Over the years a widely-used form created by the Pennsylvania Association of Realtors (“PAR”) has evolved to the benefit of buyers and sellers of residential real estate. What is helpful about the form is that it “reminds” brokers, when they are preparing the agreement of sale, of virtually all issues which should be considered. For example, it creates options relating to inspection of the premises by the buyer; possible termite infestation; possible radon presence; possible lead paint presence; etc.
By creating all of these options, the form helps the parties resolve the issues at an early stage of negotiations. This is vastly superior to having an agreement which is silent as to key issues, possibly causing problems between the parties after the agreement is signed.
However, there is one curious and inexplicable, yet very important, provision, the mortgage contingency, which often causes attorneys to scratch their heads unless it is modified properly. Virtually all purchasers and their brokers (and sometimes even their attorneys) assume that the agreement provides that if the buyer is unable to obtain a financing commitment on the terms provided in the agreement, the buyer has the right to terminate the agreement and receive a refund of the down payment. Not necessarily so.
The PAR standard agreement provides that if the buyer is unable to obtain a commitment, or if the commitment contains conditions unacceptable to the seller, it is the seller, not the buyer, who has the option to terminate the agreement; nowhere does it give the buyer the right to opt out. If the buyer is unable to obtain a commitment, the provision extends the contingency period and permits the seller to attempt to obtain financing for the buyer.
If the seller obtains a financing commitment within the parameters set out in the agreement, the buyer must complete the purchase or risk forfeiting the down payment even though he or she may not be completely satisfied with the lender or the commitment.
Our strongest advice is that no buyer should enter into an agreement based on the PAR format without insisting that the contingency provision is altered to conform to the buyer’s expectation. Most important, the form must be revised to give the buyer the right to opt out if a commitment cannot be obtained within the parameters set out.
Note also another quirk: In setting the financing parameters for the contingency, the agreement provides for a loan percentage that is the buyer’s goal and then a few lines lower sets a “maximum” percentage which the buyer must accept; the second amount is invariably set higher. It is vital, and the buyer must insist, that the two blank spaces be filled with the same number, again to avoid the buyer’s being mislead into thinking that the lower number is the one that controls. Why there are two blanks is another inexplicable aspect of the form.
As a buyer, you may feel that you have negotiated a very good price and that you do not wish to “rock the boat” and thereby put the deal in jeopardy by insisting upon these changes. This is almost never the case, especially now when it is a very strong buyer’s market. Almost without exception, even in a strong seller’s market (will we ever see another?), it is a change that the broker will strongly recommend and readily make to the PAR form to preserve the deal.
– Ken Butera