Why the ABAD is a required RMAA Document
RESPA (Real Estate Settlement Procedures Act) is a law passed by Congress in 1974 to curb unethical practices and consumer abuse in real estate settlement charges. Before RESPA, real estate professionals and closing service providers routinely abused consumers with unnecessary fees to close on their homes
Under RESPA, real estate firms and agents are required to disclose business arrangements which may result in fees or compensation to the real estate agent or brokerage. Whenever a real estate agent refers either a homeowner or buyer to a law firm, mortgage company or other associated settlement service, an affiliated business arrangement comes into existence. Therefore, a Disclosure Statement is required by law to be provided to and signed by the homeowner or buyer. To stay in compliance with the law, RMAA requires that every brokerage agreement, whether with a buyer or a seller, include an ABAD.
RESPA contains provisions relating to prohibition against kickbacks and unearned fees. However, a referral that could result in fees is not prohibited if the person making each referral has provided to each person referred a written disclosure, in the format of the Affiliated Business Arrangement Disclosure Statement.
A “referral” of a law firm or lender or other service can be oral or written. It just has to have the effect of affirmatively influencing the selection by any person of a provider of a settlement service or business incident to or part of a settlement service.
Violations of RESPA can result in fines, penalties and in civil actions by individuals. The penalties for violating RESPA can be quite severe. At one time, the Consumer Financial Protection Bureau (CFPB) fined a mortgage lender, two real estate brokers, and a mortgage servicer almost $4 million in penalties and consumer relief.
There is liability for a violation of RESPA even if the proposed real estate transaction does not conclude. Therefore, the practice of providing disclosure at the time of initiating a brokerage relationship is critical.
The RMAA ABAD form can be located 2 ways. It can be easily downloaded in Remine at the time brokerage agreements are accessed. Simply choose the forms package RMAA 01 RE/MAX Around Atlanta. The drop down includes the ABAD. Select it and it will be one of your forms in the transaction. It is also in the RMAA Resource Library section of the RMAA Hub, in the Office Forms and Documents section as a stand-alone form.
It often happens that a RE/MAX Around Atlanta agent represents a buyer and another RE/MAX Around Atlanta agent represents a seller in the same transaction. The Brokerage Relationships in Real Estate Transactions, BRETTA, a Georgia statute, controls the legal relationship of brokers to clients in this situation.In these cases, BRETTA allows the managing broker to legally assigns different licensees as designated agents to exclusively represent different clients in the same transaction. The reason for the designation of different agents as exclusive representatives of the different parties is to properly to perform the duties owed to the individual clients, particularly, to maintain the confidential information of the parties.
BRETTA avoids the dual agency position by allowing for Designated Agency by law. RMAA does not allow dual agency, except in unique, unavoidable situations with the permission of the managing broker.
The GAR Purchase and Sale Agreement requires the disclosure of designated agency at the section 10, Brokerage Relationships in this Transaction. The proper way to complete the section is with RE/MAX Around Atlanta as the Broker for both parties, but with the individual designated agents providing exclusive representation for the buyer and for the seller.
10. Brokerage Relationships in this Transaction.
In a designated agency transaction, the designated agent for the buyer owes the same duties to the buyer as if the agent was acting only as a buyer’s agent. Similarly, the designated agent for the seller owes the same duties to the seller as if the agent was acting only as the seller’s agent. With designated agency, each designated agent is prohibited from disclosing to anyone other than his or her broker any information requested to be kept confidential by the client unless the information is otherwise required to be disclosed by law. Therefore, designated agents may not disclose such confidential information to other agents in the company. The broker is also prohibited from revealing any confidential information he or she has received from one designated agent to the other designated agent, unless the information is otherwise required to be disclosed by law. Confidential information is defined as any information that could harm the client’s negotiating position which information the client has not consented to be disclosed.
The Federal Housing Administration (FHA) was created by the federal government to provide mortgage lenders with insurance against losses if a borrower defaults on a loan. FHA is not actually the lender. FHA is really an insurance company that eliminates the lender’s risk so lenders will make loans to borrowers that they might otherwise deny.
Borrowers like FHA insured loans because of relaxed credit and income ratios , lowered down payments and less cash to close. Sometimes a buyer that can’t qualify for a conventional loan will want to switch to an FHA insured loan.
Should a Seller allow a Buyer to switch to an FHA loan?
First, a buyer that includes a conventional loan contingency in a contract cannot switch to an FHA insured loan (or VA or USDA) without an amendment to the contract. That is, the Seller has to agree.
Next, there are substantial differences in the Seller’s position if the seller agrees to an FHA loan. A simple financing contingency that expires quickly can become a valid termination right before closing day.
