Statewide Form 22A—Financing Contingency: The Buyer’s Perspective

A word from The Tim: This three-part series of posts is from long-time Seattle Bubble participant Kary Krismer, managing broker with John L. Scott/KMS Renton. Kary’s expertise in both real estate and law gives him a good perspective on issues like the nuances of real estate sales forms here in Washington State. Thanks, Kary!

Part 1: Statewide Form 22A—Financing Contingency: The Seller’s Perspective


As discussed in the prior piece on Form 22A, the statewide financing contingency form in many ways heavily favors the interests of buyers. That is because absent drafting custom language, the financing contingency can remain as a buyer protection though the date of closing. After the passage of a specified period of time the seller can ask the buyer to waive the contingency, but the seller cannot force the buyer to do so. Therefore if a buyer cannot get financing, and their offer contains a non-waived Form 22A financing contingency, then the buyer will not be in breach of contract if they cannot close due to lack of financing. In most cases that means the buyer would get their earnest money returned. That sounds good for buyers, but even so, Form 22A does present some concerns for buyers.

The main drawback for buyers using Form 22A is the uncertainty of whether the seller will ask the buyer to waive the financing contingency after the passage of a specified number of days (default 30). Although seemingly is not a terribly common event, it is something that should be anticipated, and if it does occur the buyer will need to make a choice.

The buyer’s first option would be they could waive their financing contingency. If they do so and later cannot get financing, then they would likely lose their earnest money.1 A buyer’s reluctance to waive would presumably be greater the larger the earnest money originally offered. While it does not seem terribly unfair for a buyer to waive their contingency, it should be noted that a buyer’s inability to get financing can be completely unrelated to their credit situation. Back in the summer of 2007 a relatively small financial crisis created a situation where several lenders simultaneously simply quit lending, even on fully approved transactions. Buyers were left to scramble to find new lenders, and many of those buyers needed to negotiate additional time to close. The future is uncertain, and there are many reasons financing might fail totally unrelated to the buyer’s situation.

The buyer’s other alternative is to do nothing and preserve the financing contingency. That decision would mean after the passage of three days the seller could terminate the purchase and sale contract. Typically the seller would only terminate if they had a better offer in place, or at least had a very strong belief that they could get a better offer. Unfortunately the buyer would probably not have good information on the existence of other offers. In addition, by that stage of the transaction the buyer will likely have developed some attachment to the property and have spent around $1,000 in inspection and appraisal costs. In addition, the buyer may have given their landlord notice or be in contract to sell their existing house. The point is allowing the seller the right to terminate the contract could create a lot of difficulties and anxiety for a buyer. And those concerns will last through closing, because if the buyer does not waive their financing contingency, then the seller’s right to terminate the contract survives until closing.

Compared to the risks placed on the seller with Form 22A, these buyer concerns are considerably different. While a seller might have some emotional anxiety regarding a buyer getting financing, a seller’s risks are mainly financial. In contrast, absent a large earnest money the buyer risks are less financial and more emotional. A buyer waiving their financing contingency will worry about their financing and their earnest money. A buyer not waiving the financing contingency will worry about the seller backing out, the loss of the money spent on inspections and an appraisal, and possibly where they will live if the seller does back out.

Hopefully the buyer was aware of Form 22A’s provisions at the point in time when they signed the purchase and sale contract. My suspicion though is that like many sellers, many buyers may not be completely familiar with the operation of Form 22A. Fortunately those buyers who erroneously thought their financing contingency would automatically expire after 30 days seemingly would not have much to worry about if they promptly waive the contingency. Other buyers who have not thought the process out would be affected.

Beyond the risk related to a seller sending Form 22AR, Form 22A in its current format does not serve the interests of buyers that well. If a buyer wishes to use a financing contingency, the standard form does not allow a buyer to make as strong of offer as possible. Absent custom language there is no option for a buyer to have the financing contingency in their offer automatically terminate after a specified number of days.2 Having such an option in the standard forms would allow for a stronger offer and differentiate one buyer’s offer from other offers. Having this choice available would also benefit sellers because they could accept an offer with better terms, or negotiate those terms with buyers who did not offer them. Most importantly perhaps, the buyer would know what they were in for from mutual acceptance, and not have their future risk dependent on a seller deciding to ask the buyer to waive their contingency.

