REMOVE THE FINANCING CONTINGENCY? NOT ON MY WATCH!

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REMOVE THE FINANCING CONTINGENCY? NOT ON MY WATCH!

Bob Harris gives some good advice to home buyers considering buying distressed property. However, when it comes to removing the financing contingency in an offer, buyers need to understand the risks.

WHAT IS THE JOB OF A BUYER'S AGENT?? We are engaged to help home buyers "find the house"?? Of course, but so much more. When preparing a Contract of Sale, home buyers often rely on the advice of the agent about the meaning of the paragraphs in the Contract. Agents MUST be careful and give the buyer the agent's best advice to protect the buyer. Experienced agents learn through experience that what may appear simple in contract language may put the home buyer at risk.

THINK TWICE ABOUT THE FINANCING CONTINGENCY. The Financing Contingency is a paragraph in most Contract of Sale forms in the U.S. I have learned from experience to never, never, never advise a buyer to remove a financing contingency.

THE SELLER PREFERS OFFERS WITHOUT A FINANCING CONTINGENCY. It's fairly routine these days for for banks, sellers and listing agents to expect that the financing contingency in a Contract of Sale will be removed as satisfied once the home buyer has been fully APPROVED for financing. RISKY, RISKY.

APPROVED What does that mean??

The buyer has a letter that says the buyer is "Pre-Approved". Based on this letter, the agent advises the buyer to write the Contract of Sale without a financing contingency. The agent knows that the absence of the financing contingency will make the offer more appealing to the seller. However, this is very risky advice. It puts the buyer's earnest money at risk.

Pre-Approval letters have "conditions" that protect the lender. Most pre-approval letters have contingencies, conditions or disclaimers sufficient to protect the lender if the loan is not finally committed or funded and settlement doesn't take place.

If the lender's Pre-Approval letter includes contingencies that protect the lender, why would a buyer remove the financing contingency that protect the buyer?

"BUT LENN, IF THE LOAN IS PRE-APPROVED, DON'T WE KNOW THAT IT WILL CLOSE???" NO, NO, NO, you do not. What are some of the conditions that would prevent a loan from closing?

Change in the buyers financial profile through conditions totally out of the buyer's control, such as:

family tragedy
loss of job
reduction in income
reduction in credit score
loss of co-borrower
low appraisal
underwriter refuses to approve
underwriter requires supporting appraisal
lender doesn't provide FIRM COMMITMENT timely
home inspection reveals serious defects without a home inspection contingency
lender requires document(s) that borrower cannot locate timely

HOW IS THE BUYER AT RISK WITHOUT THE FINANCING CONTINGENCY? Once a property is Under Contract with no contingencies:

THE LISTING AGENT IS LIKELY TO:

cease to market the property for sale
cease advertising the property for sale
change the status in the MLS to something other than ACTIVE
remove the key access or combo access to the property

THE SELLER IS LIKELY TO:

make moving preparation
accept another job out of the area
remove the property for sale from the market
cease to show the property to prospective home buyers
make financial commitment on another property

I'm not an attorney and I'm not giving legal advice. I don't have to be. Seems to me that if an agent is giving advice to a buyer/borrower about whether or not to remove the financing contingency, they need to think carefully about the risks to the buyer of that advice.

WHAT DOES THE FINANCING CONTINGENCY MEAN TO THE SELLER? IT ISN'T OVER TILL IT'S OVER. If the home buyer defaults, meaning doesn't close, the seller has lost opportunity to sell and may have incurred DAMAGES. The contract clearly puts the home buyer's EARNEST MONEY DEPOSIT at risk if the contract of sale doesn't close FOR ANY REASON if there is no FINANCING CONTINGENCY to protect the buyer/borrower.

RISKY ADVICE!

Agent and Buyers

"Since you've been pre-approved, you don't need the Financing Contingency."

AGENTS AND BROKERS SHOULD PRACTICE "RISK AVERSE" REAL ESTATE BROKERAGE. Contingencies in contracts are there to protect one party or another. The financing contingency protects the home buyer from the loss of their earnest money deposit in case the sale doesn't close as a result of the inability of the buyer to obtain financing.

Courtesy, Lenn Harley, Broker, Homefinders.com, 800-711-7988, Serving home buyers in Maryland and Northern Virginia.