Amendatory Clause and Repairs Clause
The FHA loan contingency offers protections to a borrower, required by FHA regulations, that are not found in a conventional loan, specifically, the Amendatory or appraisal and repairs clauses. According to the FHA, operation of these clauses, cannot be eliminated. Even if the finance period has expired, the contract can still be terminated due to a low appraisal or a failure to agree to repairs. For that reason, some Sellers won’t accept an FHA insured loan contingency. Termination due to appraisal or repair issues can happen right up to closing day, even if buyer has the ability to obtain the loan.
Here’s an example:
A contract has an FHA loan contingency with 21 days from the binding date to determine if Buyer has the ability to obtain the Loan. The 21 days has expired and the buyer has the ability to obtain the loan. However, the appraisal comes in low.
According to the Amendatory Clause in the FHA Loan contingency (paragraph 11), the Buyer can terminate and the Buyer gets the earnest money back. The Buyer can decide to close, but it’s the Buyer’s choice. There are, of course, ways that the parties can negotiate if the buyer and the seller want to negotiate. The Seller can reduce the purchase price or the buyer could pay the difference to the contract price or anything in between. But if the appraised price is lower than the minimum value in the contingency and the Buyer wants to terminate, the buyer can terminate and will get the earnest money back.
Here’s a second example:
The same facts as above, but the appraised price is not an issue. Instead, the appraisal includes certain required repairs to the property that exceed the amount the Seller has agreed to pay in paragraph 15.
According to paragraph 15 (Repairs), if the costs of repair exceed the amount agreed, 1) the Seller has to provide written statement of the repair cost and 2)
the Buyer and Seller have 3 days to negotiate and agree. If they don’t come to an agreement, the contract automatically terminates. No one is in default. The earnest money goes back to the buyer.
Compare this situation to a conventional loan contingency. The ability to obtain a loan and the appraisal contingency have expired. It’s simply a cash deal now. The buyer can bring loan proceeds to closing, but if the buyer does not and does not have the cash to close, the buyer is in default and the buyer’s earnest money is forfeited to the seller.
Investigate the Situation
So, what if your seller is faced with a contract that includes a FHA loan contingency or a buyer that wants to switch from a conventional loan to an FHA loan? Our recommendation would be to investigate before agreeing. Is the appraisal going to meet the price? Are repairs going to be an issue? If the FHA loan looks good and the appraisal and repair issues look good, then it’s reasonable to agree. If a buyer is asking to switch to an FHA loan. get some answers before agreeing.
Prior inspection reports typically come up from a deal that didn’t go through. A good report can bolster a property’s value, but a bad report can hurt. The question often asked,
“Do I have to provide a bad report to subsequent buyers?”
The bottom line answer is YES. Prior reports constitute material facts. A seller's duty to disclose his knowledge of defects does not end when he completes a written Seller Property Disclosure. A seller's knowledge includes prior inspection reports obtained by previous buyers. Sellers have an ongoing duty to disclose any defects revealed in those reports.
The Brokerage Relationships in Real Estate Transactions Act (“BRRETA”) is the Georgia consumer protection state statute that governs the relationship between real estate brokers and real estate consumers. Regarding a Broker’s duties to other parties, BRETTA states the following:
A broker engaged by a seller must disclose all the following to all parties with whom the broker is working: All adverse material facts pertaining to the physical condition of the property and improvements located on such property including but not limited to material defects in the property, environmental contamination, and facts required by statute or regulation to be disclosed which are actually known by the broker which could not be discovered by a reasonably diligent inspection of the property by the buyer.
Seth Weissman, attorney at Weissman PC and general counsel for Georgia REALTORS®,
in his Safe Real Estate Series, covers 4 Listing Agent scenarios:
So, now you know, you have to disclose the bad report. Consider a few courses of action: Get a new report that neutralizes the bad report. Or, if that is not a possibility, the seller should consider repairing the defects. Or, consider adjusting the price to reflect the defects.
Always weigh on the side of disclosure, regardless of how much it might hurt. Prior inspection reports constitute material facts concerning the property which a purchaser is entitled to know in making the decision whether to buy the property.
September is Agent Safety Month.
For many agents – new and tenured alike – safety protocols aren’t top of mind, especially in a busy market with new opportunities and prospective clients popping up daily. Here are some simple safety precautions real estate professionals can take during home tours and open houses.
Verify Who You’re Meeting
Take initial meetings with clients outside of a home setting. Meet clients first in places like a coffee shop or in the office. Verifying the identity – and intentions – of each and every prospective client is a relatively simple precaution real estate professionals can take.
