December 7th, 2012 at 7:24 pm
I got a call this week that is unfortunately all too common. In this case, we represented the buyer and an outside broker had the seller. Our buyer did all his due diligence and inspections and, after some negotiation and a credit from the seller, removed all his contingencies but loan. A few weeks later, with the loan application still pending, our buyer changed his mind and decided he wanted to cancel the deal. Without our knowledge, he wrote an e-mail, with a copy to the listing agent, asking for the cancellation and explaining and why he wanted out. That explanation related to a number of property conditions, including traffic in the neighborhood and alleged defects. He did not say anything about his loan.
Of course, when the seller was asked to sign a cancellation, they balked. The seller stated that the buyer’s e-mail made clear the cancellation was based on property condition and not on anything else. As a result, because the investigation contingency had already been removed, the seller said they were going to keep the buyer’s $50,000 deposit. Now, after all that, the buyer’s loan actually got denied, and the buyer is trying to use that contingency to get out. As you can imagine, the seller is skeptical, believing that the buyer asked the lender to deny the loan or, at a minimum, that the buyer did not cooperate in trying to get the loan approved and therefore acted in bad faith. Therefore, he is still refusing to return the deposit.
So, what is the lesson of this story? Obviously, you must think long and hard before telling a seller why you are cancelling the deal. You must review the contract and determine what contingencies and cancellation rights still exist. At a minimum, you have to make sure that your explanation fits within one of those contingencies. In truth, the Cancellation of Contract form (CAR Form CC) does not require you to identify what contingency you are using to cancel. The most common paragraph used when exercising a contingency would be paragraph 1E of this form, which reads that the cancellation is being made “As otherwise permitted by paragraph _____ of the Agreement.” In completing the clause, you can merely put “14” in the blank, thereby identifying the general contingency clause in the Purchase Agreement. That way, you don’t identify any particular contingency and then only have to do so if asked by the seller. Of course, that question lets you know you have to be careful, and you can talk to your manager or the legal department to determine how best to fit your cancellation within your remaining contingency rights. By not identifying any particular clause, you give yourself options and freedom, and don’t tie yourself down if things change at a later time.
So cancel carefully and only identify a cancellation right when you have to. That way, all available options will be open to your buyer and you will have a better chance to get their deposit back.
As always, contact us with any questions you may have.
November 30th, 2012 at 7:23 pm
Given the number of short sales we see, the Short Sale Addendum (SSA), is one of the most important documents we use. Unfortunately, it also one of the most complicated and most misunderstood. As a result, I thought it a good idea to walk you through the way it works so you can properly explain it to your clients.
As you know, the SSA’s boilerplate language provides that the transaction is contingent upon receiving lender approval within 45 days of acceptance. It then provides that, if the (1) seller has not received the lender’s approval by that date, or (2) the buyer has not received a copy of that consent from the seller by that date, the contract may be cancelled. It specifically provides that “[i]n either case, Buyer shall be entitled to return of any remaining deposit…” The main question that arises in this context is whether the contract can be cancelled before day 45 if, for example, the buyer finds another property or the seller changes their mind and wants to seek a loan modification. The technical answer is no, since until that “Short Sale Contingency Date” arrives, there is no cancellation right. That right is specifically created only if approval is not received by that date.
In truth, this issue cannot be read independently of paragraph 2 of the SSA. The boilerplate of that paragraph provides that the time periods for buyer’s inspections do not begin until after bank approval is received. Of course, we know that is the way most contracts are written because buyers do not want to spend money on inspections until they know that the bank has approved the deal. However, by leaving those terms in place, it means that, technically, your buyer has no cancellation rights until either approval is received or the 45 days passes. After all, the SSA explicitly says he doesn’t have the short sale contingency until day 45 and, if the inspection periods haven’t started, he doesn’t have those cancellation rights either. So, the only way to fix this is either shorten the short sale contingency date in paragraph 1A or check the box in paragraph 2(ii) which makes your inspections begin at acceptance. In those cases, cancellation rights will start earlier and can be used if necessary.
Of course, even if you leave the boilerplate, a conversation with the listing agent should still get you out of the deal if you want. After all, while the seller can hold you in for the time being, you will be able to cancel on the short sale contingency date if approval is not received, or based on your inspections if it is. So, the fight seems silly, but we wanted to explain this because it has been coming up.
The other issue we see with regard to this form is the question of what happens when the bank asks for changes to the Purchase Agreement. As you know, the lender’s approval typically comes with a term sheet that may not be consistent with the parties’ agreement. In this case, the SSA is very clear: “[N]either Seller or Buyer is obligated to change the terms of their Agreement to satisfy Short Sale Lenders’ consent or term sheet(s).” (SSA, paragraph 1E.) As a result, in the common event that the bank asks for changes, even if they are minor, another cancellation right arises. The parties already have an agreement, subject to lender approval, and are under no obligation to change it just because the bank asks them to.
As always, let us know if you have any questions about this document.
November 9th, 2012 at 7:22 pm
As you know, we believe that electronic signatures are the future and, as importantly can be very useful for your business. Products like DocuSign and Digital ink make it easier for you to get your client’s signature no matter where they are. They allow a transaction to move forward more quickly and ensure that copies of signed documents are not misplaced. All in all, we think they are a good thing and strongly recommend that you use them as soon and as often as possible.
On the other hand, however, we are hearing that because of the way DocuSign works, it is becoming more common for documents to be signed by your clients without being read or explained by the agent. As you know, the systems make it very easy for clients to move from signature block to signature block without reading anything in between. If the agent doesn’t ensure that the documents are read by or explained to the client, then when a problem arises, we will invariably hear the “I didn’t read it and would never have agreed to that” excuse. This exact scenario has come up no less than 5 times in the last month.
