Recently I experienced a failed real estate transaction, the circumstances of which I would like to share so that others
may learn by these errors and omissions, thus avoiding a similar situation.
BACKGROUND
My prospective buyers were a young unmarried couple seeking to buy their first home. Based upon my recommendation,
they applied for a mortgage loan pre-approval letter from a qualified lender. Through this process I discovered that she had
a recent bankruptcy and he had below- average credit scores, as well as little savings to invest in a house. As a result,
they were only able to qualify for an FHA mortgage in their desired price range SUBJECT TO receiving a family gift of $20,000
($10,000 from each borrower’s parents). The parents agreed and the mortgage loan commitment was issued, including a
specific Condition that the borrowers would receive a $20,000 gift from the parents.
ACTIONS
Based upon this loan commitment we began searching for properties in their stated price
range. Ultimately, we did find a property that met their needs. After our initial tour of the property I arranged a second
viewing, taking two full hours to allow the young couple and both sets of parents to thoroughly review the property. At that
time, the parents indicated their approval of the property.
The next day the prospective
buyers called to say they wished to write a contract on the property. We met in the office and spent over two hours reviewing
comparable properties, contract language and budget calculations. After this extensive review we completed the contract with
the buyers offering an extraordinarily low price (92% of List Price), unsubstantiated by any market data.
It was only AFTER we had completed the contract that the buyers disclosed their parents had reneged on their gift commitment.
Her parents rescinded their gift in its entirety (was $10,000, now zero) and his parents reduced their gift from $10,000 to
$6,000. Accordingly, the mortgage loan commitment that was contingent upon a $20,000 gift was no longer valid, since the gift
commitment was now reduced to $6,000. Neither set of parents gave notice to the lender of this change in status, nor did buyer/borrowers
notify anyone until AFTER they had completed the contract. Note: failure to report a material change in financial condition
to your lender subsequent to the issuance of a mortgage loan commitment may constitute fraud and is a serious matter (consult
your attorney).
RESULTS
Here is what followed.
1.
The Seller received the purchase
agreement as written;
2. Both Listing Agent and Seller were insulted by the low-ball offer, but they did respond with a counter-offer;
3.
Buyers simply ignored the Seller’s
counter-offer and did not reply;
4. Seller’s counter-offer expired without any Buyer response;
5. Lender was surprised to learn that the parental promise of gift had been reneged
and subsequently cancelled the loan commitment.
6. Obviously, at this point the search was terminated.
CONCLUSION
Here are some caveats based upon the forgoing:
1) Buyer.
If you are counting on a parental
gift to complete your home purchase make sure you have a firm commitment. It is preferable for the grantor (parents) to make
the gift in advance, so that you can negotiate the transaction with confidence, knowing that you can actually perform under
the contract (you should coordinate this transfer of funds with your lender so that a verifiable audit trail can be documented).
If not, you should disclose a non-verified gift commitment to the Seller in the purchase agreement for two reasons: 1) so
that you are dealing honestly with Seller, and 2) for your own protection (consult your attorney). In all cases, notify your
lender immediately of any material change in financial condition so that they may recalculate your loan approval.
In this case, if the Seller would have accepted the original offer the Buyer would
have been contractually obligated to purchase the property for the agreed upon price. Upon making formal loan application
without the required parental gift the loan would have been denied by the lender, based upon false information provided by
the buyer. The lender did nothing wrong. They did not verify the gift commitment as a source of funds, but they did not represent
so; they simply noted it in the loan Conditions. This puts the burden on the borrower to understand their loan commitment,
including conditions, so they may make accurate representations to the Seller in the contract and addenda.
The “loan contingency clause” included in the purchase agreement would not likely have protected the buyer
from a breach of contract claim by seller (see your attorney for legal advice) because the failure to obtain a loan was directly
the fault of the buyer (and buyer’s parents). Moreover, submitting a false pre-approval letter with an accompanying
purchase agreement to Seller is fraudulent and could have serious legal implications.
2) Parent/grantor.
If you make a commitment of a gift stand by it. Do not put the grantee in an
untenable legal position by reneging on your commitment. Preferably, you should make the gift in advance of the transaction
(see above). Otherwise, if you made a gift commitment that must be changed you should immediately notify all parties and halt
any contract negotiations with the Seller.
3) Seller.
As part of your due diligence and qualification of a Buyer’s financial ability to perform you should ascertain
whether the purchase agreement is contingent upon a gift. If so, you have the right to verify these funds before you take
your home off-market and agree to a sale.
RECOMMENDATIONS
Given the increased down payment requirements recently imposed by lenders and mortgage underwriting guidelines first-time
buyers may increasingly rely on gifted funds to help them enter the housing market. In these cases it is imperative that buyers
understand the risks and responsibilities that accompany a loan commitment with a gift condition.
For more information regarding the above issues contact a qualified real estate broker, your attorney and your personal
mortgage loan officer.
PS—the subject property was sold to another party within
just a few weeks of this incident at 97% of List Price.
Copyright © 2008. All rights reserved. No reprints without permission.
Joseph A. Wolf, CPA
– Licensed Real Estate Broker