Be aware, everywhere
(GAR FORM F316 AND GAR FORM F918)
The Lead-Based Paint Exhibit was revised in April to create an exhibit exclusively for sales transactions (GAR F316) and another one for lease transactions (GAR F918). As such, the new exhibits track more closely the federal forms prepared by the Environmental Protection Agency. Both forms now include boldface disclosures explaining that prior to the contract becoming a binding agreement, the lead-based paint exhibit needs to be completed by the buyer and seller and the buyer needs to receive a lead-based paint brochure.
What is covered by the Federal Rule?
The Residential Lead-Based Paint Hazard Reduction Act of 1992, also known as Title X, directs HUD and EPA to require the disclosure of known information on lead-based paint and lead-based paint hazards before the sale or lease of most housing built before 1978. Lead Based Paint Hazards can include fixtures that were built prior to 1978, even though the property itself was built after 1978. Think about antique doors, antique light fixtures or any other elements in the property that may have been created prior to 1978. If in doubt, disclose.
What is Required and When?
Before a Purchase Agreement or a Lease becomes binding, federal law requires the following:
Compliance is Easy
If you represent the Seller, the easiest way to comply with the requirements is for the Listing Broker to have the Seller complete the Exhibit at listing (along with the Seller Property Disclosure and the Community Association Disclosure). The Listing Agent can distribute it 2 ways: 1) have it in the property for agents to pick up and 2) upload it to FMLS /and GAMLS. The Exhibit can then be downloaded by the Buyer’s agent to sign before an offer is made. Remember, the requirement is that the LBP Exhibit be executed by both parties prior to a binding agreement.
If you represent the Buyer, make it a habit to include "Protect Your Family From Lead In Your Home" GAR CB 04, along with Protect Yourself When Buying a House, with every Brokerage Agreement. Be sure to check it as provided to the Buyer in the Brochures section of the Buyer Brokerage Agreement, so you can prove that it was delivered. (And avoid a big fine.)
What boxes should be initialed?
What if a contract is not in compliance?
The law carries huge fines for violations. Each violation carries a fine from $11,000 to $16,0000. Assume that investigators from the EPA are here in Georgia, spot checking for violations. Because they definitely are here.
It’s the Law
Don’t procrastinate and don’t let the Seller push back. The LBP disclosure is a mandatory federal law. It is not optional.
A Special Stipulation is a specific instruction written in a contract that is unique to the buyer and this seller. It is not a place to reiterate what is already in the contract. In the GAR Purchase and Sale Agreement (PSA), if there is a conflict between a Special Stipulation and any exhibit, addendum, or preceding paragraph, including any changes made by the parties, the Special Stipulation controls.
The Critical 5 elements: Who, What, When, How and Remedy.
The rules for writing Special Stipulations are simple. Include the critical 5 elements and you will have written a solid Special Stipulation. Below are 2 appraisal Special Stipulations. One is missing the critical “Remedy” element. The other includes a remedy and is complete.
Missing Remedy Element Example
In the event the Property does not appraise for at least the purchase price, Buyer shall pay the difference between the appraised price of the Property and the purchase price of the Property in cash at closing, provided that the amount does not exceed the sum of $ 10,000.
1.Who is going to do it? The Buyer.
2.What are they doing? Paying the difference, limited to $10,000.
3.When will it be done? At closing.
4.How is it going to be done? In cash.
5. Remedy if the Special Stipulation doesn’t work?
There is no remedy! The Buyer and the Seller will either have to negotiate to save the deal or the contract will fail for being too vague to enforce. If one of the parties wants it to fail, it will fail.
Complete Special Stipulation In the event the Property does not appraise for at least the purchase price, Buyer shall pay the difference between the appraised price of the Property and the purchase price of the Property in cash at closing, provided that the amount does not exceed the sum of $ 10,000. Notwithstanding the above, if the difference between the sales price and the appraised value of the Property is more than $10,000, Buyer shall have the right, but not the obligation, to terminate this Agreement provided that Buyer gives notice to Seller within 3 days of receiving the appraisal of the Property, in which case Buyer shall be entitled to the return of Buyer’s earnest money. If Buyer does not terminate the Agreement within this time frame, Buyer’s right to terminate on this basis shall be waived and Buyer shall pay cash to Seller at the closing for the entire difference between the appraised value and the sales price of the Property.
1.Who is going to do it? The Buyer.
2.What are they doing? Paying the difference, limited to $10,000.
3. When will it be done? At closing.
4.How is it going to be done? In cash.
