Check-a-box Challenge - Appraisal and Financing Contingencies
The New Regional Sales Contract is intended to be more flexible than the 1999 Regional Sales Contract it replaces, making it possible to deal with a variety of different situations without requiring the real estate agent to mark-out sections and paragraphs or re-draft the pre-printed language. This is accomplished by providing check boxes at a number of critical decision points in the contract drafting process - particularly the decision to proceed with or without an appraisal and/or financing contingency.
Background
The New Sales contract replaces a contract that was written in 1999 and enshrined the experience and practice of real estate agents and professionals in the 1990s in a standard form. As many of you may remember, the real estate market in the 1990s was much different than the market we just experienced from 2001-2005. It was apparently inconceivable to the drafters of the 1999 contract that a purchaser would commit to purchase real estate without the benefit of a lenders approval contingency and the ability to renegotiate the price in the event of a low appraisal. The contract was written in such a way that it was impossible to remove those contingencies without significantly changing the standard form, or drafting an addendum to supersede the pre-printed language.
The so-called appraisal contingency, for instance, wasn't drafted as a contingency at all. Nowhere in the contract did you see the word contingent or contingency in the same sentence as appraisal. Instead, the paragraph on conventional financing contained a sub-paragraph laying out the process for negotiating the sales price in the event of a low appraisal. There was no way to waive the appraisal or financing contingency using the standard forms. Of course, in the hyper-competitive seller's market of the last 4-5 years, that didn't stop buyers from trying.
Zero Days and the Big X
Using the old contract, a buyer who wanted to convey to the seller that they were willing to proceed without the benefit of a financing contingency could do in a number of different ways, all of which lent themselves to potential future disagreements about what the intent of the parties was. One of the most common methods to demonstrate the strength of a purchasers offer was to write the contact with a Financing Contingency that gave the purchaser zero days to satisfy the contingency, and to tender some sort of approval letter from a lender with the offer. This was meant to indicate to the Seller that the financing contingency was being satisfied instantly upon contract ratification, since the financing contingency is satisfied upon the purchaser delivering an approval letter for the specified financing to the Seller.
The problem was, the definition of what constituted the Lender's Approval Letter was debatable and often misunderstood. Frequently the letter tendered with the contract was a 'pre-approval' letter and didn't make any reference to the financing specified in the sales contract. If the buyer could successfully argue that the letter was not the lender's letter, it meant they still had a financing contingency, because the zero day deadline didn't cause the financing contingency to expire. The contingency continued until the Seller made a written demand for a lender's letter that did indicate approval for the specified financing.
The other popular method of dispensing with the financing and in particular the appraisal contingency was simply to mark through the relevant language with a great big X . . . leaving the contract silent as to what happened in the event of a low appraisal or the purchaser's inability to secure the specified financing.
The Solution
Now Purchasers simply check a box to indicate whether they are proceeding with or without a financing contingency and with or without an appraisal contingency. If the box for no contingency is checked, the purchaser also acknowledges that they will be in default if they fail to close do the inability to secure the specified financing or due to a low appraisal.
Next Post:
Details of the Appraisal Contingency
Disclaimer
Background
The New Sales contract replaces a contract that was written in 1999 and enshrined the experience and practice of real estate agents and professionals in the 1990s in a standard form. As many of you may remember, the real estate market in the 1990s was much different than the market we just experienced from 2001-2005. It was apparently inconceivable to the drafters of the 1999 contract that a purchaser would commit to purchase real estate without the benefit of a lenders approval contingency and the ability to renegotiate the price in the event of a low appraisal. The contract was written in such a way that it was impossible to remove those contingencies without significantly changing the standard form, or drafting an addendum to supersede the pre-printed language.
The so-called appraisal contingency, for instance, wasn't drafted as a contingency at all. Nowhere in the contract did you see the word contingent or contingency in the same sentence as appraisal. Instead, the paragraph on conventional financing contained a sub-paragraph laying out the process for negotiating the sales price in the event of a low appraisal. There was no way to waive the appraisal or financing contingency using the standard forms. Of course, in the hyper-competitive seller's market of the last 4-5 years, that didn't stop buyers from trying.
Zero Days and the Big X
Using the old contract, a buyer who wanted to convey to the seller that they were willing to proceed without the benefit of a financing contingency could do in a number of different ways, all of which lent themselves to potential future disagreements about what the intent of the parties was. One of the most common methods to demonstrate the strength of a purchasers offer was to write the contact with a Financing Contingency that gave the purchaser zero days to satisfy the contingency, and to tender some sort of approval letter from a lender with the offer. This was meant to indicate to the Seller that the financing contingency was being satisfied instantly upon contract ratification, since the financing contingency is satisfied upon the purchaser delivering an approval letter for the specified financing to the Seller.
The problem was, the definition of what constituted the Lender's Approval Letter was debatable and often misunderstood. Frequently the letter tendered with the contract was a 'pre-approval' letter and didn't make any reference to the financing specified in the sales contract. If the buyer could successfully argue that the letter was not the lender's letter, it meant they still had a financing contingency, because the zero day deadline didn't cause the financing contingency to expire. The contingency continued until the Seller made a written demand for a lender's letter that did indicate approval for the specified financing.
The other popular method of dispensing with the financing and in particular the appraisal contingency was simply to mark through the relevant language with a great big X . . . leaving the contract silent as to what happened in the event of a low appraisal or the purchaser's inability to secure the specified financing.
The Solution
Now Purchasers simply check a box to indicate whether they are proceeding with or without a financing contingency and with or without an appraisal contingency. If the box for no contingency is checked, the purchaser also acknowledges that they will be in default if they fail to close do the inability to secure the specified financing or due to a low appraisal.
Next Post:
Details of the Appraisal Contingency
Disclaimer
posted by Marcus Simon at
7:07 AM
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