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Posted by Lenn Harley, Real Estate Broker, Virginia & Maryland on 01/24/2010 08:29 AM

Comments (43)

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43 Comments on REMOVE THE FINANCING CONTINGENCY? NOT ON MY WATCH!

JAN

2010

Very good information for home buyers and investors as well. Best wishes for continued success!

Leann,

I have had arguments with selling agents on removing the financing contingency. I will not do it. You are correct, anything can happen and in Real Estate transactions it usually does.

Lenn, this is an excellent post and oh so true. The only time we ever remove the contingency is with a cash buyer. And, then we use other contingencies to protect the buyer.

It isn't closed until the key is handed over and the loan has been funded. Smart advice here.

"Since you've been pre-approved, you don't need the Financing Contingency."

You could win a free costly trip to court with that line. Yikes!

Lenn,

You laid it out so there is no misunderstanding..for the protection of the buyer leave the financing contingency in the contract. You are right "it isn't over till it's over"..so it protects the seller also.

Leann,

The advise in general is good. There is nothing wrong in educating illinformed agents and or the general public. However while I am representing a Seller if a Buyer's agent and there Buyer want to remove all contingencies including financing that is just fine for me. The stronger position that I can place my Seller in is the goal. Fact is why not ask the Buyer's agent to remove that contingency during the transaction.

Gary. Thanks. I agree, even when it's funded, if the buyer loses a co-buyer they could lose everything. I never, never, . . . . . . . .

Gabe. You better believe you need to protect a cash buyer. I've removed the financing contingency two times over the years. Both were cash buyers and the full closing amount was in the hands of the closing attorney's escrow account. Of couse, I held the earnest money so that was the only amount at risk.

Diane. Smart agent. Very, very smart agent.

Roy. Thanks. I surely hope so.

Judy. YOU ARE SMARTER THAN THE AVERAGE BEAR.

Dorie. Removing the financing contingency for the buyer is like removing the paragraph whereby the seller has a period to remove liens on a title after the settlement date. Those abstracts have a way of turning up serious barriers to sale.

Herb. You sly smart old (no offence) listing agent you! Of course, you would.

The listing agent always would.

However, if I have shown my buyers qualifications, sellers have always accepted our buyers with the financing contingency. We have, however, had several buyers who, through no fault of their own, could not close and the financing contingency protecting them.

Lenn,

I agree 100%. It's so critical and now more than ever that the buyers have that protection. The world has certainly changed the last few years and I am no more willing to risk their earnest money today than I was then.

All the best, Michelle

Lenn,

As a buyers agent I find so few listing agents even keep track of the date the put in the contract for the financing commitment.

When I list a property I do call them on that day and usually I just get a bunch of squirming.

Rich

Michelle. Good for you. Never let your guard down.

Richard. HA! So do I. I'm also ALL OVER the buyer's lender to get that FIRM COMMITTMENT by the date in the contract. I usually have to rant and rave (nicely, of course, because I'm always nice) to get them to provide it.

Lenders do NOT like to provide LOAN COMMITTMENT docs.

Lynn, great information. And I make sure I protect my buyers money also. It ain't a sure thing until it's closed!

Lenn- You are soooooooooooooo correct and spot on. You never know what is around the next bend. And there is a reason for the PRE in pre approval. It is NOT an approval.

Lenn: I would never advise a buyer to go without a financing contingency when there is a loan to be made. You never know what will come up at the last minute.

Lenn - My clients always ask me when they can be sure that their sale is absolutely going though. I tell them that there are no absolutes, just higher and higher degrees of probability right up until closing. Even if you removed the financing contingency, the fact is that if the buyer truly needs a mortgage to buy the seller's property, the closing isn't going to occur. The escrow money softens the blow, but the failure to close may require the home to go back on the market in the dead of winter, vacant with no furnishings, and now the seller has to pay for two mortgages having already bought and moved into their new home on the belief that a "contingency free" contract means a closing will occur.

Gail. I agree completely. That's why the risk for the buyers is more than the earnest money. Sellers can sue for damages and they can usually prevail. Further, agents and buyers who rely on the financing contingency to "get out" are risking litigation.

Chris. Absolutely. Agents have to consider the risks to the buyer as well as the thrill of getting a contract.

Dick and Dixie. Right you are. It is not an APPROVAL and certainly is not a LOAN COMMITTMENT.

Lisa. You bet!

I am with you here for all the reasons mentioned above. I have never given a buyer advice to remove the financing contingency.

