As a leading name when it comes to real estate and business law services in Florida, we are well-versed in the related legalities. This is the second in a series of articles by our experts that attempt to simplify and make sense of the FR/BAR contract. In this article, we will analyze paragraph 8, the financing section, from a seller’s perspective. In the last issue, we covered the financing section, from a buyer’s perspective.
The financing section is the most confusing section in the entire contract—and, not surprisingly, it leads to the most problems. The contract drafters seem to rewrite this section every few years, and with each new version, old ambiguities and problems are solved, and new ones are inevitably created. The result is that paragraph 8 is poorly and confusingly drafted.
The buyer creates a loan contingency by checking box 8(b). The buyer then fills in the blanks specifying the loan terms. If the buyer writes “market” or “prevailing” in the blanks, or leaves them blank, then theoretically, if the buyer only qualifies for a bad loan, then he cannot cancel the contract based upon the loan terms.
The loan application date is also critical—it is the date by which the buyer must apply for financing. If the buyer does not timely apply for a loan, then the seller may be able to hold him in default.
The most important date in the entire paragraph is the loan approval date. This is the date by which the buyer must get a loan or cancel the contract. Several things can happen on or before this date, and not a day later:
The buyer does not get the loan. If this is the case, then the buyer can either cancel the contract in writing and get its deposit back, or waive the loan contingency in writing. In the latter case, he can still get a loan for the property, but he would not be able to cancel the contract if his loan falls through. If the buyer does not get the loan, nothing in the contract requires him to send the seller an actual denial letter issued from his lender. All the buyer is required to do is send his own written notice of loan denial. Some sellers get upset about buyers canceling the deal and will try to allege that the buyer did not try hard enough to get the loan. But that is very tough to prove, and most sellers are better off just letting the buyer out of the deal so they can go and sell the property to someone who is actually qualified to buy it. The buyer need not wait until the loan approval date to cancel the contract—if he has diligently tried to get loan approval but fails, then he can cancel earlier.
The buyer gets the loan. In this case, the buyer must notify the seller in writing that he has gotten loan approval. That is it. This notice to the seller must be in writing, but the loan approval itself need not be in writing. Even if the notice from the lender is in writing, the buyer is not required to send the actual written loan approval letter to the seller. Indeed, the buyer should never send the actual approval letter to the seller—doing so will likely just lead to confusion and disagreements. Once the buyer notifies the seller that he has gotten loan approval, then his deposit is non refundable if the lender ultimately does not fund (unless one of three uncommon things happen—the property does not appraise, the property-related conditions of the loan approval are not met, or the seller defaults).
The buyer does nothing. Only a foolish buyer just does nothing. If a buyer fails to notify the seller of anything and instead, lets the loan contingency date pass, then the power shifts to the seller: Now the seller, not the buyer, may cancel the contract–but the seller must do so within 3 days after the date of the loan contingency expiration. In the said case, the seller must return the buyer’s deposit. So the seller has a big decision to make quickly: Once those 3 days pass, his cancellation rights are extinguished. If, however, the seller does not cancel within the 3 days, then the contract continues as if loan approval has been obtained by the buyer. In other words, the buyer is obligated to close, but if his lender does not fund at closing, then the buyer can be held in default of the contract and his deposit will be at risk.
Request a written extension. Sometimes the best option is the 4th option, which is not specifically listed in the financing paragraph but applies to any and all terms of the contract: If the buyer cannot obtain loan approval before the expiration of loan approval date, then the buyer may ask the seller for a written and signed extension to the loan approval period—before it expires. This extension absolutely must be in writing and signed by the buyer and seller. Emails and phone calls will not suffice. The seller is not required to give the buyer more time, and the seller absolutely may refuse. Some sellers may ask for something in exchange for the additional time, such as an additional deposit, or even a nonrefundable fee to be paid to the seller immediately. Regardless, the seller may decide that giving the buyer additional time is better than starting all over again with a new buyer.
Finally, a word to the wise: All sellers should watch out for the bogus “cash” deal which is really a loan deal in disguise. The buyer is supposed to check the box on line 8(a) if they are paying cash. But this subparagraph clearly states that the buyer “may obtain a loan for any part of the Purchase Price for the Property.” Now that is nothing short of ridiculous. The buyer is either paying cash or getting a loan—there should be no in between. The fact that this subparagraph goes on to say that there is still no loan contingency is of little consolation. Some unscrupulous buyers and their agents check box 8(a) to masquerade their offer as a cash deal when they fact they fully intend to get a loan. Sometimes they get the loan, sometimes they don’t. If they do, then the deal closes. But if they don’t, then they may ask the seller for more time to close, which can put the seller in a difficult situation—either give the buyer more time or start over with a new buyer. If the seller refuses to extend the closing, then these buyers may be willing to walk on their deposit—especially if it is $5,000 or less, which it frequently is in such circumstances. The solution? Before accepting a “cash” offer, the seller should require the buyer to provide proof of liquid cash in the bank – not money in the stock market, not money in a retirement account, not money that uncle Clarence has promised.
Ned Hale is a Florida Bar Board Certified Real Estate Attorney with over 20 years of experience. He has offices in Estero, Fort Myers, and Sanibel, having experts to deal with business law services as well.