Open permits are not covered by title insurance. Open permits are considered matters of zoning and therefore are excluded from title insurance coverage. This exclusion is located within the fine print (jacket) of the Owner’s Title Insurance Policy. It is important, when processing a transaction, that the title insurance company order a permit search in a timely fashion to afford a buyer the ability to address the open permits with the owner of the property.

Association Title Services is managed solely by real estate attorneys who have almost a century of real estate closing and title experience. Please do not hesitate to contact us directly for more information on how you can become part of our Educational Enhancement Program.

 

Agent Tip of the Week: Residential Contracts and Special Assessments

One of the hallmarks of Association Title Services is the educational assistance we provide to our real estate agents. Below is your “Agent Tip of the Week”.

The Special Assessments referred to in Section 9(f) of the FAR / BAR AS IS Residential Contract refers to municipal assessments, not condominium or home owner association assessments. An example of a municipal assessment is where the municipality imposes a lighting improvement tax in a certain area. This is typically done through a resolution. The tax is often spread out over a number of installment payments and invoiced to the property owner in their real estate tax bill. These installment payments may be paid by either seller or assumed by buyer depending on which selection under 9f is checked.

As a 20-plus year real estate attorney, I have developed a loyal following of real estate agents who are seeking to enhance their customer base through education. Please do not hesitate to contact me directly with any questions you might have.