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FEBRUARY 12, 2019 • Stay Connected!
I want to make sure I am reading the bottom of Form 22EF correctly.
Background: Form 21, paragraph (a) says the buyer has to disclose any contingent funds to purchase the home. My understanding of that statement is that if a buyer did not disclose, for example, their parents were giving a gift of money for their down payment (contingent funds) and the funds were no longer available at closing, they would not be entitled to their earnest money being refunded because they did not disclose part of the down payment was going to be a gift.
To protect the buyer, buyer's broker would use Form 22EF to disclose the gift of funds from the parents. But the bottom of Form 22EF says if the contingent funds become unavailable then the buyer will lose their earnest money. If that is the case, then I do not see any protection for the buyer. In fact, why would a buyer want to disclose contingent funds on 22EF if they lose the earnest money, when a seller might not want to sign the contract knowing they were relying on gift funds?
Form 21, paragraph (a) includes a statement, which becomes a representation by buyer once buyer signs Form 21, that buyer is NOT relying on a contingent source of funds for the purchase of the property, unless disclosed in the PSA. If buyer signs Form 21 and is relying on an undisclosed contingent source of funds, then buyer has potentially engaged in fraud. The consequences for fraud, should seller choose to prosecute, can be much greater than loss of EM. The "forfeiture of EM" clause will not likely protect buyer if seller successfully prosecutes a claim for fraud. Moreover, in a market where there is the potential for seller's property to decline in value between sale failed buyer #1 and subsequent buyer #2, seller has a more realistic claim of significant damages against a buyer who commits fraud.
Form 22EF is a disclosure form. It is not a contingency form. No where in Form 22EF is there contingency language giving buyer a basis for terminating the PSA if buyer is unsuccessful in obtaining the contingent funds that buyer assures seller that buyer will obtain. That is the point of a buyer signing Form 22EF and disclosing contingent funds. Seller is able to evaluate buyer's level of confidence that the contingent source of funds will actually be delivered. If buyer is relying on a gift from buyer's parents, buyer should have 100% confidence in the delivery of those funds or buyer should not lead seller to believe that those funds are forth coming. Seller will rely on that assurance from buyer in evaluating buyer's offer and there is no way that seller is in a good position to evaluate the viability of those funds other than through buyer's representation. If buyer is not sure that buyer's parents can or will actually come through with the gift funds, then buyer should not lead seller to believe that the gift funds are guaranteed. If buyer cannot guarantee the availability of contingent funds, then seller can evaluate that risk when determining whether seller will accept buyer's offer.
Form 22EF is a form that protects buyer from entering a PSA without making full disclosure as to the availability of funds, as described in broker's question. It also, however, protects seller by giving seller a measuring stick for buyer's financial wherewithal. Form 22EF allows a seller to evaluate a buyer's financial capacity to close the transaction, assuming buyer succeeds in obtaining a loan. Buyer is likely to provide a pre-approval letter from a lender regarding the likelihood of buyer securing necessary financing and seller will evaluate buyer's offer, in part, on the strength of that letter. Clearly, obtaining a loan generates only some of the funds that most buyers need to close the transaction. Form 22EF is seller's contractual security that buyer is confident in the availability of all other funds necessary to close the loan. With Form 22EF, buyer may disclose that buyer already possesses all other required funds (non-contingent funds) or that buyer is still gathering other required funds (contingent funds) but will have definitely have those funds in time for closing.
If buyer wants to make buyer's PSA obligations contingent on buyer obtaining a loan and also contingent on buyer obtaining gift funds, then buyer should not sign Form 22EF regarding those gift funds. Instead, buyer/buyer's broker is going to have to create a form that makes buyer's purchase obligation contingent on buyer obtaining gift funds. There is no statewide form for that purpose. Frankly, most sellers are likely to conclude that a serious buyer will eliminate or absorb the risk of contingent funds before asking seller to take seller's property off the market and/or forego other viable buyers. Seller will likely evaluate buyer's offer differently from a similar offer where buyer evidences confidence in buyer's contingent fund source by disclosing contingent funds on Form 22EF.
Summarizing ... broker is correct. When a buyer discloses contingent funds on Form 22EF and is then unable to produce those funds for closing, buyer will be in default of the PSA and the seller's remedies provision from the face of Form 21 will be triggered. Broker is incorrect, however, that the penalty for failing to secure Form 22EF contingent funds is the same as the penalty for buyer's failure to disclose, at all, buyer's reliance on a contingent source of funds. The penalty for buyer failing to disclose reliance on a contingent source of funds may be much greater.
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 firstname.lastname@example.org or leave a message at 800.562.6027. Please include your NRDS number.
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