REMOVE THE FINANCING CONTINGENCY? NOT ON MY WATCH!

By
Real Estate Agent with Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate 303829;0225082372
http://activerain.com/droplet/4YSW

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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Re-Blogged 6 times:

Re-Blogged By Re-Blogged At
  1. Roy Kelley 01/24/2010 12:36 AM
  2. Barbara Martino-Sliva, Top Producer 01/24/2010 12:40 AM
  3. Gabe Sanders 01/24/2010 12:46 AM
  4. Esko Kiuru 01/24/2010 03:42 PM
  5. C. Lloyd McKenzie 01/25/2010 04:22 PM
  6. Georgie Hunter R(S) 58089 02/02/2010 12:11 PM
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland
Rainmaker
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Petra Norris
Lakeland Real Estate Group, Inc. - Lakeland, FL
Realtor, Lakeland FL Homes for Sale

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.

Jan 24, 2010 09:50 AM #25
Rainmaker
1,139,177
Bryant Tutas
Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL
Selling Florida one home at a time

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.

Jan 24, 2010 10:27 AM #26
Rainmaker
1,128,109
Jane Peters
Home Jane Realty - Los Angeles, CA
Connecting you to the L.A. real estate market

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.

Jan 24, 2010 10:33 AM #27
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Paddy (Patricia) Pizappi
Better Homes and Gardens Rand Realty - Pine Bush, NY
Real Estate Associate Broker Hudson Valley NY

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.

Jan 24, 2010 11:31 AM #28
Rainmaker
325,715
Esko Kiuru
Bethesda, MD

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 24, 2010 03:38 PM #29
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

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. 

Jan 24, 2010 08:30 PM #30
Rainmaker
224,121
Laurie Mindnich
Centennial, CO

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...

Jan 24, 2010 10:42 PM #31
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

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.

 

Jan 24, 2010 10:48 PM #32
Rainmaker
1,139,177
Bryant Tutas
Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL
Selling Florida one home at a time

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.

Jan 25, 2010 10:05 AM #33
Rainmaker
316,051
James Downing - Metro DC Houses Team REALTORS®, CRS, GRI, ABR,MRP, MilRes
Real Living | At Home - Washington, DC
When Looking to Buy or Sell - Make the Right Move

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

Jan 25, 2010 02:00 PM #34
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

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. 

Jan 25, 2010 07:36 PM #35
Rainer
288,226
Leslie Helm
Tennessee Recreational Properties - Jamestown, TN
Real Estate For Trail Riders

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!

 

Feb 01, 2010 07:12 AM #36
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

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.

Feb 01, 2010 09:29 AM #37
Rainmaker
314,091
Carol Culkin
Reece & Nichols - Leawood, KS
Overland Park

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 01, 2010 03:21 PM #38
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

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.

 

Feb 01, 2010 09:47 PM #39
Rainmaker
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Georgie Hunter R(S) 58089
Hawai'i Life Real Estate Brokers - Haiku, HI
Maui Real Estate sales and lifestyle info

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

Feb 02, 2010 12:08 PM #40
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Katerina Gasset
Get It Done For Me Virtual Services - Wellington, FL
Get It Done For Me Virtual Services

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. 

Feb 02, 2010 06:10 PM #41
Ambassador
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

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

Georgina.  Thanks.  I love the reblog.

Feb 02, 2010 08:56 PM #42
Rainmaker
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Dr. Stacey-Ann Baugh
Century 21 New Millennium - Upper Marlboro, MD
A doctor who makes house calls.

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. 

Mar 10, 2010 09:38 AM #43
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