Industry Update:
On November 1st the latest changes to the FR/BAR Residential Contract for Sale and Purchase and the FR/BAR “AS IS” Residential Contract for Sale and Purchase took effect. The majority of the changes reflect an intent to somewhat level the playing field as between buyers and sellers of residential real property. Below I summarize the main changes to the contracts as expressed in the FR/BAR “AS IS” Residential Contract for Sale and Purchase since, in my experience, the “As Is” version of the Contract is used in the vast majority of transactions. This is not an exhaustive review of every change made and I therefore encourage agents in particular to carefully review all changes made to understand their impact on the Contract as a whole. Note that capitalized terms used derive their definitions from the Contract unless otherwise indicated.
Section 4:
The Contract now defines when the “closing” has occurred, a welcomed change to the Contract. Frequently sellers insist that keys can’t change hands until their wire has either been initiated or funds actually received in their bank account. The changes to the Contract clarify that the “Closing” occurs when the following elements are satisfied: (1) the Closing Agent has received all funds required for the closing and the funds are Collected (as defined in Standard S of the Contract); and (2) the Closing Agent has received all documents required by the parties to close the deal. Note that there is nothing in this definition of “Closing” that requires seller’s wire to be initiated let alone funds actually received in order for keys to change hands. Rather, once the Closing Agent has received all signed documents required and all Collected funds (meaning also, in the case of a loan, the lender has given the Closing Agent authority to disburse the loan proceeds), the transaction is “closed” and the buyer is entitled to receive their keys.
Section 5:
The prior version of the Contract had a built-in extension of the Closing Date in the event the lender is unable to close due to compliance with CFPB rules (also known as TRID rules). The Contract still retains this automatic extension but in order for a buyer to avail themselves of it (1) Loan Approval must have been obtained earlier in the transaction, and (2) lender’s underwriting must be complete. Stated differently, if the reason the buyer needs the extension to comply with CFPB rules is because the lender still hasn’t completed their underwriting, the buyer won’t benefit from the built-in extension.
Section 8:
The most significant changes came with respect to buyers who elect financing in order to close the transaction. First, during the “Loan Approval Period” the buyer must now (1) get their mortgage loan approved by the lender; and (2) significantly, the lender’s Appraisal of the property must be concluded prior to expiration of the Loan Approval Period. Under the prior Contract, a lender’s Loan Approval could contain an appraisal condition which allowed the buyer to cancel the Contract at any point during the transaction (even up to the Closing Date) if the Appraisal that came in wasn’t sufficient to meet the lender’s terms to finance the deal. That is no longer the case under the revised Contract. With appraisals taking sometimes 2-3 weeks (or longer) to procure, a buyer with a 30-day Loan Approval Period needs to hustle from Contract inception to procure their Appraisal; otherwise, they forfeit the financing contingency which places buyer’s deposit at significant risk of being lost to seller if the buyer fails to close on the deal.
Section 8(b) also requires that if a buyer’s Loan Approval will be conditioned on the buyer selling their current property in order to obtaining financing on their new purchase, the buyer must attach Rider V to the Contract at Contract inception. If the buyer fails to do so, the sale of the buyer’s current property cannot be a condition of Loan Approval.
The next significant change to Section 8(b) concerns what I call the buyer’s “3 doors.” Prior to expiration of the Loan Approval Period the buyer must walk through 1 of 3 doors; failure to do so results in (1) the Contract being deemed a cash deal (i.e., the parties proceed as though Section 8(a) had been selected at Contract inception and buyer loses their financing contingency), and (2) seller can cancel the deal within 3 days of expiration of the Loan Approval Period by delivering written notice to buyer of same. This is an important seller right in the Contract. Recall that once the Contract is fully executed, the seller cannot cancel or terminate the Contract unless there is a buyer default along the way. Compare that to the buyer’s ability to cancel the Contract for any or no reason so long as written notice of buyer’s intent to cancel is delivered to seller within Section 12’s Inspection Period. Listing agents now need to pay close attention to the Contract’s Loan Approval Period because an important seller right matures should buyer fail to walk through 1 of the 3 doors afforded prior to expiration of the Loan Approval Period, but the right is book ended – seller has only 3 days to elect to cancel the Contract.
Going back to the buyer’s 3 doors, prior to expiration of the Loan Approval period buyer must deliver written notice to seller electing 1 of 3 options: (1) confirming buyer obtained Loan Approval and is proceeding to closing; (2) confirming buyer didn’t obtain Loan Approval but nonetheless desires to continue to closing; or (3) buyer elects to terminate the Contract for failure to timely procure Loan Approval from their lender. Note that each option must be elected prior to expiration of the Loan Approval Period and must be delivered in writing to the seller. Failure to do so (as stated above) (a) converts the transaction into a cash deal, and (b) allows seller to terminate by delivering written notice of same to buyer within 3 days of the Loan Approval Period expiring.