Quite frankly, I do not find the buyer’s financial risks to be all that significant compared to the risks a seller takes when accepting an offer with a Form 22A contingency. I continue to believe that Form 22A benefits buyers more than sellers, but the buyer’s stress after receiving a request to waive the financing contingency cannot be disregarded. A buyer receiving a request to waive their financing contingency will be facing an important choice at what might be only a week or two prior to the closing date. Seemingly it would be much better if Form 22A’s terms for requesting waiver either did not exist, or were terms negotiated as part of getting to mutual acceptance. What we have now is a process where the seller can poke and annoy the buyer near the end of the transaction, but the buyer does not have to respond. That simply is not a well thought out process. Hopefully both buyers and sellers know what they are getting into when they agree to use Form 22A, but undoubtedly many do not.

Note: This piece is not intended to provide legal advice, and is merely the author’s interpretation of Form 22A and related forms. A party wanting legal advice needs to hire and consult with their own attorney regarding their own specific facts. That attorney’s opinion may vary from that of the author.

Part 3: Statewide Form 22A—Financing Contingency: The Broker’s Perspective

Footnotes

1 – This assumes forfeiture of earnest money is the exclusive remedy of the seller.

2 – Custom language is problematic because of limitations on brokers drafting language and the seller’s possible desire to have such language reviewed by their attorney.

About Kary L. Krismer

Kary Krismer is a frequent contributor at SB and a managing broker with John L. Scott/KMS Renton. His real estate interests include keeping track of current real estate issues and developing risk avoidance strategies for buyers, sellers and agents. Kary is also a lawyer, but he is not your lawyer, and his posts do not constitute legal advice.

4 comments:

  1. 1

    A portion of a comment from the prior piece:

    By Deerhawke @ 4:

    In my last sale the high bid involved a financing contingency and over time it became clear the agents on both sides really didn’t understand it, the actual timelines involved, the implications, etc. The deal was much more of a nail biter than it should have been. I regretted not taking the second highest offer–all cash but $15k less.

    This current piece mentions a seller’s anxiety over buyer financing, but focuses on the buyer’s anxiety. This post from the prior piece shows that sellers can have some significant anxiety over the buyer getting financing.

    I have often said that the highest offer is seldom the best offer. Sounds like Deerhawke’s transaction did at least close, so that is good.

  2. 2
    Marc says:

    When explaining the machinations of the 22A to my clients, both buyer and seller, I usually describe seller’s right to ask for waiver of financing as having a hammer to swat a fly. It’s a really inefficient and not particularly effective tool for the job at hand. The default time period is 30 days and a large percentage of deals are set up to close within 30-35 days. Thus, by the time the seller gains the right to ask for waiver, he or she is usually better off simply hanging tight to see if the buyer’s financing goes through rather than terminating the deal.

    Like Kary, I think the form is much more protective of the buyer at the seller’s expense. Accordingly, when representing the buyer I like to use it and don’t like waiving it. When I represent the seller I always discuss it with the client as well as the pros and cons of seeking to modify it. Generally speaking, most deals do not fail on financing so we must consider the “cost” of negotiating for a change to this form. Most agents don’t understand it and never bother to discuss it with their buyers. Thus, if we bring it up the buyer will have the occasion to closely read it and come to understand it must benefit them if only because the seller wants to change it. Thus, it becomes a bargaining chip for the buyer. If we have a bunch of offers this bargaining chip is very small and of little concern. Or, if everything else in the offer is good (price, contingencies, etc.) and this financing piece is the only issue, it may be worth negotiating. But, if we don’t have other offers and/or if we do have other issues with this particular offer that we want to negotiate (higher price, shorter inspection, etc.), then we have to decide where and how to focus the negotiations to get to the best net outcome.

    In some cases, it makes sense to roll the dice a little on buyer financing in order to get something else we value more highly. That’s particularly true where the buyer’s financing appears to be solid (large, readily available down payment, no current home to sell, solid employment, reputable lender, etc.).

  3. 3
    Marc says:

    By Marc @ 2:

    Thus, it becomes a bargaining chip for the buyer.

    Negotiation is an art and is performed at novice and expert levels (experience and practice being the separators). For an expert, there are times when you want to point out a bargaining chip the other side didn’t know they had. That way, you can let them win with that chip while having to concede on another point.

  4. 4
    ronp says:

    thanks Kary, good articles!

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