The Best of the Legal Hotline

In the 1996 film Jerry Maguire, Cuba Gooding Jr.’s character demands Tom Cruise’s character to repeat the phrase “show me the money,” to emphasize the importance of financial success in his contract. In a similar fashion, real estate sellers want to ensure that buyers have the financial capability to purchase their property, whether it be through mortgage financing, cash or seller financing. The following questions and answers discuss various scenarios regarding financing a real estate transaction.

Financing commitment contingency

The accepted offer names two buyers and includes the financing commitment contingency. One buyer is unable to sign the loan commitment at this time. If only one of the two buyers signs the loan commitment, would that satisfy the Financing Commitment Contingency?

Both buyers on the offer to purchase should review the loan commitment and both should either sign a copy of the loan commitment or provide written direction for delivery.

The Satisfaction of Financing Commitment Contingency section of the WB-11 Residential Offer to Purchase provides:

“If Buyer qualifies for the loan described in this Offer or another loan acceptable to Buyer, Buyer agrees to deliver to Seller a copy of a written loan commitment. This contingency shall be satisfied if, after Buyer’s review, Buyer delivers to Seller a copy of a written loan commitment (even if subject to conditions) that is:

(1) signed by Buyer; or

(2) accompanied by Buyer’s written direction for delivery.”

The Financing Commitment Contingency in the WB-11 Residential Offer to Purchase is clear that the buyer is required to sign the loan commitment or provide a written directive to deliver the loan commitment that must be delivered along with the loan commitment. The provision was designed to eliminate the practice of licensees and lenders delivering a commitment without the buyer’s authorization, and to protect buyers from loan commitments being forwarded to the seller without their knowledge.

In the WB-11 Residential Offer to Purchase, a “buyer” is those individuals named on line 3 and who sign at the end. Those individuals should review the loan commitment and either sign the loan commitment or give written instructions for the delivery of the loan commitment. That written directive must accompany the loan commitment when it is delivered to the seller. Arguably, delivery of a commitment without notice or signature of both buyers is as if the delivery did not occur.

The seller accepted an offer that includes the Financing Commitment Contingency. The buyer did not submit a loan commitment by the deadline. Now, the seller has received a secondary offer. Has the buyer defaulted by not delivering the loan commitment on time? Can the seller accept the secondary offer as primary?

The Seller Termination Rights provision in the WB-11 Residential Offer to Purchase provides:

“If Buyer does not deliver a loan commitment on or before the Deadline on line 250. Seller may terminate this Offer if Seller delivers a written notice of termination to Buyer prior to Seller’s Actual Receipt of written loan commitment from Buyer.”

To prevent the seller’s termination rights, the buyer must deliver a copy of a written loan commitment that is signed by the buyer or accompanied by the buyer’s written direction for delivery. A buyer’s failure to deliver the loan commitment by the deadline gives the seller the right to terminate the offer but does not constitute a breach or default by the buyer, nor does it make the offer null and void.

The seller may terminate the offer before actual receipt of written loan commitment by delivering written notice of termination to the buyer. The seller may also send a WB-45 Cancellation Agreement and Mutual Release (CAMR) along with the notice of termination. Although the seller may terminate, the seller may choose not to act on their termination rights. If the seller chooses not to terminate the offer and the buyer is unable to close because the lender will not finance the transaction, then the buyer arguably has defaulted.

If the parties have not signed a CAMR and if the seller elevates a secondary offer to primary when the primary offer has not been definitively concluded, there is a risk of two primary offers. If the parties have not signed a CAMR and the seller would like to resume marketing and accept another offer as primary, the agent should recommend the seller seek legal counsel before accepting another offer as primary.

A CAMR is prudent practice for licensees because it provides a way to have certainty for the parties that a contract is over — rather than having the parties expect the agents to tell them whether the transaction is over and done, which requires a legal opinion. That is why an attorney’s opinion is often stated as the alternative to having the CAMR signed by the parties.

