In the last newsletter, we reviewed in detail the first two pages of the Regional Sales Contract. This article continues with a discussion beginning with Paragraph 10 titled, “Seller Subsidy.” This provision provides for the Seller to pay a specified amount at settlement towards the Buyer’s closing costs. However, the Contract emphasizes that only those costs “allowed by the lender” may be paid, and the credit will be reduced to the amount permitted by the lender.

Unfortunately, many Agents tell the Buyers that the entire credit can be utilized. At settlement, when the Buyer learns that the lenders’ underwriting guidelines will not allow for a full credit, the Buyer is often disappointed or, in some cases, extremely angry. Some settlement companies, agents or buyers illegally suggest that the funds be paid to the Buyer outside of the settlement by a separate check from the Seller to the Buyer.

Such actions constitute loan fraud, and will subject all parties, including the agents, to significant fines and even jail time. It is advisable for the agent to have the buyer confirm with the lender, in advance, that the full amount of the credit is likely to be allowed. More important, however, is that the agent must also caution the Buyer, early in the transaction, that is possible that the lender will not allow full use of the credit and some funds may be left “on the table.” The reason for disallowing use of part of the credit would be that the closing costs were less than anticipated, so the Buyer should not be dissatisfied receiving less money, since they are paying less money. Attempting to illegally pay the money to the buyer outside of closing may seem like a good idea, but agents must understand that the buyer obtaining a smaller credit is certainly better than receiving a prison sentence.

In other developments, the new Regional Contract now requires a specific choice as to whether or not the contract shall be contingent on an appraisal. If it is so contingent, a separate addendum is to be attached, clarifying the terms of the contingency. If there is not an appraisal contingency, then the Buyer has agreed to pay any extra sums necessitated by a lower appraisal. Appraisal contingencies or the absence thereof are especially important if the buyer is short of funds and can not provide any additional cash at closing.

The Financing Contingency is also much more specific than in most contracts. The parties have the option to select the specific form of the required Lender Letter. That option sets forth six (6) requirements that must be included in the Lender Letter. Failure to provide the complete letter within the time specified affords the Seller (but not the Buyer) the right to declare the contract VOID after three (3) days written notice. If the Buyer is able to provide the appropriate Lender Letter, or provide proof of ability to perform even without the financing, within the notice period, then the contract will remain in force. Failure by the Buyer to provide any of the choices will result in the contract being void, not voidable, at the end of the three (3) days notice.

The Termite Inspection provision of the Regional Sales Contract has been overly simplified, and its simplicity can create some extreme results. It gives the option to choose whether the Buyer or Seller pays to obtain the report, which is to be dated less than thirty (30) days prior to settlement, as opposed to the previous sixty (60) day period from the old contract form. However, in providing that the Seller is responsible to pay for all extermination and structural repairs identified in the report, there is NO LIMITATION on the costs to the Seller. The MAR Contract, for example, limits the Seller’s possible expenses to two percent (2%) of the sales price of the Property. It is not inconceivable to have the Seller be obligated to exterminate and/or rebuild an entire room or garage if this provision is not modified or limited.

The new “Repairs” paragraph is also somewhat unusual. If the lender requires repairs to be made to the property, the Buyer notifies the Seller and asks the Seller to pay for the repairs. If the Seller refuses to do so, then the Buyer can either elect to make the repairs at the Buyer’s expense, or refuse to do so. Failure of either party to choose to make the repairs will void the Contract. This provision will essentially give the Buyers an added inspection contingency that the Seller never contemplated. Notwithstanding the terms of the “Repair” provision, the Seller remains responsible for the property condition terms as stated in Paragraph 7.

Copyright 2008. Village Settlements, Inc. All Rights Reserved.