This blog marks a somber occasion. The Side/Repair Agreement is dead and buried. Somber yes, but should we be sad? This week, we’ll make the case for why the end of the Side/Repair Agreement is actually an event to celebrate.
The Theory: During the heyday of side agreements, once a Seller agreed to perform repairs, the real estate professionals involved in the transaction would begin working on a so-called “side agreement or repair agreement.” The theory was straightforward: if the Buyer’s lender was aware of the reasons for the repair, it would cause delay, hassle, re-inspection costs, and worst of all, an outright denial of financing. While the results were never as dire as this list would suggest, the side agreement was carried as a talisman to thwart the ever-prying lender who stood to derail the deal.
This theory never sat well with many of us for a few key reasons: 1) most of the time, the lender simply didn’t care about the repairs, 2) withholding material information from the lender approached the shadow of mortgage fraud (for those of you who would scoff at this, the FBI defines mortgage fraud as “material misstatement, misrepresentation, or omission in relation to a mortgage loan which is then relied upon a lender”), and 3) the Buyer isn’t adequately protected with two distinct agreements.
The Lender doesn’t care (usually) about repairs: Most repairs are minor. Even repairs that aren’t minor rarely result in re-inspection by the appraiser-the boogeyman that most who peddle side agreements fear most. At the end of the day, as long as the repair does not suggest that there is a structural or value issue with the property, the lender rarely has an interest in delaying the process. This is especially true if it is carefully crafted. Requiring completion 10-14 days prior to closing will give everyone, including the lender, ample time to make sure the agreed repair was done.
Mortgage Fraud is Serious: Most conceive of mortgage fraud as perpetrated by scammers who lie about their income, intentions, or some combination of the two. Frankly, withholding material defects to the structure of the home, e.g. termite infestation, could be an equivalently damaging misrepresentation as overstating one’s income. Why would a true Buyer Agent knowingly advise their client to hide anything from their lender and risk the accusation of mortgage fraud? Somebody will inevitability send it to the lender innocently or accidentally; then what? How do you explain that? Now the lender wonders what else is falsified. Who needs that?
The Buyer is Not Protected: If the Seller decides not to comply with the “side agreement”, there’s no mechanism within the Purchase and Sale Agreement to protect the Buyer. The closing will not be extended and the Buyer, if he or she refuses to close, will be the one in breach of the terms of the Purchase and Sale Agreement. Perhaps the Buyer has a cause of action against the Seller after the closing; however, this would require attorneys, lawsuits, and a whole heap of unpleasantness. Further, your Buyer would need to admit that they withheld information from their lender, in open court. When your Buyer is stuck in this quagmire, they will turn to their Real Estate Professionals for an explanation as to their unwise advice, thus creating reputational damage.
Side agreements are dead, but we should not be sad. A combination of experience and the strictures of TRID cause too many to realize the side agreement should never have existed to begin with. Feel confident adding your repair items to the Purchase and Sale Agreement. Quite simply, the false security that a side agreement provides pales in comparison to the risk.
Stiles Law, with offices located in Boston and Marshfield, Massachusetts, is a firm concentrating in real estate conveyancing and mortgage lending services, representing buyers, sellers, borrowers, banks, mortgage companies, investors, builders and developers in all of their real estate and mortgage transactions. Stiles Law serves all areas of eastern Massachusetts–the North Shore, Boston, and Cape Cod, in addition to the entire South Shore, including: Plymouth, Kingston, Duxbury, Hanover, Pembroke, Marshfield, Scituate, Norwell, Cohasset, Hull, Hingham, Weymouth, Braintree, and Quincy.
Copyright © 2017 Stiles Law, All rights reserved. Stiles Law is a Massachusetts licensed law firm and all content is based on Massachusetts law. The information presented above is meant to be used for general informational purposes and it should not be construed as legal advice or legal opinion on any specific facts. No child labor laws were breached during the creation of this Blog, further Bob Bonkley was compensated for his likenesses and appearances in the same.