December 14th, 2011 at 12:07 am
Paragraph 3 (G) of the RPA, relating to the buyer’s verification of funds, is one of the contract’s most important protections for the seller. Specifically, this clause obligates the buyer to provide written verification of their down payment and closing costs. In other words, the contract requires that the buyer prove that they actually have the cash necessary to close the deal. At the time the present version of the RPA was drafted, this clause was added in response to objections of listing agents. After all, with the broad contingency rights given to buyers, listing agents felt that the document was unfairly favorable to buyers. As a result, this verification requirement was added to allow the seller to get some comfort that their buyer can actually perform.
What does all that mean from our perspective? It means that when you represent the seller, it is imperative that you ensure that verification documents are actually received. In far too many instances no verification documents are ever produced by the buyer and that the seller’s agent did nothing to procure those documents for her client. In my view, failing to follow up on the verification is a breach of your duty to the seller. As a result, when representing the seller, you should always calendar the 7th day to make sure the verification documents are received. If the seller does not receive them on time, you should call the selling agent to request them. If documents are still not received after a few days, you should talk to your seller about serving a Notice to Perform (“NBP”) on the buyer. By doing these things, and allowing the seller to decide whether to serve an NBP, you are doing your job.
The other issue that arises in regard to this paragraph relates to the sufficiency of the buyer’s verification. As you know, paragraph 14 allows the seller to give a NBP if he “reasonably disapproves” of the verification provided. So the question invariably becomes, what does “reasonably disapprove” mean? Unfortunately, I cannot really tell you. After all, “reasonably” is a very subjective term. As a result, if there is a question in this regard, your seller or their attorney needs to decide if the disapproval is reasonable. What we can tell the seller, however, is what our experience shows us. Specifically, sellers often disapprove of verifications written by the loan broker because they have an interest in the deal. They earn money if the buyer closes a loan with them. On the other hand, bank statements, or brokerage statements, are normally accepted. After all, those documents show the buyer’s actual cash and what they have to deposit in escrow. So, if asked what is reasonable, share that information with your seller and let them decide how to proceed.
As always, let us know if you have any questions.
December 7th, 2011 at 12:07 am
As you know, CAR releases new and revised forms for our use twice per year, in April and November. In its latest release, CAR included a revised Addendum that has one important issue you should be aware of. As you know, the Addendum is used if additional terms need to be added to another document. In the document’s introduction, CAR included check boxes for the common documents that an Addendum may relate to. Over the years, those boxes have included the various purchase agreements that CAR has created. In this latest revision, however, they have added two listing type documents: the Residential Listing Agreement and the Buyer Representation Agreement (collectively the “Broker Agreements”). Additionally, in the signature block, they have added a signature line for the Broker. While this is fine and makes sense with regard to the Broker Agreements, it creates problems if the Addendum is being used in connection with a Purchase Agreement. After all, as the broker, we are not a party to the purchase agreement and therefore should not sign it. In fact, if we were to do so, in the context of a dispute, the buyer or seller could argue that we were are a party and try to hold us to the obligations of that agreement. As a result, signing an Addendum to a Purchase Agreement could actually increase our liability in a transaction.
As a result, please be very careful when using the new Addendum form (CAR Form ADM). Only sign that document if it is being used as an Addendum to the Broker Agreements. If it is not, and is instead an Addendum to one of the CAR Purchase Agreements, you should refuse to sign and instead should leave the Broker signature line blank. If you are questioned about this position, please explain to your client that we are not a party to their purchase agreement and that the signature is only to be used if the Addendum modifies the Broker Agreements. Of course, if you have any problem with this policy, please contact your manager or the Legal Department for help.
November 18th, 2011 at 12:04 am
In today’s market, there may be no clause in your contract more important than paragraph 3(C) relating to loans. This is true because that clause, when filled out correctly, helps define when it is appropriate for the buyer to use their loan contingency. Given how difficult and complicated the world of loans is these days, it is obviously critical that your buyer protects themselves in every way possible. So, what do you need to be aware of when filling out this paragraph? First, and most importantly, you need to remember to fill in the blanks, WITH NUMBERS, in every deal. Those numbers will identify a “not to exceed” percentage rate and points, thereby protecting your buyer and establishing what loan they have to take in order to be in compliance with the contract. For example, if paragraph 3(C) provides that the buyer will get a first loan in the amount of $500,000, with an interest rate not to exceed 5%, and the only loan they can get is at 5.25%, then it would appropriate and reasonable for the buyer to exercise their loan contingency and cancel the deal. On the other hand, in the same case if they got a loan at 4.99% but decided they no longer want the house, the use of their loan contingency would probably be a breach of contract. After all, in the contract they said they would take a 5% loan, so turning down one with a lower rate would not be good faith performance. Of course, the same discussion applies to the amount of points your client is willing to pay.