Additionally, per Standard of Practice 1-7 of the REALTOR^® Code of Ethics, “REALTORS^® shall recommend that sellers/landlords obtain the advice of legal counsel prior to acceptance of a subsequent offer except where the acceptance is contingent on the termination of the pre-existing purchase contract or lease.”

The seller would like the buyer to use a local lender and countered an offer with the following language: “The buyer is to secure a local lender to proceed with the transaction within 5 days of acceptance.” Can the seller force the buyer to use a local lender

The seller may try to restrict the lenders the buyer may use to satisfy the Financing Commitment Contingency in the offer, but the buyer does not have to agree. Under the pre-printed terms of the WB-11 Residential Offer to Purchase, the buyer may satisfy the Financing Commitment Contingency by delivering a loan commitment for the loan described in the offer or for any other loan acceptable to the buyer. Delivery of the loan commitment must be accompanied by the buyer’s written direction to deliver the loan commitment or, alternatively, the buyer may sign the loan commitment and deliver it to satisfy the Financing Commitment Contingency.

Further, it is difficult to know what would constitute a “local lender” for satisfaction of that requirement without more detail. The buyer may send their own counter-offer removing the financing restriction.

If this offer is not contingent on financing commitment

The accepted offer does not include a Financing Commitment Contingency. The buyer currently has funds invested in stocks and would like to submit a copy of the buyer’s stock investments as proof of funds. Would proof of stock investments count as proof of funds?

When a buyer uses a WB-11 Residential Offer to Purchase and does not include a Financing Commitment Contingency, the If This Offer is Not Contingent on Financing Commitment section is automatically included as terms of the offer. For offers not contingent on financing, a buyer agrees to provide verification of funds or other documentation as described in the offer to the seller within the deadline, with the default being seven days after acceptance.

This written verification from a financial institution or third party in control of the buyer’s funds is to verify the buyer has sufficient funds to close at that time. Since stocks and other investments have to be liquidated in order to obtain them, the seller could argue that the buyer providing evidence of stocks, mutual funds or other investment accounts does not meet the language of the offer. For that reason, the blank lines were added to the form so the buyer could provide guidance to the seller as to how the buyer would like to meet the verification of funds. If the buyer did not write in written verification of the buyer’s stock investments, then it would seem that the stock investments would not be sufficient to prevent the seller’s termination rights.

If the buyer does not provide written verification from a financial institution or third party in control of the buyer’s funds or other negotiated documentation within the deadline, the seller can terminate the offer by delivering written notice to the buyer.

The buyer did not include the Financing Commitment Contingency in their offer, and the seller accepted the offer because it was cash. Now, the buyer sent a letter from a lender stating the lender will finance the transaction and the lender allowed the offer to be written as a cash offer. Does this letter from the lender count as proof of funds?

When an offer is not contingent on financing, the buyer still has a right to obtain financing if they choose, and the seller has already agreed to allow access to an appraiser in the If This Offer Is Not Contingent On Financing Commitment provision of the WB-11 Residential Offer to Purchase. That provision provides:

“Within ___ days (“7” if left blank) after acceptance, Buyer shall deliver to Seller either: (1) reasonable written verification from a financial institution or third party in control of Buyer’s funds that Buyer has, at the time of verification, sufficient funds to close; or (2) ______________________ [Specify documentation Buyer agrees to deliver to Seller].

If such written verification or documentation is not delivered, Seller has the right to terminate this Offer by delivering written notice to Buyer prior to Seller’s Actual Receipt of a copy of Buyer’s written verification. Buyer may or may not obtain mortgage financing but does not need the protection of a financing commitment contingency. Seller agrees to allow Buyer’s appraiser access to the Property for purposes of an appraisal. Buyer understands and agrees that this Offer is not subject to the appraisal meeting any particular value, unless this Offer is subject to an appraisal contingency, nor does the right of access for an appraisal constitute a financing commitment contingency.”

To prevent the seller’s termination rights, the buyer must still deliver written verification from the buyer’s financial institution that indicates the buyer has sufficient funds to close at the time of verification. If the written verification from the financial institution does not show that the buyer has sufficient funds to close but rather the lender is willing to finance the transaction, the seller may argue the document does not constitute written verification of sufficient funds to close, and the seller may terminate the offer.

