New Regional Sales Contract

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It looks like there may be a new version of the Regional Sales Contract approved soon, that will be released in Novemebr and effective for use in the region on January 1, 2012. 

GCAAR Board of Directors still needs to take final action to approve it. Details to follow.

I had an “A Ha!” moment while teaching a class on Appraisals in Virginia and the new FHA and VA Financing addenda. In my previous post I describe the new FHA financing contingency as it is laid out in the new FHA Addendum to the Regional Sales Contract, and point out that there is language which makes it impossible to remove the financing contingency until a satisfactory appraisal has been received.

What I didn’t explain, and didn’t fully appreciate until I got an excellent question at last night’s class, what why. The question presented to me was, where is the “Appraisal Deadline” in the new form? My reply, as I explained in my earlier post, was that federal law protects purchasers and their earnest money deposits from low appraisals, right up until the date of settlement,therefore there is no deadline. The follow up question was, “How do we protect or Sellers if several weeks have gone by, and we still haven’t had any news about the appraisal?”

It was then that I realized that there is a way to kick out a Purchaser who is unable to provide evidence of a satisfactory appraisal, even when they are using FHA or VA Financing. The Seller simply provides a notice to the Purchaser that the contract will become void if the the Purchaser fails to deliver Form 100 removing the financing contingency. If the appraisal hasn’t been done, the Purchase may not deliver Form 100 . . . effectively allowing the Seller to void the contract for lack of progress on the Appraisal.

In other words, the Financing Contingency Deadline is also the Appraisal Contingency Deadline. Anytime after that deadline has passed, the Seller can void the contract if the Purchaser’s lender has not received a satisfactory appraisal.

Buyer’s Agents should keep this important fact in mind when filling out the FHA and VA Financing Contingency Forms. While your buyer may be pre-approved and be an excellent credit risk, you may not want to put in a short deadline to try to improve the quality of your offer.

Next Post:

More the FHA and VA Addenda “Appraisal Provisions” paragraph.

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Today I will continue to breakdown the FHA Financing Addendum released with the new 2009 version of the Regional Sales Contract. We’ll begin with the Financing Contingency. Without retyping the entire contingency (the form is available to view or download two posts down) lets look at how it is similar and how it is different from the Conventional Financing Contingency that many of are far more familiar with.

The new language is similar to Paragraph 10 of the Regional Sales Contract in that:

There is a definite date after which the Seller can force the Purchaser to remove the contingency or the contract become void (the Financing Deadline);

• The Contingency may only be removed by using Form 100;
• The parties must decide if Form 100 must be accompanied by a Lender’s Letter, and the lender’s letter is defined as containing the same 6 representations we use in the Paragraph 10 (although they are lettered rather than numbered);
• The Purchaser must provide a written rejection to Void the Contract, merely being unable to secure financing by the Settlement Date won’t excuse the Purchaser’s non-performance.

The are some important differences as well. This contingency introduces the concept of removal using a “Loan Option” or an “All Cash Option.” The Loan Option is the procedure described above, and is designed to require the Purchaser to provide some evidence that they are really capable of securing their loan before they are allowed to remove the contingency, depriving the Seller of the right to kick them out should another offer present itself. The All Cash Option is to be used in the event the Purchaser elects to buy the property without taking out a loan at all, which is a theoretical possibility, but doesn’t seem likely in the FHA context.

The real reason for defining the terms this way appears to have been to create mechanism to tie the Financing and Appraisal contingencies together: “Unless Buyer is removing the Financing Contingency using the All Cash Option, Form #100 shall not be delivered prior to lender’s receipt of a satisfactory appraisal(s).”

Note that this line doesn’t require the Purchaser to remove the Appraisal Contingency prior to removing their financing contingency. Under Federal laws regulating the FHA loan process, there is no circumstance under which the buyer can be REQUIRED to close the loan if the house appraises below the Sales Price, nor can they be required to forfeit their deposit under those circumstances. As a result, the contract remains contingent on Appraisal until it has closed, funded and disbursed. What this line does, though, is preserve the Seller’s potential to kick the buyer out if, for example, an all cash back-up offer were to come in, rather than be stuck with a non-contigent FHA financed offer that might still blow up a day or two before settlement over a low appraisal, or at least that’s the idea.

As many of us have learned from experience, lender’s “receipt of a satisfactory appraisal” is often not the end of the story. Many FHA loans in the DC area are subject to a two appraisal requirement. Does that mean you can’t remove the financing contingency until the second appraisal is received? The standard form doesn’t say that. Also, the underwriter reviewing the loan package may take issue with elements of the appraisal long after it “received” by the lender. Still, this langauge should help when, as frequently happens on bank owned properties, the appraiser notes the presences of mold, a lack of copper piping or kitchen appliances.

