Much like the characters in the 1998 movie The Big Lebowski, sellers want to know that buyers have the financing or funds available for a transaction to successfully close. The WRA Legal Hotline frequently receives questions about financing and what to do when financing problems appear during a transaction. The following discusses various scenarios involving financing.
Financing acceptable to the buyer
The seller accepted an offer with a conventional loan. The listing agent then received a call from an FHA appraiser saying an FHA appraisal must be done on the property. The seller chose the offer because she did not want to deal with an FHA appraisal. Can the buyer switch from a conventional loan to an FHA loan after the offer is accepted?
A buyer is allowed to obtain financing that is acceptable to the buyer. Lines 270-271 of the WB-11 Residential Offer to Purchase provide the following:
If Buyer qualifies for the loan described in this Offer or another loan acceptable to Buyer, Buyer agrees to deliver to Seller a copy of a written loan commitment.
Further, the seller agrees to allow the buyer’s appraiser reasonable access to the property to satisfy contingencies in the offer. If the buyer’s lender requires an FHA appraisal to be done, then the FHA appraiser would need access to the property to satisfy the Financing Commitment Contingency. Lines 258-259 of the WB-11 Residential Offer to Purchase state the following:
Seller agrees to allow lender’s appraiser access to the Property.
If the seller does not allow access to the appraiser, the seller may be in breach of the contract. The seller may wish to review the default provision of the WB-11 Residential Offer to Purchase on lines 487-506.
According to the Default provisions of the offer, the parties have a duty of good faith and due diligence to meet the terms of the offer. See lines 487-489 of the WB-11 Residential Offer:
Seller and Buyer each have the legal duty to use good faith and due diligence in completing the terms and conditions of this Offer. A material failure to perform any obligation under this Offer is a default that may subject the defaulting party to liability for damages or other legal remedies.
For further discussion about the FHA appraisal, see “FHA Loan Commitment? The Offer Said Conventional Financing,” from the February 2021 issue of Wisconsin Real Estate Magazine at www.wra.org/WREM/Feb21/FHALoan.
No financing commitment contingency
The seller accepted an offer that did not include a financing contingency or an appraisal contingency. The buyer attached a financial statement and a pre-approval letter to the offer. The listing agent was told that it was a cash offer, but the buyer might end up pursuing a loan. The buyer’s lender contacted the listing agent to schedule an appraisal. If the offer was a cash offer with no appraisal contingency, does the seller have to allow the appraiser to conduct an appraisal of the property?
The licensees should review lines 296-307 of the WB-11 Residential Offer to Purchase that apply when the Financing Commitment Contingency is not marked or marked “N/A” at line 248, per line 247.
When an offer is not contingent on financing, the buyer still has a right to get financing, if they so choose, and the seller has already agreed to allow access to an appraiser in the “If This Offer Is Not Contingent On Financing Commitment” provision of the WB-11 Residential Offer to Purchase. Lines 304-307 of the WB-11 Residential Offer to Purchase provide the following:
Seller agrees to allow Buyer’s appraiser access to the Property for purposes of an appraisal. Buyer understands and agrees that this Offer is not subject to the appraisal meeting any particular value, unless this Offer is subject to an appraisal contingency, nor does the right of access for an appraisal constitute a financing commitment contingency.
This does not mean, however, that there is an Appraisal Contingency. The box on line 308 of the WB-11 Residential Offer to Purchase would need to be checked to include the Appraisal Contingency.
The “If This Offer Is Not Contingent On Financing Commitment” provisions of the offer at lines 296-307 provide that “within ___ 7 days of acceptance (default is 7 days),” a financial institution or third party in control of the buyer’s funds shall provide the seller with reasonable written verification that the buyer has, at the time of verification, sufficient funds to close.
Unless the contract is modified, the elements of a proper proof of funds can be broken down into a few distinct elements. First is the party who can provide the documentation: either a financial institution or third party. Second, the financial institution or third party is to be in control of the buyer’s funds at the time of verification. In addition, the verification must indicate the buyer has enough funds to close the transaction at the time of the verification, which is not what a loan approval typically states. Depending on the content of the approval, the described elements or conditions contained in the offer would not appear to be met.
See the discussion of the “If This Offer Is Not Contingent On Financing Commitment” provisions on pages 3-4 of the October 2019 Legal Update, “WB-11 Residential Offer to Purchase — 2020 Edition — Part II” at www.wra.org/LU1910.
Land contracts
The broker has a listing with a client and now the buyer and seller want to do a land contract. Does the broker draft the land contract using the offer to purchase with the land contract rider attached?
