Revisions to the 2011 AAR Residential Resale Real Estate Purchase Contract
Posted on January 1, 2011 by Michelle Lind, Esq
The Residential Resale Real Estate Purchase Contract (“Contract”), Pre-Qualification Form and Loan Status Update (“LSU”)were revised/developed due primarily to changes in the Real Estate Settlement Procedures Act (“RESPA”) rules regulating the issuance of a Good Faith Estimate (“GFE”) to a buyer. The RESPA reforms require a property address before a GFE may be provided by a lender and encourages the buyer to “shop” for lenders. (For more information, visit http://www.hud.gov/offices/hsg/rmra/res/respa_hm.cfm.) There have been numerous other changes in the lending industry as a whole. As a result, the primary substantive changes are concentrated in the financing section of the Contract.
The Pre-Qualification Form, which is designed to be completed by the lender, was developed to provide information on the buyer’s ability to qualify for a loan without a GFE. Therefore, the new form is not property specific but does provide more information than provided on the current Loan Status Report. The form sets forth the loan amount for which the buyer can pre-qualify, assuming a stated maximum monthly housing payment. The Contract does not require the buyer to submit a Pre-Qualification Form with the offer because there are circumstances in which the buyer may wish to submit an offer prior to consulting with a lender.
The Contract provides that the buyer’s obligation to complete the sale is contingent upon the buyer obtaining loan approval without Prior to Document (“PTD”) conditions no later than three days prior to the close of escrow (“COE”) date. If the loan contingency is not fulfilled by that date, the buyer has no obligation to close escrow, and the Contract is cancelled. Thus, the Contract requires the buyer to sign loan documents or deliver a notice of the inability to obtain loan approval no later than three days prior to the COE date. The loan contingency was changed to expire three days prior to COE rather than on the actual COE date to increase the probability that the seller will be informed prior to the COE date whether or not the buyer will be able to qualify for the loan and close escrow.
To obtain loan approval without PTD conditions, the buyer must submit all necessary documentation, the appraisal must be completed, any appraisal conditions met and the loan underwritten all as set forth in the revised LSU. The remaining prior-to-funding loan condition requirements, such as approving the pre-audit and receiving the signed loan documents, are unrelated to the buyer’s ability to qualify for the loan.
The buyer is obligated to deliver the revised LSU to the seller five days after Contract acceptance. The LSU is required at this point in the transaction to establish that the buyer intends to proceed with the lender indicated in the LSU on the terms described. The LSU also allows the seller and listing broker the opportunity to begin “tracking” the progress of the buyer’s loan.
The following is an outline summary of the revisions from the 2005 Contract:
PROPERTY – SECTION 1 Sub-section 1e: Added “existing” keys to clarify that the seller is not obligated to have keys made for locks, etc.
Sub-section 1f: Added “AS IS” and “Short Sale” addenda.
Sub-section 1g: Added “central vacuum, hose, and attachments” to the list of fixtures and personal property that are included in the sale. Omitted “TV” from “attached media antennas/satellite dishes” to clarify that attached TVs, such as flat screens, are not included in the sale.
TITLE AND ESCROW – SECTION 3 Sub-section 3a: Added lines for the Escrow/Title Company’s address and email information.
Sub-section 3c: Omitted “general warranty deed” and replaced the term with “warranty deed, subject to existing taxes, assessments, covenants, conditions, restrictions, rights of way, easements and all other matters of record.” This change was made due to an Arizona court case that ruled that the standard form of deed utilized in Arizona is not a general warranty deed. The revision was intended to respond to the recent court case and, more importantly, represent the type of warranty deed being used in the common residential transaction. Also added to this section: “If applicable, Buyer shall pay the cost of obtaining the A.L.T.A. Lender Title Insurance Policy.” to clarify that the expense of a lender’s policy is the buyer’s obligation.
DISCLOSURE – SECTION 4 Sub-section 4c: Added “Buyer is further advised to use certified contractors to perform renovation, repair or painting projects that disturb lead-based paint in residential properties built before 1978 and to follow specific work practices to prevent lead contamination.” This addition is intended to advise buyers of the EPA rule, effective April 22, 2010, that requires the certification of contractors who renovate properties constructed prior to 1978. For more information on this EPA rule, go to http://www.aaronline.com/Documents/rule-on-lead-paint-renovation-certification.aspx.
WARRANTIES – SECTION 5 No changes
DUE DILIGENCE – SECTION 6 No changes
REMEDIES – SECTION 7 Sub-section 7b: Changed sub-section references due to changes in the financing section’s sub-sections. Added: “The parties expressly agree that the failure of any party to comply with the terms and conditions of Section 1d to allow COE to occur on the COE Date, if not cured after a cure notice is delivered pursuant to Section 7a, will constitute a material breach of this Contract, rendering the Contract subject to cancellation.” This language was included in the pre-2005 AAR residential/vacant land contracts and was relied upon by an Arizona court in affirming a seller’s right to cancel for a buyer’s breach of contract by failure to close escrow (Mining Invest. Group v. Roberts, 217 Ariz. 635, 177 P.3d 1207 (App. 2008)). This addition does not change current practice or the rights and obligations of the parties in the event of a failure to close escrow as agreed.
ADDITIONAL TERMS AND CONDITIONS – SECTION 8 Sub-section 8n: Added: “Buyer acknowledges that failure to pay the required closing funds by the scheduled Close of Escrow, if not cured after a cure notice is delivered pursuant to Section 7a, shall be construed as a material breach of this contract and all earnest money shall be subject to forfeiture.” As with the change to Section 7b, this language was included in the pre-2005 AAR residential/vacant land contracts and was relied upon by an Arizona court in affirming a seller’s right to cancel for a buyer’s breach of contract by failure to close escrow (Mining Invest. Group v. Roberts, 217 Ariz. 635, 177 P.3d 1207 (App. 2008)). Again, this addition does not change current practice or the rights and obligations of the parties in the event of a failure to close escrow as agreed.
Sub-section 8o: Added: “price and terms of sale, return on investment” and “The parties understand and agree that the Broker(s) do not provide advice on property as an investment and are not qualified to provide financial, legal, or tax advice regarding this real estate transaction.” The seller’s initials are now required along with the buyer’s because price, terms and investment decisions affect both buyer and seller.
Sub-section 8r: Added “preferred” to telephone number.
SELLER ACCEPTANCE – SECTION 9 Sub-section 9a: Added “preferred” to telephone number.
For additional information, please view the webinar discussing these revisions.
The AAR Residential Contract Revision Workgroup was led by Jim Sexton, chair, with the valuable assistance of workgroup members Amy Swaney (lender representative), John Lotardo (title/escrow representative), Kelly Hand, Martha Appel, Holly Mabery, John Foltz, Kerry Melcher, Jerome King, Paula Monthofer and AAR staff Christina Smalls and Jan Steward.