I would never write an offer without a financing contingency unless of course it was a cash sale and I have seen the proof of cash. Stuff happens all the time and a pre approval does not mean something won't go wrong.

Bill. It makes no sense. Of course, there is no financing contingency in new home contracts.

Paddy. I don't even advise it with cash buyers. Suppose there are co-borrowers and one loses their job 2 days prior to settlement? Mmmmmmm.

Lenn- a few years ago in Georgia the finance contingency was taken out of the actual 7 page sales agreement and we have to add it as an attachment. Many agents don't because they use the due diligence clause and figure the financing will be approved by the 14 or 21 day due diligence period. I think that's nuts. I always make it part of the contract for my clients seeking a loan and give them at least 28 days. With all the new disclosure stuff I may even extend my recommendation period based on what my lenders tell me. Had a long talk with my favorite loan officer yesterday about new changes in disclosure rules and GFE. But I certainly feel it's my job to protect my clients and of course to see to it that all my agents do as well.

Tammy. YOU BET IT IS.

Due dilligence and financing contingency are two completely different matters.

Do they omit the appraisal contingency too?????

GUYS, THANKS FOR THE REBLOGS.

Gabe Sanders, Stuart Florida Real Estate (Premier Realty Group)

Barbara Martino-Sliva, Vero Beach Real Estate, Homes for Sale (Treasure Coast Sotheby's International Realty)

Roy Kelley (RE/MAX Realty Group)

Lenn - 100% with you. A couple of month ago my client (buyer) walked away from a contract due to the appraisal. The appraisal was right on the money, but low and behold the lender said it was a faulty appraisal and therefore would not allow to go with the financing for my buyer unless my buyer would come up with the extra cash.

Lenn, My attitude is "it's either going to close or it's not". In my area escrow deposits are normally very small and are held by title companies. They can't be released unless both parties agree who gets it.

My sellers know upfront that the chances of them getting the deposit from a buyer that defaults is slim to none. It's just not practical to sue someone over a $2,500 deposit.

So....we try to find the most qualified buyer. It really doesn't matter whether or not they have a financing contingency. We just want to close the deal.

I do however make sure that time lines are within reason and are strictly enforced.

Purchasing real estate in California has to involve the most paperwork of any other state in the country. You could destroy a forest. And in terms of contingencies, there is absolutely no way a realtor can advise their client to remove the loan or appraisal contingencies which are standard for 17 days in our forms. Even 17 days is not long enough in many cases and this has to be extended. No realtor worth his or her salt will allow their buyer to remove the loan contingency until after the lender has guaranteed the loan and is on the hook for it if something were to go wrong at the last minute.

You know Lenn the more I think about it the more I think you are right. Even with cash deal there should be the financing contingency just in case. Thanks.

Lenn,

The pre-approval letter is a good first step to show the seller that the buyer is capable of closing on the deal. But, as you say, so many events out of the buyer's control can change his mortgage application before closing and nix everything, therefore he needs to be protected. Absolutely.

JAN

2010

Esko. Thanks. Indeed, the financing contingency protects the buyer. No other reason is needed.

Paddy. I could list many potential causes of failure of a cash deal. You just don't know what you don't know.

Jane. How does a lender ever get "on the hook". They can withdraw approval at the last minute with absolutely no accounting or penalty.

Bryant. The question is, would you, as a buyer's agent advise a buyer to remove the financing contingency.

Petra. There you go!!!! Lenders, because they are not always forthcoming about the real reason for withdrawal of a loan approval, often use the appraisal as a fallback. That's just the way things are. However, with no financing contingency, the buyer would lose their earnest money with no protection. The seller has been damaged. The buyer will pay.

Lenn, it was amazing to me here in NY that few contracts in our area included a finance contingency...UNTIL loans were being denied. Once the screaming started, they began to appear- wonder how this could happen when buyers always have both a real estate agent, AND a lawyer? Add a typical 10% down requirement (and no contingencies) and it certainly seemed pretty remiss on the part of the buyers lawyers...

Laurie. Indeed. Makes one wonder about the value in having an agent AND a lawyer.

I love real estate agents in my area, AGENTS RULE.

I guess it would depend. In my market cash is king. If my buyer was fully qualifed and I knew the appraisal would be OK then possibly if it would help them get the property they wanted. All they would be risking is usually a$1,000 deposit. But it wouldn't be a standard of practice.

