Last several weeks episodes we discussed the commercial real estate contract paragraphs 1 through 3. Today we discuss paragraphs 4 though 6 which concern Third Party Financing, Loan assumptions, and Seller financing. Additionally we discuss Earnest Money and the Universal Commercial Code searches. What should buyers and sellers watch for?
Be sure to subscribe to our eye-opening newsletter in the box on this page.
Last episode we discussed the first page of the Texas Association of Realtors Commercial contract
It is similar to the 1 to 4 Family Residential contract, but longer …. 14 pages instead of 9.
Para 4 can be very challenging with 3 parts dealing with
Third Party Financing
Assumption of existing loan
Seller financing
If the property is unique, then it may be difficult to appraise.
If you are a seller, you may wish to NOT check the box which makes the contract contingent and depending on the attached Third Party Financing Addendum
This means the lender must be willing to loan the amount noted in papr 3 and 4
By NOT checking this box, the contract can not be terminated if the buyer can Not get a loan.
If the property appraises at a low value, the contract is still binding.
Some buyers are not confident of their ability to get the perfect loan with great terms,
By Not making the contract, contingent upon the Third Party Financing Addendum. If the buyer can get a loan, but on terms with are less than the criteria expected in the separate attached Third Party Financing Addendum, then the buyer can not terminate days before the expected closing date.
If the contract is written such that it is not contingent on the Third Party Fianncing Addendum. Then the earnest money is not refundable to buyer after the inspection feasibility option period.
If the property appraises low and the contract is contingent upon the terms in the attached Third Party Financing Addendum, then the buyer can terminate and receive the earnest money.
Assumption
Concerning assumption of existing loan, a buyer may wish to see a copy of seller’s loan note in advance to know before acquisition costs ….
1) If the is a bank loan assumption fee of 1%
2) If the seller has a pre-payment penalty
Seller Financing – will it be a 1st lien or 2nd lien.
The contract should stipulate who writes the loan note?
If seller’s attorney writes the loan note the day before final closing ….. it may be one-sided and have terms which a prudent borrower can not agree to.
Thus buyers may lose earnest money and acquisition costs if the buyer backs out.
Maybe the contract should stipulate that the title company attorney will write the loan note.
Paragraph 5
It is common for earnest money to be 1% of the sales price, however if the property is hot, it may need to be 10% of sales price. They call it “Earnest Money” ….. I call it “Good Faith” money.
If the buyer abides by the contract, then the buyer can terminate to get the earnest money refunded to the buyer.
If the other defaulting party does not sign the “Release Of Earnest Money” form, then a penalty at court might be 3 times the earnest money plus legal fees.
Frequently sellers do not realize the time and effort it takes to the finish line. In the recent 9 years regulations and lender policies have become strict and cumbersome.
Or the seller want the ability to close quickly or find another buyer.
But life happens to create unexpected nightmare snake pit delays, which we have discussed in other podcasts.
Snakes sometimes get hiccups or trigger landmines near appraisers, slow lenders and bad environmental studies.
Therefore sellers can be placated with Paragraph 5B whereby buyer deposits additional earnest money, thus the seller becomes convinced that buyer is confident that deal will happen or lose the additional earnest money.
Paragraph 6 A (3)
In Texas, normally the seller pays for title insurance policy.
A title commitment can normally be sent to seller in 15 days.
Paragraph 6 A (2)
If you are buying the State of Texas, a title insurance policy may insure your ownership …. “EXCEPT” if the Rio Grand River moves.
The key word is “Except”
If you want the “Exception” removed from the policy, the price of insurance increases 15% and seller may not agree to pay for the increase.
Paragraph 6 A. (2) decides who pays that additional 15% increase.
In urban city areas, parcels are made with regular cookie cutters, however in less populated irregular areas it may be wise to have the “Exceptions” removed from the title insurance policy.
Paragraph 6 B – Survey
Look carefully at your existing survey.
Recent surveys may have a copyright in small letters, which say the survey can only be used for one transaction. This help the survey companies make more money.
Older surveys may not be acceptable to the title company.
It depends on the title company examiner. Let them see the survey early in the process.
The seller does not need a survey and probably will not pay for a new survey.
The buyer needs a new survey, thus it is common for Paragraph 6 B (1) to have buyer obtain a new survey
However, the seller can informally agree to provide the existing survey “as a courtesy” for the title company to review.
Paragraph 6 C – UCC search
IF you are buying a property with equipment, such as a restaurant or auto repair shop, a court house record search may show the equipment belongs to a leasing company or has a bank lien. A UCC search costs about $100.
Paragraph 6 D
If buyer finds a problem with the survey, title commitment, or UCC search, the buyer can write a letter of objection within the time noted in Paragraph 6D.
Withing “X” days after receipt of the survey, title commitment, or UCC search.
How long does it take to write a letter?
Hope this has you asking more questions.
Soon we will discuss the remaining parts of the contract
Please give your review on Apple iTunes
Be sure to subscribe to our newsletter. Fill in the box on our website Houstonius.com
Phone us if you have see a snake, landmine or grass fire.