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!
Most offers written within the Northwest Multiple Listing Service area use what are referred to as the “statewide forms,” a collection of real estate forms which can be selected and completed by real estate brokers and others. While some attorneys might argue those are not the best forms, they are in general well balanced between the interests of buyers and sellers, and serve the parties well. In contrast, there is one form, the Form 22A financing contingency, which some argue heavily favors the interests of buyers, and which I would argue is poorly drafted. The vast majority of non-cash offers in our area contain Form 22A.1 This piece will address the financing contingency from a seller’s perspective, while future pieces will look at the contingency from the buyer’s side and then from the broker’s perspective.
The intended purpose of a financing contingency is somewhat obvious. If a buyer cannot complete a purchase due to an inability to obtain financing, and their offer contains a non-waived financing contingency, then they will not be deemed to be in breach of contract. In most cases that means the buyer would get their earnest money returned, and the seller would simply be out of luck. In many ways the application of Form 22A is just that simple, but in application it can be more complex.
The most misunderstood aspect of Form 22A may be that a form providing for the default 30 day financing period is not a 30 day financing contingency. Form 22A containing the default 30 day period terms does not expire merely with the passage of time, and may continue up to the closing date. That means that an offer providing for only a 20 day contingency period may not be better than an offer containing 30 or 40 day periods. That is because after the expiration of the specified number of days the seller only has the right to send the buyer a Form 22AR “Right to Terminate” notice, which in effect asks the buyer to waive their financing contingency. If the buyer does not waive the contingency within the next 3 days, then the seller has the right to terminate the contract, but they cannot force the buyer to waive the contingency. If the seller does terminate, then the buyer gets their earnest money returned. Unless the seller has a better offer in hand, preferably not subject to other contingencies, the threat to terminate the contract is likely little more than an empty threat.2 If the buyer does not waive, that leaves the seller subject to the contingency through closing.
How this affects a seller depends on their situation. If the seller’s house is subject to a large mortgage, and they are not living in the house, then interest paid while an offer is pending could be significant. Similarly, if buyer cannot get financing and the property is later foreclosed or the seller faces higher tax consequences from selling in a subsequent year, those losses could also be significant. In contrast, a seller living in a house free and clear of any mortgage debt might not suffer any significant loss if a sale falls through. Absent drafting custom language, there is no way around the seller bearing whatever risks they face if the buyer does not waive their financing contingency.
There is one major exception to the financing contingency surviving through closing if the buyer does not voluntarily waive the protection. The buyer can involuntarily waive their financing contingency, and one way of doing so is by not applying for financing in a timely manner. Unfortunately for sellers the July 2015 form changes made such a waiver much less likely. Prior to the July amendments a buyer was required to apply for financing within 5 days of mutual acceptance, and failing to do so resulted in waiver of the contingency. The act of applying was commonly thought to mean actually submitting a formal loan application to a loan originator. Under the new version, “application” is now a defined term, and a loan “application” is no longer really a loan application. Instead an “application” is merely the submission of certain basic information to a loan originator without any instruction to actually start the loan process.3 In making this change the intent was apparently to use the same definition of “application” as the new rules of the Consumer Financial Protection Bureau (“CFPB”). Unfortunately those rules serve entirely different purposes, and envision a buyer possibly making “application” with multiple lenders. Without a specified deadline for a buyer to actually start loan processing, sellers are now offered less assurance that a buyer will obtain a loan in a timely manner.
The July revisions did give sellers one additional right, but those revisions were not well thought out or terribly valuable. After a specified number of days (default 10) the seller can now send a Form 22AL, and that requires the buyer to return a Form 22AP. The latter form, if returned by a buyer, lets the seller know what information the buyer has given their lender, such as tax returns, and also a warranty that they have provided everything the lender needs. It also gives express permission to contact the lender. If the buyer does not return the form, the seller can terminate the contract, with the earnest money again going back to the buyer. If the buyer returns the form with information which raises significant concerns, the seller is powerless to take any action to terminate the contract. Thus the process leaves the seller with relatively little additional power.
This Form 22AL/AP process demonstrates a failure of the statewide form drafters to understand not only how real estate brokers operate, but also what sellers need to know. Two weeks into a transaction neither listing brokers nor sellers really need to know that a buyer submitted their paystubs and tax returns to the loan originator. That is the type of information that a listing broker and seller might want to know before the seller accepts a buyer’s offer. Obtaining that detailed information after mutual acceptance is pointless at best, and really provides the seller with little in the way of additional protections.
If the above analysis makes it seem as if Form 22A greatly favors buyers, then that is because in many ways it does. Not even mentioned is the fact that Form 22A does not contain any provisions requiring timely notification that a loan was denied. But even though Form 22A does greatly favor buyers, it also does not manage to serve the needs of buyers well. Buyers have their own risks and concerns using Form 22A. That will be the topic for the next piece.
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 2: Statewide Form 22A—Financing Contingency: The Buyer’s Perspective
Part 3: Statewide Form 22A—Financing Contingency: The Broker’s Perspective
1 – Form 22A was amended effective July, 2015 and October, 2015, the later form created apparently to correct drafting errors. Inexplicably, both forms have the same 7/15 revision date—a very poor practice. The issues addressed here were not affected by the October changes.
2 – Whether or not a seller should even send a Form 22AR will be covered in the third part of this series.
3 – An “application” is now the submission of basic information like name, income, social security number, property address, purchase price and loan amount, for the purposes of obtaining a loan.