Seller financing

An agent is going to write an offer for a buyer who wants the seller to finance the transaction. The agent does not have a broker license and knows they cannot draft a land contract. How does an agent draft an offer contingent on seller financing?

Drafting an offer contingent on seller financing depends on the type of seller financing the buyer wants. A seller can provide a mortgage just like a bank or a credit union, and the buyer and the seller would execute and record, as necessary, mortgage documents just like when a buyer finances with a bank or credit union. The buyer would typically execute a promissory note, and the seller could file a mortgage lien to secure the debt. At closing, the seller would execute and deliver a deed to the buyer, and the buyer would have legal title to the property. If the buyer and the seller would like this type of financing, they could use the Financing Commitment Contingency in the WB-11 and modify accordingly. The parties should be referred to legal counsel for drafting and execution of the mortgage documents.

Another form of seller financing is a land contract. Under a land contract, a buyer typically pays the purchase price to the seller in installments over the term of the land contract. If this is the financing the buyer and the seller want, the agent can use the WRA’s Land Contract Addendum to the Offer to Purchase to negotiate the terms of the subsequent land contract. That addendum allows the seller to negotiate the down payment amount, term, interest rate and terms such as tax and insurance premiums. Then at closing, the land contract terms negotiated in the offer can be executed when the buyer and seller enter into the land contract itself. A salesperson can draft the WRA’s Land Contract Addendum but cannot draft the actual land contract. The Wisconsin State Bar has a standardized land contract form known as a “Form 11 Land Contract.” Wisconsin-licensed brokers may use the State Bar forms, but salespeople cannot.

When a buyer and seller have a land contract, the deed remains in the seller’s name until the buyer pays off the entire amount at which time the seller typically transfers legal title to the buyer.

The agent has a buyer client who is a limited liability company (LLC). The members of the LLC want to use the LLC to buy a home for rental purposes. The seller is willing to sell the home to the LLC on a land contract. The agent has heard about certain transactions having to be reported to the Financial Crimes Enforcement Network (FinCEN). Is this transaction subject to FinCEN reporting requirements?

If the parties have any questions regarding whether the transaction is subject to FinCEN reporting requirements, they should be referred to the closing agent and private legal counsel. Licensees should not determine the parties’ legal obligations regarding FinCEN reporting requirements.

The WRA-FD FinCEN Report Disclosure for Wisconsin Properties form is available in Transactions (zipForm Edition) and the WRA Forms Library. This form gives agents a simple way to inform buyers and sellers early in a transaction about potential federal reporting requirements and what information they may need to provide to the title company. By using the form, you can help clients prepare without taking on the risk of handling sensitive personal data on your own.

The FinCEN rule applies to the sale of residential real property, including single-family homes, townhouses, condominiums and 1-4 family units, and applies to non-financed transfers — including all-cash deals, sales that are privately financed or seller-financed transactions. Privately financed could include the money coming from a family member, a friend or even a charitable organization. Privately financed could also include funds from a “hard money” source such as an investment group. Seller financing could be a land contract or a mortgage provided by the seller.

If the buyer (transferee) is an entity or trust, any direct transfer to a legal entity like an LLC, corporation or a trust — rather than an individual — triggers reportability regardless of the price.

The rule defines a “reporting person” as the individual performing key settlement functions, such as preparing the closing or settlement statement. This typically includes title agents, escrow agents, attorneys or settlement officers. The closing agent, typically the title company, is responsible for collecting the information and for submitting the FinCEN report. If this information is not provided, the title company will close the transaction. Agents do not collect this information. Buyers and sellers must provide it directly to the closing agent.

If the transaction is subject to FinCEN reporting, both sellers and buyers will need to provide the closing agent with the information and documentation necessary to complete the FinCEN report. For some parties, locating this information might mean tracking down trust documents, articles of incorporation for incorporated entities, and operating agreements for LLCs.