Q: We represent a seller who has agreed to credit buyer “$20,000 for non-recurring and recurring closing costs.” We now have a dispute over what is covered. Buyer wants seller to pay for prepaid interest and prepaid property taxes required by the lender, which seller disputes. Buyer also wants seller to pre-pay HOA dues for six months after COE, a home warranty (not mentioned in the purchase agreement) and a move-in fee that the HOA charges buyers when they move into the unit; all of which my seller does not believe should be his obligation. What is the definition of Non-Recurring and Recurring Closing Costs?
A. Unfortunately, there is no one place you can look to find a definition of recurring and non-recurring closing costs. If a court were involved in making such a decision, it would rely on expert testimony from experienced escrow officers as to the standard of practice with regard to this issue. Escrow companies generally will state:
Non-Recurring Closing Costs (“NRCC”): These are items that are charged only once and are REQUIRED by either the contract, lender, HOA, title and/or escrow company.
Recurring Closing Costs (“RCC”): Any item REQUIRED to be paid through escrow that would be a recurring type charge. This would include any prorations that are a charge (debit) to buyer, any fees that lender requires to be pre-paid, etc.
With respect to the items that the seller disputes, if the buyer’s lender requires prepaid interest and prepaid taxes, that would be a legitimate RCC. A move-in charge required by the HOA would be a legitimate NRCC.
Charges for HOA monthly dues for a period of time after the COE would not be a REQUIRED RCC unless for some reason the HOA is requiring that payment at COE. An optional home warranty that buyer wants — but did not specify as a seller obligation to pay for in the Purchase Agreement — this would not be a legitimate NRCC.
Regardless of whether any of the requested credits fall within the definition of a NRCC or RCC, the total amount of credits paid to buyer from any source, must not exceed the lender’s limit on credits. A reminder of that federal lending requirement is in Paragraph 3J (5) of the C.A.R. Purchase Agreement (and will be in the “soon to be released” 2018 PRDS® Contract). Thus, if the amount that the lender will allow for buyer credits is below the amount of credits requested in the Purchase Agreement, then the lender’s limit controls the amount of credits.
PRACTICE TIPS
1. If you are going to make closing costs a credit in a transaction, it would be best to identify whether you are including NRCC, RCC or both.
2. It would also be best to specify that the closing costs are those REQUIRED to be paid, e.g., “Seller shall credit up to $20,000 to buyer for NRCC required to be paid at close of escrow.”
3. LISTING AGENTS: It is also wise to state that seller will credit “up to” a specific amount or the actual required closing costs whichever amount is less. For example: Seller shall credit Buyer up to $20,000 for Non-Recurring Closing Costs (“NRCC”) or the actual amount of required closing costs, whichever is less.
4. Regardless of who you represent: Before any agreement is reached on credits to Buyer for any issue, the best practice is to determine the maximum amount of credits that the Buyer’s lender will allow since the Parties cannot agree to an amount which exceeds the lender’s limits (whether paid in or outside of escrow).
This Weekly Practice Tip an attorney client privileged document and 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 2018 Broker Risk Management 09/21/18