BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
CREDITS TO BUYERS
Q: I represent a buyer in escrow who sent seller a Request for Repairs which asked the seller to complete some repairs identified in the inspection report. In lieu of the repairs, the seller agreed to credit buyer $10,000 toward closing costs and my buyer removed the inspection contingency. Now buyer’s lender will only allow a $4,000 credit. My buyer is furious and is threatening to sue the seller and even me for the remaining $6,000 he is claiming is due to him. Help.
A: Having a lender disapprove credits to buyers is a common occurrence. Sometimes the lender may feel that a large credit back to buyer reduces the buyer’s “skin in the game” (i.e., down payment minus credit) increasing a buyer’s risk of defaulting. Other times the loan must meet certain criteria to be re-sold into the secondary mortgage markets. In any event, the lender has the right to make such a limitation as a condition of granting buyer the loan.
PRACTICE TIPS
1. When representing a buyer who is receiving a credit from any source, be sure that buyer’s lender is aware of the credit. All credits to buyer from any source must be disclosed to, and approved by, buyer’s lender.
2. Point out to buyer that in the CAR (and SFAR) purchase agreement any credit to buyer is limited by contract to the lender-approved limit. When negotiating a credit, set your buyer’s expectation that this credit amount may be reduced by buyer’s lender and that, per the terms of the purchase agreement, buyer will then just have to accept that amount.
3. Be sure that your buyer fully understands this limitation and that you cannot make up the difference by a payment that does not appear on the closing documents.
4. Do not engage in a plan or scheme to make up the difference in the credit to buyer disallowed by buyer’s lender by a payment outside of escrow, either before or after the close of escrow.
5. If you have a mortgage broker (as opposed to the actual lender underwriter) advising you to just make a credit to buyer outside of escrow, do not listen. A mortgage broker is NOT the lender. There are mortgage brokers who will advise agents that such payments are okay. But, unless the UNDERWRITER for the actual lender approves a credit, it cannot be paid. Discuss any issues regarding this with your manager or broker.
6. If any party is attempting to convince you to make a payment to or for the benefit of buyer outside of escrow, immediately discuss this situation with your manager.
7. Remember the formula: Lender + Outside of Escrow = Fraud.
8. Also, note that any credits to buyer late in the escrow could cause the lender, even if they approve the credit, to have to create a new Closing Disclosure which could delay the closing.
9. Sellers and buyers often will be negotiating repairs or credits for discovered defects or issues and then, once a dollar credit amount is agreed to by the parties, the agents will create a contract Addendum which simply states, “Seller shall credit buyer $4,000 toward buyer’s closing costs.” A problem often then occurs when the buyer complains after COE that the defects or damages are more expensive and comes after the seller for more money. Defending such buyer claims after COE is difficult because the Addendum did not tie the credit from the seller to the buyer to the repairs or defects being negotiated.
10. Note that there is release language in the CAR “Seller Response and Buyer Reply to Request for Repair” form (zipForms form RRRR). This form ties the credit to buyer to the requested repairs/credit/price reduction and the disclosed condition of the property.
11. For larger and/or more complicated credits, sellers and buyers should be advised to have a specific Waiver and Release prepared at the time they agree to the credit. This will usually involve having qualified California real estate attorneys for the parties drafting such releases.
For further information, see Weekly Practice Tip: “Releases and Waivers – When Needed”
12. For smaller and simpler credits, for example a few hundred up to a couple thousand dollar credits, it is still best to use the RRRR form, or at a minimum, have a simple release on a separate sheet, such as:
“In consideration for Seller crediting Buyer $1,000.00 to re-finish the floors, Buyer releases Seller from any and all liability or responsibility in connection with floor damage or repair.”
13. However, for structural or water intrusion issues (which may well be more serious than they first appear), it is always wise to recommend that your seller or buyer consult with a qualified California real estate attorney prior to agreeing to signing any waiver or release.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
© Copyright Broker Risk Management 2016 02/19/16