SPECIAL REPORT

REQUIRING BUYER TO COMPLETE LOAN APPLICATION

WITH SELLER’S DESIGNATED LENDER

(First In A Series)

 The Association has been besieged by a number of calls regarding a “bank practice.” 

In the current real estate market, with the high numbers of foreclosures and real estate owned by lenders (“REOs”), a long-standing practice common with developers in new home sales transactions is now becoming common in resale of existing homes.

Developers often provide in the purchase contract that the buyers will complete a loan application with the developer’s preferred lender, even if the buyers have pre-qualified with their own lender.  This purportedly protects the developer from making alterations, purchasing and installing upgrades, and wasting time and energy on a transaction only to have the escrow cancelled when the buyers are unable to procure the loan.  With the loan application already approved by the seller’s lender, it is more likely that a buyer, who by then is emotionally and financially invested in the purchase, will use the seller’s lender and close the transaction.

A lender/seller does not want to own property.  It is important to the REO lender/seller to evaluate the buyer early in the process to ensure that the buyers will in fact have financing and close escrow. 

For privacy protection and negotiation strategy, buyers may not want to disclose their personal financial information to the seller and its agent.  Buyers are asking their real estate agents if the selling lender can legally “force” them to apply for a loan with a lender not of their choosing when they already have a loan application submitted and pre-approval from their own lender.

The answer is, “Yes!”  A buyer cannot be forced to borrow from the designated lender, but the REO seller may require the buyer to complete an application and be pre-qualified with its preferred lender.  If the REO seller is a lender, it may also require pre-qualification through its loan department.

If the pre-qualification is required, the REO lender should require its listing agent to state in the Multiple Listing Service, under Agent Remarks, that any offer on the property must be accompanied by a pre-qualification letter from a specified loan officer at a designated lending institution.  Furthermore, the REO lender may instruct its listing agent that all offers are to be presented to the listing agent by the buyer’s agent.  Requiring the use of the seller’s lender or agent is NOT an acceptable practice. 

Under Model MLS Rule 9.6, the cooperative broker has the right to be present when the client’s offer is presented to the seller.  This rule is not violated if the seller has given instructions, in writing, to the listing agent that offers are to be presented to the listing agent, either in person or via facsimile or email.  Additionally, the listing agent does not have to present the offers to the REO lender in the order received, or at all, if so instructed by the seller in writing.  The buyer’s agent has a right to receive a copy of the written instructions by the seller.

REO lenders frequently require that other terms unfavorable to buyers be added to the Real Estate Purchase Contract form, and many lenders have their own complete contract and will not sign the CAR RPA form.  Buyers should be advised to seek legal counsel for review and interpretation of such contracts that so they do not inadvertently engage in the unlicensed practice of law.  The new REO Advisory should be used (REO or REOL).

Other unfavorable terms an REO lender could require are large good faith deposits, “as is” clauses, no buyer contingencies; and automatic waiver of any contingencies after a specified number of days.  They also might refuse to provide disclosures, do repairs, pay closing costs, or provide a home warranty.  Some lenders even require the buyer to pay for every day after the scheduled escrow closing date, provide a hold-harmless agreement, or waive other rights.

Explaining to the buyer client these issues unique to making an offer on an REO property fulfills the agent’s responsibility to protect the client’s interests and can help avoid unrealistic expectations and disappointments.  Remember, the MLS belongs to the Associations and their members—the participants and subscribers.  It is not up to the banks (or their agents) to dictate rules or practices that violate those rules.