While I don’t believe saying that “I didn’t read the document” is an excuse for your client, it does point out a problem in our practice. First, as a legal matter, it is your obligation to ensure that your client reads and understands what they sign. As a result, even if you use electronic signatures, which we believe you should, you need to still go over the documents with your client. Of course, there are many ways to do this. As I have said many times, some agents go over all the documents at the beginning of their relationship with a client, like when they get a listing signed. That way they can tell the client what is coming and set the appropriate expectations. Others, especially in the case of electronic signatures, go over the documents on the telephone and emphasize, in an e-mail, that the client needs to read everything before he signs. However you do it, you need to recognize that your obligation to guide and give advice to your client has not changed because they can sign documents electronically.
Furthermore, and more importantly, your business is all about relationships. It is those relationships that make your deals easier to close and results in the referrals that you need to succeed. As a result, meeting with your client to show your expertise and go over documents should be seen as an opportunity, not a burden. By explaining things professionally to your client, you are advertising your expertise, and making them realize why they hired you and why they should hire you in the future. This time with your client can be priceless if used correctly. So, keep up with technology and use electronic signatures. There are many good reasons to do so. At the same time, however, don’t forget to go over all documents with your client. Not only is it your legal obligation, it is one of the best marketing opportunities you have.
As always, let us know if you have any questions.
November 2nd, 2012 at 7:20 pm
One of the common problems we see in our files is the late delivery of AVIDs. Oftentimes, a deal is a few days from closing, and no AVID has been delivered to the buyer or signed by the agent. This, of course, causes many potential problems that you need to consider and avoid. First, it is very common for an agent to complete his portion of the Transfer Disclosure Statement by writing “[s]ee attached AVID.” By doing that, you are incorporating the AVID into the TDS, and making its delivery the delivery of the TDS itself. As a result, in such a case, the delivery of the AVID carries with it the three day right to rescind. Therefore, in most transactions, delivering the AVID early eliminates the right to rescind and makes your deal more likely to close. By delivering it late, you give the buyer a last minute right to cancel.
Even if the AVID is not expressly incorporated in the TDS, the problem of a “right to rescind” still exists. After all, the law states that any time the TDS is amended, the buyer gets a new three day cancellation right. As a result, if I give the buyer the TDS on day 3, but deliver my AVID on day 35, there is a question regarding whether the buyer has a right to cancel. In those instances, we need to determine whether the late delivered AVID constitutes an amendment to the TDS. While there is no express answer to that question, at a minimum we have created an argument for the buyer. They will claim it is and that they can cancel. More importantly, we have probably created some distrust on the buyer’s part. After all, when a buyer is told about a material fact so late in the deal, they often feel that the seller was hiding things and distrusts the seller’s performance as a whole. In such a case, your buyer is more likely to cancel the deal. Furthermore, if you take the position that no cancellation right is created by the late delivery of an AVID, you are theoretically forcing the buyer to close on a house they don’t want, thereby making it more likely that a lawsuit will result.
Finally, by delivering your AVID late in the transaction, you are running the risk of a late cancellation. Why put in all that work only to have the buyer cancel the deal, when you could have determined whether that would happen by delivering your disclosures earlier? In other words, you protect both yourself and the seller by delivering early and eliminating cancellation rights. If the buyer cancels, you have invested less time and can move on. If they don’t, you know you have a more solid deal. So deliver your AVID early. It is better in every way.
As always, please let us know if you have any questions
October 31st, 2012 at 7:25 pm
As you all know, our market has changed this year. Throughout the company, we have seen an uptick in activity, but also a very low inventory. This has, in some cases, created a seller’s market, with multiple offers and buyers competing for popular properties. Of course, when that happens, buyers craft their offers to be more attractive to the seller, by shortening escrow, or shortening the contingency period, or even going forward with no contingencies at all. In talking to our escrow people, I hear that they are seeing a lot of 30 day escrows coming in the door. And, while we all love an active, competitive market, we have to ask ourselves what problems it might create and how we need to handle the new problems it presents.
Most obviously, while the real estate market has changed, and buyers and sellers are reacting appropriately, the lenders and their processes have not changed. In other words, regardless of how popular a house may be, the buyer of that property will still have to deal with today’s lending environment to get a loan. Of course, that means providing a ton of documents, answering round after round of questions, hoping the appraisal can be scheduled and comes in high enough and just getting the bank to prepare and forward loan documents to escrow. It also means, in most deals, that the loan process will take time, often more than we expect or more than we provide for in escrow. In truth, while I know it is possible to get loan approval in less than 30 days (and HSL has done it for us in emergencies on numerous occasions), a typical loan takes more than 30 days to process. This, of course, is dependent on the responsiveness of the buyer, and how quickly they provide documentation to the lenders, but on average, 45 days is probably a better benchmark. So, what should you do about this?
First, talk to your client about it before writing an offer with a 30 day escrow. If you represent a buyer, get them to your HSL rep before they find a house and have them processed through underwriting. Further, when writing the offer, manage their expectations. Tell them that loans are hard to get and that even if the deal has a 30 day escrow, the loan may not come through that quickly. On seller’s side, make sure to have this same conversation with your client. They need to know that the 30 days is a goal, but may not be possible in this lending environment. Then stay on top of the buyer, making sure they do everything possible to get approval quickly. You may want them to double app with HSL, so you have someone on your side who knows about the buyer’s financial situation. In either case, don’t be silent. Make sure that, at the beginning of the deal, your client understands that while everyone will do their best to close on time, the loan is unpredictable and may cause delays. That way, no one will be surprised when an extension is needed and no one will be angry with you. By properly managing the clients’ expectations, you are protecting both your deal and your relationship with your client. And that, of course, should be one of your main goals.
As always, please contact us with any questions you may have.
