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BUYER STATED FINANCING

by | Jul 31, 2023 | Fraud

BROKER RISK MANAGEMENT

WEEKLY PRACTICE TIP

 

 

  1. I wrote a non-contingent offer for my Buyer using the new CAR RPA; we checked the boxes for no loan, no appraisal contingencies, and that it was an “All Cash” offer. I also included a Contingency Removal form that specified that All Contingencies were removed.  However, I also included loan terms in Paragraph 3E of the grid because the Buyer would need to secure a loan.  The appraiser was not able to get to the Property until after the 17 Days had elapsed for Informational Access.  When the appraiser arrived, the Listing Agent and Seller refused to let him inside.  The Buyer’s lender will not approve the loan without a full appraisal and the Buyer cannot buy the Property without a loan.  When the Buyer tried to cancel, the Seller said the Buyer was in breach of contract and the Seller wants to keep the Buyer’s deposit.

 

Since the Seller and Listing Agent knew that the Buyer was going to get a loan, the Seller should have cooperated and let the appraiser into the Property.  The Buyer wants her deposit back.  How can I help?

 

  1. The new RPA explicitly states in Paragraph 5B that if the Buyer’s Offer is “All Cash” then “this Agreement is NOT contingent on Buyer obtaining a loan.” The same effect is achieved by waiving or removing the Loan Contingency as part of the offer. Paragraph 8A(5) explains that having “No Loan Contingency” means that the Buyer does not have a right to safely cancel the Agreement and get the deposit returned if the Buyer is unable to secure the loan.  The Buyer needs to complete the purchase as agreed or the Buyer may be in breach of the contract.  What your client needs at this point is to consult with her own qualified California real estate attorney to find a different basis for the Buyer to safely cancel.

 

This situation involves the concept of “Buyer Stated Financing” which is in Paragraph 6C of the RPA:

 

“Seller is relying on Buyer’s representation of the type of financing specified (including, but not limited to, as applicable, all cash, amount of down payment or contingent or non-contingent loan).  Seller has agreed to … sell to Buyer on Buyer’s specified financing.  Buyer shall pursue the financing specified in this Agreement, even if Buyer also elects to pursue an alternative form of financing.  Seller has no obligation to cooperate with Buyer’s efforts to obtain any financing other than that specified in this Agreement and shall not interfere with closing at the purchase price … even if based upon alternate financing.  Buyer’s inability to obtain alternate financing does not excuse Buyer from the obligation to purchase the Property and close escrow as specified in this Agreement.”

 

If a Buyer specifies “All Cash” and then adds financing terms in paragraph 3E, perhaps wanting to indicate that the buyer will be pursuing alternative financing, at best creates ambiguity and leads to a conflict later, and could also mislead a Buyer into erroneously believing that the Buyer has created a right to cancel if the Buyer cannot get that loan.

 

Buyer Stated Financing is not an easy concept for many people to understand.  This Week’s Practice Tip is designed to aid Agents in explaining this concept to Buyers and Sellers and to minimize Agent risk.

 

Buyers’ Agents:

 

  1. Explain to Buyers that specifying “All Cash” means that the Buyer must have good funds available in time to close escrow on the date agreed. Agreeing to an “All Cash” transaction precludes the Buyer from later deciding not to close because (a) they cannot obtain a loan; (b) they cannot get the gift money or funds from a lawsuit that they were promised; and/or (c) they have elected not to sell stock because of a decline in value or other reasons.  If a Buyer must obtain a loan to be able to purchase the Property, then the Buyer needs the loan and appraisal contingencies included in the offer.  If a Buyer needs to get money from a third-party source or the successful sale of stock at a particular price, then a contingency should be included in the contract to protect the Buyer, such as:

 

“This Agreement is contingent upon Buyer selling stock in _________ Company for no less than $_____ per share within ___Days after Acceptance.”

 

  1. Review the “Buyer Stated Financing” provision with the Buyer and explain that the contract states that Seller does not have to, and may not, cooperate with the Buyer’s efforts to obtain alternate financing; unless there is a separate appraisal contingency, the Seller does not have to give access to an appraiser except during the Buyer’s Investigation Contingency and/or during the Informational Access to Property time frame.

 

  1. Do not include loan terms in the offer unless the Buyer is including a Loan Contingency.

 

  1. Strongly encourage Buyers, in an email, to refrain from making “contingent-free offers”. The best practice is to give Buyers the Market Conditions Advisory before preparing the Offer and, if a Buyer insists upon making a non-contingent offer, then document that the Buyer is proceeding against your advice.

 

See Weekly Practice Tip:  How to Handle Clients Who Will Not Follow Advice 11/16/2018

 

Sellers’ Agents:

 

  1. If a Seller receives an “All Cash” or “No Loan Contingency” Offer, review the “Buyer Stated Financing” provision in the Agreement with the Seller. Explain the following points:

     (a) Buyer has the right to try to obtain other (non-cash) financing.

     (b) However, if Buyer cannot obtain that other financing, Buyer will not have a cancellation right for that issue.

(c) While the contract states that Seller has no obligation to cooperate with Buyer’s efforts to obtain alternative financing, all parties have an obligation to act in good faith and deal fairly with the other party.  If Seller is considering not cooperating with the Buyer on this matter, Seller should be advised to consult with a qualified California real estate attorney.

(d) Seller cannot refuse access to an appraiser if Buyer has an Investigation Contingency or Information Access rights in place.

(e) Seller cannot refuse to close escrow simply because Buyer has obtained “other” financing.

 

  1. If a Seller receives an “All Cash” or “No Loan Contingency” Offer and loan terms are included, recommend that Seller specifies in a Counter Offer that “Any loan terms included in the offer are not part of this Agreement.”  

 

PRACTICE TIPS

 

  1. Regardless of who you represent, make sure that your clients understand the concept of Buyer Stated Financing by reviewing the points specified above.

 

  1. Loan terms should not be included in a Buyer’s offer if the Buyer is making an “All Cash” and/or a “No Loan Contingency” offer.

 

  1. Buyers should receive the Market Conditions Advisory before their offer is prepared.

 

  1. If a Buyer wants to cancel because they were not able to obtain a loan or other funds and they do not have that contingency in place, immediately encourage the Buyer to consult with a qualified California real estate attorney.

 

 

ATTORNEY-CLIENT PRIVILEGED COMMUNICATION: 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.