5. Remedy if the Special Stipulation doesn’t work? If the difference is greater than $10,000, the Buyer can terminate or the buyer’s right to terminate is waived.The complete Special Stipulation appraisal is not vague. It allows the contract to proceed according to its terms.
Hope this helps!
Closing Attorney Acting as Holder of Earnest Money (GAR F510)
and Agreement of Closing Attorney to Serve as Holder of Earnest Money (GAR F511), also referred to as an Escrow Agreement
In the GAR Contract, if the buyer and seller want the closing attorney to hold the earnest money, they sign a form titled “Closing Attorney Acting as Holder,” which becomes an exhibit to the purchase and sale agreement. It is GAR Form 510. There is a required companion document in which the Attorney agrees to hold the earnest money, the Escrow Agreement (GAR F511). The 2 documents operate together. The 510 is attached to the purchase agreement and is signed by the Buyer and Seller. The 511 or Escrow Agreement is not attached to the purchase agreement. It is a separate agreement signed by the closing attorney agreeing to hold the funds.
Within two business days of the binding agreement date, the buyer is required to deliver to the closing attorney a copy of the fully signed and executed purchase and sale agreement with all exhibits, including the F510, and including the unexecuted F511 escrow agreement. The closing attorney must then agree to serve as the holder under all of the same conditions laid out in the purchase agreement. The closing attorney must then deliver notice of execution of the F511 to the buyer and seller within three business days of receiving notice that the closing attorney is desired as the holder. The notice method is generally the fully executed F511.
What If the Closing Attorney Does Not Agree to Hold the Earnest Money?
If the closing attorney does not agree and deliver the executed F511 back to the buyer and seller, then the F510 provides that the alternate holder named in the F510 will automatically become the holder instead. The alternate holder must be a broker in the transaction. Therefore, an alternate holder must be inserted into the F510 at section 7. If no alternate holder is inserted, the buyer’s agent is the default.
When Do the Duties of the Escrow Holder Begin?
The duties of the escrow holder do not begin until the closing attorney actually receives the purchase and sale agreement in which he is named as holder. The logic is that a holder should not be punished for failure to follow the terms of an agreement that he has potentially not yet even seen.
Potential for an Attorney’s Conflict of Interest in a Cash Transaction
The GAR Purchase and Sale Agreement provides that the closing attorney will represent the lender in the transaction, but if there is no lender, then the closing attorney will represent the buyer. A particular area of concern arises when the closing attorney who is representing the buyer is also the holder of the earnest money in an all-cash transaction because, unlike real estate brokers and agents, attorneys owe fiduciary duties to their clients, and their role as the holder has the potential to result in a conflict of interest for the attorney. If there is a dispute and the attorney owes a fiduciary duty to the buyer, the attorney must disburse the funds back to the buyer, if there is any reasonable basis for doing so. The seller may well object to this, however, since as the holder of the earnest money, the attorney is required to be neutral and make an objective determination. The holder may well feel that under these facts the buyer is in breach and that the funds should be paid to the seller. But how can the attorney make such a call when doing so is against the best interests of his buyer client? The GAR contract resolves this conflict issue by requiring the Holder to interplead the funds. Therefore, in a cash transaction, consider having one of the brokers in the transaction hold the earnest money rather than the closing attorney.
“From your friendly neighborhood lenders over at the Mooreteam
The back to school lull in volume seems to be over and we are seeing increased intensity again in purchase sales.
The FED keeps talking about tapering their purchases of the Mortgage Backed Securities and that is expected to happen before the end of the year. That means rates are going up soon. There is no better time to purchase a home than right now. Soon rates will be back in the upper 3’s and into the 4’s again. Historically those are great rates but if you can score a home with a rates in the upper 2’s or lower 3’s… why not. Now is the time.
Refinancing, especially cash out refinancing, is also hot right now. Homeowners have more equity in their homes and with rates so low, it makes sense to leverage the equity for renovations, paying down expensive debt, or home maintenance. We are here to help!
The GAR Purchase and Sale Agreement aggregates the disclosures and agreements relating to the community association into one exhibit, the Community Association Disclosure Exhibit (“CAD”).
Who Pays for What in the CAD
The seller generally pays for the following things:
1) the closing letter
2) all amounts assessed against the property that come due before the closing, including both regular and special assessments
3) any move out fees and other fees designated by the community association as a seller fee
4) any transfer, initiation and administrative fees that the seller has not fully disclosed to the buyer (or which increase after the seller has initially disclosed this amount to the buyer)
5) any special assessments that have been adopted or are under consideration
that have not been fully disclosed by the seller to the buyer.
