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March 27, 2018 • Stay Connected!
         

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QUESTION:  It appears that a questionable forms combination is being used frequently in the current market. Buyer brokers are attempting to use form 22AA and 22AD, without a 22A, to preserve appraisal protections, guarantee a larger down payment if necessary, but not have a financing contingency. 22AD references 22A twice, which seems to preclude it from being used in this manner. Using both 22AA and 22AD also creates simultaneous notices and price negotiations which seem to create ambiguity.
 
a) Is there a different combination of forms that will allow what the buyer brokers are attempting to do?
b) Is there a reason why this can't or should not be done by buyer brokers?



ANSWER:  Broker's question highlights was does, in fact, appear to be a rampant misuse of Forms 22AD (Additional Down Payment Addendum) and 22AA (Low Appraisal Contingency Addendum).
 
First, consider the goal of the buyer broker in this situation. Broker is attempting to create an offer that is as attractive to seller as possible. For this reason, buyer does not want to include a financing contingency but clearly, buyer requires financing to complete the purchase. Buyer broker recognizes that if buyer has no financing contingency but is relying on obtaining financing to purchase the property, broker must make provision for buyer to conduct an appraisal of seller's home because without specific permission in that regard, seller has no obligation to give buyer's appraiser access. For that reason, broker includes a Form 22AA, Low Appraisal Contingency.
 
Buyer broker then realizes that seller may balk at the inclusion of a low appraisal contingency because if the appraisal comes in low, buyer will have the right to terminate the PSA. To correct that potential outcome, buyer broker recommends to buyer the inclusion of a Form 22AD, "Additional Downpayment Addendum". The Form 22AD says, right on its face, that it replaces the low appraisal provision of Form 22A, the Financing Contingency. Said differently, if there is no Form 22A in the transaction, then it is improper to include Form 22AD in the transaction. The only purpose of Form 22AD is to replace the low appraisal provision of Form 22A. Why?
 
Form 22A, the Financing Contingency says that buyer may terminate the PSA if, notwithstanding a good faith effort to obtain financing, buyer is unable to do so by the closing date. One of the reasons buyer's financing may be unavailable is because buyer's lender's appraisal comes in low. The low appraisal provision of Form 22A sets up a procedure by which buyer has several options for addressing a low appraisal but ultimately, buyer retains the right to terminate the PSA if the purchase price is not reduced to meet the appraised value. The purpose of Form 22AD is to allow buyer to assure seller that if the appraisal comes in low, buyer will contribute up to $X as additional down payment to solve the low appraisal problem. That is all that Form 22AD does. It says that within the context of buyer's financing contingency, if buyer's lender's appraisal comes in low, buyer will contribute $X as additional down payment. The form ONLY operates within the context of a Form 22A Financing Contingency.
 
With that as background, return to the buyer's objective. Buyer wants to write an offer without a financing contingency but including the right to appraise seller's home without causing fear in seller that buyer may terminate the PSA based on the low appraisal. The answer is very simple.
 
Broker should not include a Form 22AA because the very purpose of the Low Appraisal Contingency is to give buyer the right to terminate the PSA if the appraisal comes in low. Rather, broker should write a sentence on one of the blank spaces in buyer's offer, by which seller will allow access to the Property by buyer's lender's appraiser. There is no standardized form for this. Broker will have to write a sentence allowing buyer to conduct an appraisal.
 
With that, buyer will still have no financing contingency and if buyer's appraisal comes in low, buyer will still have no excuse for failing to close. Buyer has no need to give seller additional assurance that buyer will make up the difference between a low appraisal and the purchase price because that obligation is incumbent on buyer in satisfaction of buyer's contingency-free purchase agreement. Buyer's objective is satisfied by the absence of contingencies and the inclusion of a sentence by which seller gives buyer permission to access seller's property for an appraisal.
 
If buyer and buyer's broker are attempting to craft a middle position where buyer is obligated to close if the appraisal is, for example, $25,000 low but not obligated to close if the appraisal is more than $25,000 low, no such form exists in the Statewide Forms system.
 
It should be noted, additionally, that in this scenario, if buyer is relying on financing to complete the purchase but buyer is not including a Form 22A Financing Contingency, then buyer must include a Form 22EF (Evidence of Funds Addendum) and put seller on notice that buyer is relying on a loan, a contingent source of funds, for an identified portion of the purchase price. Without inclusion of the Form 22EF, buyer misrepresents buyer's financial condition because of boiler plate language included in Form 21, paragraph "a".  

 

The Legal Hotline Lawyer does not represent Washington REALTORS or its members. To browse through our database of past Q & A's, visit www.warealtor.org. Attorney Annie Fitzsimmons writes the Legal Hotline Question and Answer of the Week. Please submit questions to legalhotline@warealtor.org . Please tell us your NRDS number when you e-mail the Hotline with your question.



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Primary Mortgage Rates Survey
(updated every Thursday)  Source:  Freddie Mac
 
 March 22, 2018    30-yr FRM  15-Yr FRM  5/1-Yr ARM
 Average Rates  4.45%  3.91%  3.68%
 Fees & Points  0.5
 0.5
 0.4
 Margin  N/A  N/A  2.75



 March 15, 2018    30-yr FRM  15-Yr FRM  5/1-Yr ARM
 Average Rates  4.44%  3.90%  3.67%
 Fees & Points  0.5
 0.5
 0.4
 Margin  N/A  N/A  2.75



 March 8, 2018   30-yr FRM  15-Yr FRM  5/1-Yr ARM
 Average Rates  4.46%  3.94%  3.63%
 Fees & Points  0.5
 0.5
 0.4
 Margin  N/A  N/A  2.75



 March 1, 2018       30-yr FRM  15-Yr FRM  5/1-Yr ARM
 Average Rates  4.43%  3.90%  3.62%
 Fees & Points  0.5
 0.5
 0.4
 Margin  N/A  N/A  2.75



 
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