The Problem With Seller Concessions

THE PROBLEM WITH SELLER'S CONCESSIONS-

ATTORNEYS' REQUIREMENT TO DISCLOSE

On November 13, 2013 the NYS Bar Association issued Opinion 993 that discusses misrepresentations as to purchase price in residential real estate contracts and disclosure of "gross ups" in the sales contract.  The requirement to disclose a 'grossed up" real estate purchase price is triggered when the purchase price has been increased in connection with a seller's concession.  This opinion confirms that any attorney who fails to properly include the required language in a contract of sale and who intentionally conceals the concession from a HUD Settlement Statement will be subject to disciplinary action.

When the parties to a contract of sale agree to increase the purchase price to allow the purchaser to raise the amount borrowed on the mortgage or loan, attorneys and real estate professionals have encountered problems with various lenders concerning "significant delays, requests for modifications of contracts, including the striking out of the gross up text and outright rejection of the loan application."  These problems have arisen because when the contracts specifically disclose the existence of a seller's concession, the lending institutions consider this to be an "inducement to purchase" and will only lend on the amount of the purchase price less the seller's concession rather than based on the adjusted purchase price or the grossed up amount.

What the lawyer is required to disclose in the contract depends on the facts of the transaction. A lawyer shall not "engage in conduct involving dishonesty, fraud, deceit or misrepresentation."  The parties can agree on a purchase price and thereafter agree on an increase or gross up of the price in connection with the seller's concession. An attorney is required to disclose such a gross-up and insert language in the contract confirming same by stating, in essence, "The purchase price reflects an increase equal to the amount of the seller's concession."; however, when there has been no gross-up because the seller is actually bearing an economic cost reflected in the concession, the lawyer is under no obligation to assert that a gross-up has occurred.  This would apply in the case where the parties have agreed give the purchaser a credit at the time of closing to reimburse the purchaser for the cost of a repair.  In this case, the seller is actually bearing an economic cost reflected in the concession.

Many lending institutions now require that the seller's concession language be removed from the contract of sale in order for the underwriting department to approve the transaction but the NYS Bar Association has issued its decision that a lawyer who participates in the transaction is required to ensure that the grossing up of the price is disclosed.  Failure to do so will subject the lawyer to disciplinary action by the Bar Association.  It is therefore strongly recommended that the parties to the transaction which will anticipate a seller's concession first confirm that the buyer's lending institution will approve the concession and will not require the parties to remove any evidence of this from the contract.  An attorney will not be able to remove the language at a later date to simply satisfy a condition imposed by the lender.

Alfred M. Fazio, Esq.

Capuder Fazio Giacoia LLP 

90 Broad Street 

New York, N.Y.  10004-2627  

212-509-9595