Speaking of Appraisals, tommorrow’s post will fully explore Paragraph 3, Appraisal Provisions. Note that the title of the paragraph is careful to avoid the use of the word Contingency. There is no contingency period, as noted above, after which a Purchaser’s earnest money is put at risk in the event of a low appraisal . . . but more on that in the next post.
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I’ve now had some time to digest the new FHA and VA addenda and they are available for download at NVAR.com and elsewhere. I understand that some of the vendors don’t have them in their systems yet, but they will soon.

Before I launch into a Paragraph by Paragraph breakdown, a couple of important points should be made up front.

1) The Forms do not contain an option to proceed without a Financing Contingency when you are using FHA or VA financing. You may still elect to proceed without a financing contingency. We on the Standard Forms Committee are working on a library of useful “clauses” that have found there way in and out of our standard forms over the years. Rather than redoing all of our forms every time the market changes, these clauses will be made available on line as suggested language of the association. A clause to make the contract non-contingent on FHA or VA financing will be among the first included. I would imagine you could simply take the language of Option 2 from Paragraph 10 of the Regional Sales Contract and insert FHA or VA as appropriate, before the word financing.

2) The Forms suggest to some that the Purchaser must give the Seller the option to lower the price in the event of a low appraisal. If you read more carefully, though, you’ll see language giving the Purchaser the right not complete the transaction, at no penalty, if the appraisal comes in low.

Over the next few days I’ll post more . . .and I’ll try to moderate your comments quickly so we can get a little bit of a discussion going over these new forms.

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Here are links to the new contract and two new addenda to be used for VA or FHA Financing.

The are educational samples only. Please go the NVAR website to download the actual documents. You must be a member of NVAR. These forms were also released to various vendors on Friday, so you should have them available in Zip Forms, Auto Contract, or through your brokerage soon.

Regional Sales Contract

VA Financing Addendum

FHA Financing Addendum
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The Greater Capital Area Association of Realtors which cover Montgomery County and Washington D.C. has posted the new Regional Sales Contract and a summary of the changes on their website found here

NVAR should have their version out to Vendors and on the NVAR website soon. I’ll have a paragraph by paragraph breakdown of the new VA and FHA Addenda posted here soon.

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I am off to the NVAR Standard Forms committee to discuss GCAARs proposed changes to the 2006 Regional Sales Contract which they would like us to adopt in 2009. The idea is to correct a major oversight made by the 2005-6 Regional Sales Contract Task force which forgot to include an FHA/VA financing contingency. In addition to correcting that oversight, the proposed FHA and VA financing contingencies would address some recent issues having to do with FHA appraisals and other unique underwriting conditions that come into play when FHA or VA financing is used.

Stay tuned. I’ll post samples of the language later today.

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We’ve been inundated with news about the impact the January 20th inaugural festivities will have on traffic, our bridges, roads, metrorail, schools and the federal government, but what about the impact on the Regional Sales Contract? I didn’t think there would be much of impact until I got this question from a real estate agent the other day:

“We added the word business days to the contract to measure the time for our home inspection contingency. Since the Federal Government is closed on Tuesday, will that count as a business day or not?”

It turns out not to be such a simple question. Because the sales contract defines days only as calendar days, there is not definition of what constitutes a “business day.” In the Virginia Jurisdictional Addendum, which regulates delivery and notices we have decided not to measure all time periods in business days. Maryland and the District of Columbia, however, do define business days as Monday – Friday with the exception of Federal Holidays. This is a fairly widely accepted definition of business days. (Keep in mind that Friday the 16th of January is Lee-Jackson Day, a state holiday in Virginia, but still a business day under this definition.)

Accepting the definition of business days as any day that’s not a Saturday, Sunday or Federal Holiday, the question is, is Inauguration Day a Federal Holiday?

According the Office of Personnel Managements list of official Federal Holidays for 2009, it is not a full fledged federal holiday. A foot note to the schedule reads as follows: “Inauguration Day, January 20, 2009, falls on a Tuesday. An employee who works in the District of Columbia, Montgomery or Prince George’s Counties in Maryland, Arlington or Fairfax Counties in Virginia, or the cities of Alexandria or Falls Church in Virginia, and who is regularly scheduled to perform non overtime work on Inauguration Day, is entitled to a holiday. (See 5 U.S.C. 6103(c).) There is no in-lieu-of-holiday for employees who are not regularly scheduled to work on Inauguration Day.”

So, although it is paid holiday for federal workers in the area, it’s not really a Federal Holiday.

As a practical matter, of course, the best way to handle this issue if you have a deadline measured in business days is to simply all the other side and ask them how they intend to treat Inauguration day. As long as there is a meeting of the minds between the parties, all should be well.

Happy New Year everyone. I hope to post more regularly in 2009. We have some interesting addenda and clauses floating through the Standard Forms Committee which should give me plenty of material to write about.

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