Wednesday, May 27, 2009

Foreclosures: Read the Fine Print

Buyers should read the fine print on bank addendums very carefully before agreeing to complete the purchase of a foreclosed (“REO”) home.

I’m reading a bank’s REO Addendum now and I’ve got 2 problems with it.  1) It removes the buyer’s financing contingency after the “Financing Commitment Date.” 2) The actual Financing Commitment Date is left blank.

In part, the bank Addendum says
. . . If Buyer delivers written notice to Seller that … financing has been declined (a “Notification of Decline”) prior to the Financing Deadline, then the Agreement to Purchase shall become null and void and the Deposit shall be returned to Buyer. If Buyer fails to deliver to Seller either a Commitment [i.e. full loan approval] or a Notification of Decline prior to the Financing Deadline, then Buyer shall be deemed to have waived the foregoing contingency and the Agreement shall remain in full force and effect without any such financing contingency.

If that doesn’t sound scary to you, keep reading to see why it IS scary.  If you already know how to read and interpret legalese, you know where I’m headed: caveat emptor.

What’s a Financing Contingency?

In a standard purchase contract, the buyer’s purchase is contingent on getting a mortgage.

If the buyer’s loan application is denied at any point in time – up to and including closing day – the buyer notifies the seller in writing “my loan was denied” and she/he gets his/her earnest money deposit back.

The buyer goes on his merry way. Or maybe it’s his depressed way. But at least it’s not his “poorer because I lost my earnest money” way. (there can be extenuating circumstances, but this is the gist of the contract language)

What’s Wrong With This Picture?

Back to the example above – remember, the bank’s REO Addendum removes the buyer’s financing contingency after the passing of the “Financing Commitment Date,” which is left blank.

What Does This Mean?

I can see this potentially going very, very badly.

  • IF my buyer client is denied her mortgage loan,

  • THEN we inform seller in writing “loan denied” and say “please give us back buyer’s earnest money.”

  • IF bank doesn’t feel like giving earnest money back because they’re bleeding red ink all over their quarterly government filings showing what they did with all that taxpayer bailout money,

  • THEN they could use the blank Financing Commitment Date to justify taking Buyer’s earnest money.

HOW? I used to work for a bunch of lawyers. I grew up listening to my Mom talk about the lawyers for whom she worked for over 20 years. Believe me, it wouldn’t be hard to find a lawyer who’d argue that that a blank Financing Commitment Date meant the buyer needed full loan approval at the time she signed the contract.

Slam, bam, thank you Ma’am. You’ve just been burned by legalese. Your earnest money? Gone.

(and I'm not even lawyer bashing; they’re just doing their job)

The Bottom Line

I’ve laid out a pretty far-fetched scenario. It’s highly unlikely the bank selling the foreclosed house expects the buyer to have a full loan commitment on the date she signed the contract to buy the house. (Technically, it’s 99.9%  impossible to have a full loan commitment on the date you make an offer.) It’s also pretty unlikely that a bank would actually take my buyer’s earnest money if we told them our loan was denied.

But as a buyer’s agent it is my job to anticipate and explain to my client the potential worst case scenario. Murphy’s Law says the minute I don’t, is the minute the worst case scenario hits my buyer in the face. Or the wallet, as the case may be.

Buyer Beware

Read the fine print on everything you sign. The banks selling foreclosed homes are not your friend. They do not wish you well. All they wish is to recoup as much money as possible on every house they sell.

My buyer is very likely to decide to go through with this deal. But at the very least, she deserves to know the risks she’s taking, upfront. And she deserves to make an informed decision, after hearing the potential risks (bigger risk of losing earnest money) and the potential benefits (nailing a screaming good deal on a solid little house).