Assuming buyer timely elects and walks through 1 of the 3 doors referenced above, if buyer fails to close the deposit goes to the seller unless (a) the failure to close is due to a seller default or (b) property related conditions of the Loan Approval (but specifically excluding the Appraisal) haven’t been satisfied. This is a narrow out for the buyer. Typically in a conventional loan there are no “property related conditions of the Loan Approval” save a casualty event such as Dorothy’s house blowing way in a tornado. Rather, this limited out for the buyer likely won’t factor unless the buyer elected FHA or VA financing because those loan programs can require certain repairs to be made prior to closing even under the “As Is” Contract.
The moral of the story is that, under the prior iteration of the Contract, agents closely watched the Contract’s Inspection Period under Section 12 because the buyer’s ability to cancel the deal for any or no reason at all lapsed upon expiration of the Inspection Period. Agents seldomly monitored the Loan Approval Period because there wasn’t a whole lot of reason to do so under the prior version of the Contract. That is no longer the case. Under the most recent version of the Contract agents need to very carefully monitor when the Loan Approval Period expires and make sure they send the proper written notice required to seller prior to expiration of the period; otherwise, important buyer rights are lost and an important seller right matures.
Standard F – Time:
Anyone who has taken my class on the Contract knows that “time is always on my mind.” As I state repeatedly throughout my classes, important rights of the parties are won and lost by failing to strictly adhere to the numerous time periods contained in the Contract.
This is no different under the revisions made to Standard F. However, the Contract made certain significant revisions as it relates to computing time periods: (1) calendar days where the Property is located is now used for computing time periods; (2) except for time for acceptance and Effective Date, time periods which end on a Saturday, Sunday, national public holiday, or a day in which a national public holiday is observed extends to the next day that is not a Saturday, Sunday, national public holiday, or a day in which a national public holiday is observed. Recall that this year (2021) July 4th fell on a Sunday. The national public holiday is July 4th (Independence Day), but the holiday was observed on the Monday after (July 5th). Under the revised Contract, if your time period expired on Sunday, July 4th, the period would automatically extend to Tuesday, July 6th, given that Monday, July 5th, was the day the public holiday (July 4th) was observed. Note here too that the Contract got rid of the 5 p.m. deadline on extended time periods and instead adopts a wholesale calendar day approach to expiration of time periods.
Standard G – Force Majeure:
The Contract always had a force majeure clause which excused the failure to perform a Contract obligation due to certain events outside of a party’s control (such as in the case of fire, earthquakes, hurricanes, floods, etc.). The force majeure clause was modified to capture additional events (such as governmental actions and mandates, government shutdowns, epidemics, or pandemics). Care to guess why? Additionally, the clause now provides that the Force Majeure event will be deemed to have begun on the first day in which the effect of the Force Majeure event prevents performance, non-performance, or the availability of essential Closing services (such as binding insurance). Also, an important change was that the clause can now be invoked to save the exercise of a right, not just the performance of an obligation. What’s a cogent example of what we’re talking about here? The ability of the buyer to perform a walk-through of the Property at or shortly before Closing is buyer right, but not an obligation. The revised Contract now preserves this important buyer right should a Force Majeure event prevent performance of same.
Standard O – Notices:
Last but certainly not least revisions were made to how notices must be delivered between the parties during the transaction. Most importantly, parties now can only deliver written notices by mail, facsimile transmission, personal delivery, or email. Notice through electronic media was deleted. Why? Text messages were previously an acceptable form of notice delivery (i.e., electronic media). The problem with text messages is that they are difficult to preserve and important notices may be lost because they were transmitted by text instead of one of the other forms of delivery. If you’re a texter, get used to using email instead of texting, at least with respect to formal written notices under the Contract.
Conclusion:
As referenced in the introduction, the fundamental thrust of the changes were aimed at leveling the playing field between buyers and sellers, and curbing the buyer’s right to cancel a deal and get their deposit back at the 11th hour. With loan transactions especially taking about 45 days to close, it isn’t fair to hold sellers in a deal only to have the buyer cancel same just before Closing simply because the Property didn’t appraise, for example. The revised Contract places much more onus on the buyer to complete whatever needs to be done to get their financing approved to Close. Agents will do well by carefully reviewing all of the revisions made to the Contract (not just those summarized here) to be sure they properly represent their clients in a transaction.