With all this in mind, you also need to realize that leaving these blanks empty deprives your clients of the specific protection we discussed above and, according to some people, deprives them of their right to use the loan contingency at all. After all, the argument goes, you can always get some loan, even if it is at 20% amortized monthly. By not putting numbers in this clause, these people would argue that if you can get any loan you have to take it and close escrow. You only limit what loan you need to take by putting a number in the blank. Without any number, these people claim you must take whatever loan someone is willing to give you.
Similarly, please use numbers, not terms like “prevailing” or “best available rates.” Like we have said many times in the past, contracts need to be as objective as possible. No one can argue what “4%” means, but they can have a different understanding of best available rates. Those terms just ask for a fight. So please use numbers to protect your buyer and eliminate any ambiguity. Thanks and feel free to contact us with any questions you may have.
November 4th, 2011 at 12:04 am
We dealt with a new short sale issue this week that I thought I would share with you. In this deal, we represented both buyer and seller and the seller had retained a Short Sale Negotiator (“SSN”) to handle the transaction. The short sale, with B of A as the first lien holder, was approved and the approval letter provided that the second could receive a “maximum” of $3,000. The approval letter also had the following language: “Any additional fees that were not approved on September 6, 2011 will not be covered by Bank of America, N.A. and become the sole responsibility of the agent, the buyer or the seller to pay at closing.” Based on that language, the SSN told our agent that he needed to credit over $50,000 to the second lien holder at close of escrow. Both the SSN and escrow officer claimed that this language meant that an agreement to pay more to the second was allowed if it was made after September 6 and was not to be “covered” by B of A. As a result, escrow prepared a new commission instruction memorializing the credit and asked us to sign it.
As you can imagine, we do not agree with the SSN’s interpretation of the above clause and refused to sign the escrow instruction. The approval letter specifically says that the “maximum allowed to the Jr. Lien Holder…” was $3,000. Whatever the term, “additional fees” means in the clause quoted above, it does not mean that you can ignore the “maximum” language and pay the junior lien holder whatever you want. If any more money is to be paid to any other lien holder, it has to be approved by the first. The language cited by the SSN and escrow, is not enough. So please do not let anyone pressure you in to accepting this position. It is just the latest way people have come up with to avoid the limitations of the short sale process. As much as we want to close deals, we cannot succumb to this type of temptation. We are closing deals every day, and doing so the right. Let’s continue to do so.
October 27th, 2011 at 12:03 am
As you know, each of the attorneys in our legal department spends a lot of time on the telephone answering questions and helping you get your deals closed. Often, in order to provide you with the best advice possible, we need to review the subject transaction’s file documents. When reviewing a file, however, it is not uncommon for us to find that most, if not all, of the documents have not yet been turned in. This is a problem, and bad idea, for numerous reasons.
First, the DRE requires that documents be turned in as soon as practical after they are executed. That way, your manager or file reviewer can review them as required by law. Next, by allowing us to conduct that review, we can spot red flags and solve problems that we see but you may not even know exist. Your managers are experts on your transactions and have seen and resolved problems you have never dealt with before. By turning in your documents right away, you give them the chance to help you, let your deals close and keep your client happy.
Finally, because our agents do so much business, it is not uncommon for us to sell the same property multiple times. Of course, when we do that, we are deemed to have knowledge of everything that we knew from the earlier deal. However, because of the number of transactions we have, it takes about 2 weeks for us to notify you of a prior transaction. Obviously, if you don’t turn in your documents right away, that delay is even greater and you won’t learn what additional disclosures are necessary until it is too late. We know that the last thing you want to do is make new disclosures in the week before closing. So please, don’t make that necessary. Instead, turn in your documents early and let us help get you all the needed disclosures up front. By doing so, we protect both you and your clients from future problems, and ensure that all disclosures are reviewed at the same time. Your clients are obviously more likely to accept them when they are not made at the last minute.
Thanks, and let us know if you have any questions.
