Lenders do not want to be Owners of Residential property.  They are in business to loan money so that others may own property, not them.  The inventory cost of a $200,000 home is easily $1,500 per month or more when including the interest income they lost by having their funds tied up in the home. This is also why Lenders approve Short Sales.

Lenders or companies that represent them (Asset Management Companies) often operate in more than one State and County. Each State and often Counties and other local jurisdictions have their own laws, forms and rules governing the sale of real estate.  As Lenders do not have the legal staff stay current with all state laws and review each purchase contract, they have created an Addendum.

It would be more accurate to call Lender Addendums “Replacement Contracts”, because that is exactly how they work.  The Addendums often cover virtually every process or rule governing the transaction including prices, terms, deadlines, contingencies, disclosures, inspections and closing costs, to name a few.

And here is the tricky part. The language in the Addendum replaces or overrides similar content in the Purchase Contract.  If the Purchase Contract states one price but the Addendum another, the Addendum price wins. 

Many Addendums look alike, but every Lender customizes it to their requirements.  As a result, they must be carefully scrutinized, line by line, as there may be unexpected terms that can cost thousands.

That reminds me of the first time I read a Fannie Mae Addendum.  The Addendum states that the Buyer is responsible for ALL CLOSING COSTS.  Not just the Buyer’s “normal” costs, but also the Seller’s costs, including Title Insurance, Escrow Fees, HOA Transfer Fees, etc., which could easily cost the Buyer an unexpected $2,000. 

I jumped when I first read that.  That was the first Lender Addendum I read that stated they would not pay their “fair” closing costs. Then there is the Inspection surprise.

The day after the purchase agreement is accepted begins the ten day Inspection period. Usually that is not a problem, but are the utilities on? The answer is often “No”.  How long will it take to turn them on? You only have ten days!

Reading further, to see if the disconnected utility problem is covered elsewhere, you read that the “Buyer is responsible for all costs associated with Inspecting the property including any deposits or fees required to connect utilities”.  Unbelievable! 

How do you protect your interests?  What about the Inspection period if the utilities are not on?  I need ten days!

First, obtain a copy of the Addendum prior to submitting the Purchase Contract.  This won’t be the Addendum you actually sign but it will tell you what areas you need to cover.  Including language in the initial Purchase Contract is the best way to protect your interests.

For example, you could write in a change to the Inspection Period Start Date by adding verbiage that makes it the day all utilities are connected. The Lender is still likely to refuse to pay for them to be turned on, but it does not hurt to try. Perhaps the Seller’s Agent will have them turned on.

To offset paying for Seller’s Closing Costs, you could include language that requires the Seller to contribute $X,XXX towards them. If you also want the lender to pay Buyer’s Closing Costs, be sure to include funds for both of them if the Addendum puts them on the Buyer’s side.

In a foreclosure purchase, you are usually first alerted of contract acceptance by phone.  A few days later you might receive the Arizona Purchase Contract and the Lender’s Addendum.

The Arizona Purchase Contract may be signed by the Lender but the Addendum is almost never signed by them. As Buyer you will be required to sign the Addendum and send it to the Lender for their signature…eventually.

The Addendum will actually state that the contract is not valid until signed by the Seller (Lender).  In fact, it often states that the Seller can sign a contract with another Buyer as until they sign the Addendum. Your signature will be on the Addendum, obligating you to the purchase, but you will likely not have a signed copy of the Lender’s Addendum until at least a week or more after you sign it.

The Buyer is “exposed” and does not have a signed agreement while waiting for the Lender to return it. The Lender signs the Contract and Addendum according to their process and they will not be hurried.

Very one-sided, isn’t it? Yes it is.  There are even fines and penalties for Buyers that miss close of escrow, but there are no comparable penalties for the Seller. Why would you ever sign such a one-sided Agreement?

The short answer is because the Lender will not accept alterations to their Addendum.  That is not entirely true; we have been able to change some of the terms with additional Addendums.  However, you might also lose the sale to another offer while trying to negotiate terms of the Lender’s Addendum.

The Lender’s Addendum, although it may appear otherwise, is not designed to penalize the Buyer nor do the Lenders intend to change Buyers, even if a better offer was submitted.  The purpose of the Addendum is to protect the Seller, not hurt the Buyer.

The Lender often does business in a number of states, and the Addendum is written to cover the Seller under all circumstances. The Lender does not want to change Buyers once the terms have been agreed upon, which is usually when you receive verbal approval.  Although I have not seen or am directly aware of Lenders accepting a different contract after agreeing to the first one, I am told that it has happened and will happen again.

A Lender did alter a contract after the Buyer signed it, however. The last page of the Lender’s Addendum, which had been typed by the Lender, authorized a credit of $9,000 towards Buyer’s Closing costs.  When the Addendum was signed by the Lender and returned, the amount on the last page and been marked through and $500 was handwritten next to it.

I was floored when we found it.  I thought that checking for changes to a Lender-originated Addendum was almost like comparing a photocopy to an original.  No reason to check it, or so I thought.

The lesson here is to closely read and understand every line in the Addendum. Obtain a copy before submitting a contract in order to protect yourself against unreasonable terms in the Addendum. And check the Addendum and Purchase Contract a second time when it is returned. 

Getting Your Offer Accepted

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