The land contract is a vehicle for seller financing. It is not an offer to purchase. The offer to purchase is the preliminary contract. When writing the offer, it should be contingent on the seller agreeing to finance with a land contract and the financing contingency would not be used. The offer may be used and can include a land contract rider for the terms of the land contract that will be drafted by the title company or an attorney. The land contract rider, which is the WRA-LCR form, spells out the terms the buyer wants in the land contract and may raise additional details the parties have not yet considered. Whether the broker drafts the land contract or refers it to an attorney is a judgment call for the broker to make. Additionally, the broker will want to review the firm’s errors and omission insurance policy to see if it covers the broker drafting land contracts.
See the July 2008 Legal Update, “Using Land Contracts and Leases with Options,” at www.wra.org/LU0807 for further discussion and drafting tips. The January 2001 Legal Update, “Land Contract Financing,” at www.wra.org/LU0101, is also a very useful resource regarding land contract financing and drafting. The broker may wish to review the financing contingencies for seller financing in the Wisconsin Real Estate Clauses Manual.
A property owner has an existing mortgage on a property but was approached by a potential buyer about purchasing the property on a land contract. The current lender informed the owner that it would not permit the property to be sold on a land contract because of the existing mortgage. Is this typical of all mortgages?
It depends on the mortgage and the lender. Many, but not all, mortgages have what is called a “due on sale” clause, which means any transfer of the property, whether by a traditional sale or sale on a land contract, would trigger the remaining mortgage amount to become due immediately.
The property owner could consult with various lenders to see if any of them offer loans that do not contain “due on sale” clauses and whether the financing could be transferred to one of those lenders. Then the property could be sold on a land contract. Loans without “due on sale” clauses are not common, but sometimes government-backed financing such as FHA, VA or USDA loans can be made without “due on sale” clauses. Those loans, however, are typically only available for residential property used as a primary residence.
Side agreements
The buyer has an accepted offer on a property that has two parcels. Both parcels are included in the offer. The buyer’s lender does not allow financing for two parcels and has asked the buyer to remove the second parcel from the offer. The appraisal did not include the second parcel. The buyer’s agent suggests that the buyer amend the offer to remove the second parcel and complete a separate purchase agreement for the second parcel to be sold for $0-25. The buyer has agreed to pay costs associated with the second deed. The listing broker has declined, stating that an auditor may flag the transaction due to the low sales price of the second parcel. Does the sales price of the second parcel matter if the seller and buyer agree to the low price?
Selling the second parcel for $0-25 when the second parcel may have a higher value may be considered mortgage fraud. An amendment to purchase the second parcel when the lender does not allow financing for two parcels could be considered to falsely portray an interest in real estate. A licensee cannot participate in an act of fraud under Wis. Admin. Code § REEB 24.085, which reads:
False portrayal of interest, prohibited. No licensee shall draft or use any document which the licensee knows falsely portrays an interest in real estate.
In addition, a licensee may be required to make disclosures to the secured lender per Wis. Admin. Code § REEB 24.07(4):
DISCLOSURE OF SIDE AGREEMENTS. A licensee, when engaging in real estate practice, who becomes aware of the fact that a party to the transaction has not disclosed that party’s entire agreement regarding the transaction to that party’s secured lender, shall disclose this fact, in writing and in a timely manner, to the party’s secured lender.
Lender requirements
The transaction is set to close in a week, and the buyer is financing with a VA loan. A termite inspection was conducted in accordance with the terms of the VA loan. The lender is requiring the termite inspection report to be signed by both the buyer and the seller. The listing agent has stated that he is not going to have his seller sign the report because the listing agent believes the seller is not required to sign it. The buyer’s agent believes that the seller has not received the termite inspection report from the listing agent. Does the listing agent have to present the termite inspection report to the seller? Does the seller have to sign the termite inspection report?
If the lender is requiring both the buyer and the seller to sign the termite inspection report, the transaction may have problems closing if both parties do not sign.
Arguably, the listing agent has a duty to show the termite inspection report to the seller and inform the seller that the buyer’s lender requires written confirmation on the termite inspection report. The listing agent should inform the seller that there may be problems with closing if the seller does not sign. This may constitute information material to the transaction that is not known or reasonably discoverable by the seller and thus requires licensee disclosure, per Wis. Stat. § 452.133(2)(b).
The buyer’s agent may discuss with her supervising broker whether to contact the seller directly about the termite inspection and lender requirement, if they believe that the circumstances reasonably compel direct negotiation with the seller, per Wis. Admin. Code § REEB 24.13(5).
Wis. Admin. Code § REEB 24.13(5) provides the following:
A licensee may not negotiate a sale or lease of real estate directly with a party if the licensee knows that the party has an unexpired written contract in connection with the real estate that grants to another licensee an exclusive right to sell, lease, or negotiate. All negotiations shall be conducted with the firm holding the exclusive right to sell, lease, or negotiate, and not with the party, except with the consent of the firm or where the absence of the firm, or other similar circumstances, reasonably compels direct negotiation with the party. A listing firm has no duty to investigate whether a buyer has granted a buyer’s agent an exclusive right to negotiate.