Unless its a CASH deal - they need the Finance contingency! Especially these days with lenders changing the rules on a daily basis.

JAN

2010

James.

One would think that it would be safe if it's a cash deal. However, WHO IS HOLDING THE CASH????

Cash buyers are notorious for changing their minds at the last minute. They believe that they can just cancel and get their earnest money back.

FEB

2010

Hi, Lenn. This advice is platinum plated! WHY wasn't this post featured??

I had a closing nearly tank this past week....JUST AS YOU SAID. The offer was submitted with an approval letter and the contingency that the appraisal price equal the purchase was released. At the last minute, the underwrite declined to accept the property because it is a "cabarn" (cabin/barn combination, usually an efficiency apartment with a couple of stalls attached, favored by weekend riders). That is exactly the buyer's purpose in purchasing it but the square footage would not make it an appealing prospect on the secondary market, therefore....

Victory was snatched from the jaws of defeat but there were a few hard lessons there that, thankfully, no one had to learn!

Leslie. Do you now believe that I don't get many features??? It's a fact. But, I have subscribers, so I toil on.

I never, never, never remove either the financing contingency or the appraisal contingency.

I see nothing in it for the buyer. All it does is put them at risk.

I've seen lenders withdraw Firm Commitments. I've seen underwriters ask for second appraisals after the contingency has been removed.

If the seller doesn't like it, that's just too bad. They took the contract. Listing agents just e-mail me or call very cavelierly letting me know that the contingency can be removed now that we have an appraisal or a firm loan commitment. They think I was born yesterday.

Lenn - You think like a realist but unfortunately not many people do. I had an attorney take it one step further once and tell the seller to NOT buy until they actually closed on the home they were selling for all the reasons you mentioned above. What if the buyer dies ....and you don't close ....and you were relying on the proceeds to purchase your new home. Consequently the attorney put the fear of God in them and they ended up going into temp housing - 2 small kids and she was pregnant too. Yikes. I felt sorry for them but the attorney shrugged and said that he is a realist. And, they were NOT risk takers by any means.

FEB

2010

Carol. If there are contingencies to protect the buyer, nothing wrong with buying before the closing on the first homes takes place. There MUST be a "sale of home" contingency. If the seller wouldn't accept the contract without that contingency, the buyers would be at risk. I would agree with the attornty. Further, new home builders, if they take a contract with a "sale of home" contingency, usually limit the time to sell and close and won't even begin construction until the buyer's existing home has closed. Temporary housing is quite often the only solution. Buyers who expect a seamless one time move are being unrealistic.

I like this and since you have made it available... will reblog it. Thank you!

FEB

2010

Lenn- Since I don't work with buyers I have the listing agent's perspective on this. But if I were working with buyers and we of course review our buyer agents contracts- we would make sure the financing contingency is in the contract if they are getting financing. There is just too much that can happen before closing.

Katerina. Indeed, a lot can happen before closing. We do not, however, abuse the financing contingency.

Georgina. Thanks. I love the reblog.

MAR

2010

This is great advice. I am dealing with this right now. We were supposed to be closed about a month ago. The lender keeps needing extensions. Finally the seller denied our request for an extension last week and sent us a contract release indicating they are keeping the earnest money deposit. The financing contingency has not been removed because the seller never asked us to remove it so we at least have that leg to stand on to argue for the return of the deposit.

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Lenn Harley, Real Estate Broker, Virginia & Maryland

Leesburg, VA

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Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate

Address: Lovettsville, Fairfax, Arlington, Alexandria, Stafford, Woodbridge, King George, Fredericksburg, Leesburg in VA., Rockville, Laurel, Columbia, Baltimore, Waldorf, Frederick, Eastern Shore, Bowie, Harford, Annapolis in MD. , Maryland, Virginia

Office Phone: (800) 711-7988

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Maryland and Virginia real estate agents and brokers serving buyers and sellers with experience. Search listings in Maryland and Northern Virginia and get daily updates of new homes for sale by e-mail. Contact Lenn for a tour of homes. REALTORS available every day for home tours. Homefinders network of experienced agents and brokers includes new home specialists, resale specialists and luxury home experts. We can help you with your home buying needs. Homefinders offers discounted 5% listings for Maryland, Northern Virginia home owners. Experienced agents helping buyers and sellers in the Washington Metro area since 1985.

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