Fun With Financing (A Look at the Financing Provisions of Real Estate Contracts)
By Jay Caudill, Esq. (Real Estate Group)
In today’s market we see all sorts of transactions: cash purchases, lease options, seller finances, and traditional finance purchases. The purpose of this article is to discuss the traditional finance transaction in light of the two most common contracts in our market: the FR/BAR Contract and the NABOR contract. As a self-proclaimed real estate geek and dirt lawyer, I have come to realize that each contract has advantages and disadvantages that realtors may want to consider when determining which contract to recommend to their client.
In the Residential Contract for Sale and Purchase and the “As Is” Residential Contract for Sale and Purchase (collectively “FR/BAR Contract”), the contracts allow the Buyer to have a specified period of time to make application for a loan and a specified period of time to obtain “Loan Approval” for a loan meeting the financing terms described in the Contract. The default time frame (if not otherwise changed by the parties) for Loan Approval is 30 days from the Effective Date and is defined as the “Loan Approval Period”. Buyer has several duties during the Loan Approval Period: (i) the duty to use a good faith and diligent effort to obtain Loan Approval; (ii) the duty to keep all parties fully informed about the status of its loan application; (iii) the duty to promptly deliver written notice of Loan Approval if it is obtained; and (iv) the duty to give notice to the Seller prior to the end of the Loan Approval Period if the Loan Approval is not obtained. The notice to be provided by Buyer being referenced above as item (iv) is a notice declaring Buyer’s election to either: (i) waive the Loan Approval contingency; or (ii) terminate the Contract and obtain a refund of their deposit. If Buyer fails to timely provide any notice to Seller, the Loan Approval contingency is deemed to be WAIVED and Buyer’s deposits are at risk (unless some other contingencies are outstanding or any of the “outs” described in paragraph 8(b)(vii) apply). In addition, Borrower’s failure to provide notice gives rise to a unilateral right of the Seller to terminate the Contract (which right lasts for a period of three days from the end of the Loan Approval Period). A couple fun facts about the FR/BAR Contracts: a loan commitment which is conditioned upon the Buyer selling Buyer’s residence is not a Loan Approval for the purposes of FR/BAR Contract Section 8 and Loan Approval can be verbal. As an attorney, I look at the provisions above as Seller favored. More risk appears to be allocated to the Buyer than the Seller. In addition, as a Seller, I would like to know if a Buyer is locked in at the expiration of the Loan Approval Period. I realize that there are still some outs for the Buyer (regarding property condition issues and appraisal issues), but the lion’s share of financing loose strings are tied up at the end of the Loan Approval Period. Contrast this to NABOR’s Section 4(b).
In the Sales Contract (Residential Improved Property) and Sales Contract – As Is (Residential Improved Property)(collectively “NABOR Contracts), the Buyer has a specified period of time to apply for a loan and a specified period of time to obtain a loan meeting the financing terms described in the NABOR Contracts. During this period of time, Buyer has a duty to use good faith and diligent efforts to obtain the loan described therein. The default time frame (if not otherwise changed by the parties) for Buyer to obtain a loan is 45 days from the Effective Date. But here comes the big kicker…If the Buyer does not affirmatively waive this finance contingency before the end of the contingency period, then either party may thereafter terminate the contract, and in such an event, the Buyer will receive a refund of its deposits! In stark contrast to FR/BAR, this contingency, if not affirmatively waived, can last up until the day of closing. If Buyer affirmatively waives the finance contingency prior to Seller’s termination of the NABOR Contracts, Seller’s rights to terminate are extinguished and Buyer’s deposits are at risk. It is important to note that there is a NABOR form which can be utilized by the parties and signed by the Buyer to effectuate the waiver. Fun fact on the NABOR Contracts: Buyer’s delivery of a loan commitment to Seller does NOT constitute a waiver of the finance contingency. Remember, an affirmative waiver signed by the Buyer is required. However, if Buyer attempts to terminate the NABOR Contracts after the expiration of the Finance Contingency Period, Buyer must either (i) provide a credit denial letter from their Lender; or (ii) provide other evidence that Buyer attempted to obtain approval with diligence and good faith and Buyer was not able to obtain an approval or denial within the finance contingency period. Clearly, the provisions in the NABOR Contracts are more Buyer favored. If Buyer refuses to waive the contingency, the Seller is put in the position of either terminating the Contract or gambling that the Buyer will close. Thus, Buyers can take advantage of the flexibility of knowing that a last minute change in their circumstances might give them an out in the Contract.
So, when it comes to financing, the FR/BAR Contracts seem more Seller friendly and the NABOR Contracts seem more Buyer friendly. While financing provisions are certainly in no way dispositive in selecting a Contract (one should consider inspection provisions, personal property descriptions, etc), financing provisions should play an important role in your discussions with customers over which form to select when making and/or accepting an offer.
Here’s to success in the coming season and have fun out there.