Mortgage or No Mortgage on Purchase Offer

QUESTION:  In recent months, I have had several transactions where buyers who have represented that they do not have to obtain a new loan in order to purchase the property have later notified me that they will be financing their purchase with some sort of loan. I suspect that each of these buyers intended all along to obtain a new loan, but checked the "does not" box in paragraph 5(a) of the Contract in order to make their offer look more attractive. Is there anything I can do to protect my seller-clients from this tactic?     

ANSWER:  Unless you can prove that a buyer misrepresented whether he or she needed financing, that buyer's subsequent decision to obtain a loan would not give your seller-client the right to terminate a contract. However, we do have a few suggestions. First, we strongly encourage you and your seller-clients to heed the following advice which appears in the note at the end of paragraph 5(a): "If Buyer represents that Buyer does not have to obtain a new loan in order to purchase the Property, Seller is advised,prior to signing this offer, to obtain documentation from Buyer which demonstrates that Buyer will be able to close on the Property without the necessity of obtaining a new loan." If a buyer is able to provide the requested documentation, it is much more likely that he or she will proceed to close without financing, or will at least be able to easily obtain any financing that he or she decides to seek.

You should also consider having an attorney-drafted addendum available that your seller-clients can insist on attaching to the Contract whenever an offer is received with a "no new loan" representation. The addendum could impose fairly serious consequences on any buyers who decide to seek financing after representing that they do not need to do so. For example, the addendum could give the Seller the right to terminate the contract, and retain the Buyer's Earnest Money Deposit, in the event the Buyer seeks financing in connection with the purchase of the Property.

Buyer agents who employ the tactic you describe are cautioned that any buyer who will need to obtain a new loan in order to purchase a property, but represents otherwise, is engaging in conduct which constitutes a breach of contract. Paragraph 1(e) of the Contract states that the Earnest Money Deposit shall be paid to Seller in the event of a breach by Buyer. Furthermore, buyer agents who are aware of intentional misrepresentations being made by their clients are engaging in conduct which violates both North Carolina's Real Estate License Law and Article 1 of the REALTOR® Code of Ethics.