Seller Obligated to Pay All Assessments Owing Through Closing
The seller is obligated to pay all assessments against a property owing through closing in order to convey good title to the buyer. This includes all recurring assessments owing through the closing. These are normally annual assessments that are paid in intervals established by the community association such as monthly, quarterly, or semi-annually. For example, if an assessment is $1,200 per year and is due in monthly installments of $100 per month and a property closes halfway through the year, the first six months of assessments would be paid by the seller, and the second six months of assessments by the buyer. The point is that assessments are prorated through the closing. Assessments can include late fees, fines, court costs, interest and attorney’s fees charged against a property. It is critical that the assessment amount is completed correctly. The form calls for the annual assessment and the number of installments. If the seller completes the document with the monthly assessment amount, for example, the Seller will have the pay 11 months for the buyer because the annual amount was not properly disclosed.
Special Assessments Paid in Installments
Some special assessments may be paid in installments while others must be paid at once. The due date for the special assessment will determine what must be paid by the date of closing. If a special assessment is due in installments, some of which come due before the closing and some of which come due after the closing, the installments coming due before the closing would all be the obligation of the seller to pay. Most special assessments are technically due in full when they are passed, but no late fees or penalties are imposed if the owner timely makes all permitted installment payments. When installment payments are permitted by the community association, those installments coming due prior to the closing are the responsibility of the seller and those installments coming due after the date of closing are the responsibility of the buyer.
Seller Pays for Seller Clearance Letter
Under the CAD, the seller is obligated to pay the cost of any association account statement, clearance letter or closing letter. This letter normally details all amounts owing to the community association through a specified date on the letter and is used to help a seller convey clear title to a property to a buyer. In some instances, the closing letter will only be issued by the community association as part of a package, where other amounts must also be paid to get the closing letter. So, for example, a community association might charge $500 to issue a clearance letter and to provide other documents to the seller at the same time. If the clearance letter will only be issued in a package of documents or other information, information, the seller is required to pay whatever amount is necessary to get the package of documents or information, including the clearance letter.
Buyer Pays for Transfer, Initiation and Administrative Fees That Are Fully and Accurately Disclosed
Under the CAD, the buyer pays all transfer, initiation, and administrative fees that have been accurately and fully disclosed to the buyer. “Transfer, initiation and administrative fees” is a defined term in the GAR Community Association Disclosure Exhibit and includes: “. . . any initiation fee, capital contribution, new member fee, transfer fee, new account set-up fee, fees similar to the above but which are referenced by a different name, one-time fees associated with the closing of the transaction and fees to transfer keys, gate openers, fobs and other similar equipment. Advance assessments due at Closing for a period of time after Closing, shall not be Transfer, Initiation and Administrative Fees and shall be paid by Buyer.” It is critical that the Seller accurately disclose these fees in the CAD. If the Seller does not and fees in excess of the agreed amount are due, the Seller has to pay them. See 3.C on page 3 of the CAD.
If the buyer wants the seller to make a contribution to transfer, initiation and administrative fees, a Special Stipulation can be used.
The Seller Pays for Transfer, Initiation and Administrative Fees
Above an Agreed Amount
Transfer, initiation and administrative fees need to be accurately disclosed by the seller to the buyer. One problem that arises in this area is that sometimes a fee will increase from the time it is initially disclosed to the buyer. In other cases, the seller may forget to disclose a fee. The (CAD) provides that the buyer pays up to a maximum fill-in-the-blank amount for transfer, initiation, and administrative fees. The seller then pays all transfer, initiation, and administrative fees above this amount, regardless of why. So, for example, let’s say that the buyer and seller agree in the CAD that the buyer will pay a maximum of $1,000 for transfer, initiation and administrative fees. The community association then increases the fees to $1,400. In this case, since the maximum amount the buyer is obligated to pay is $1,000, the seller is obligated to pay the additional
If Seller Accurately Discloses Special Assessments Approved/Under Consideration
If the seller accurately discloses in the GAR Community Association Disclosure Exhibit that a special assessment has passed or is under consideration, then the special assessment is paid for by the party who owns the property at the time the special assessment is due. In other words, if the special assessment is due prior to closing, the special assessment is paid by the seller. If the special assessment is due after closing, the special assessment is paid by the buyer. If a portion of the special assessment is due before and after closing, the buyer and seller would each pay their respective portions of the special assessment.
Buyers have a general duty under Georgia law to exercise reasonable care to protect themselves against being defrauded. Buyers should try to independently verify whether a special assessment has been passed or is under consideration, since doing so will strengthen the buyer’s legal position by showing that the buyer exercised reasonable care to discover whether a special assessment was under consideration or approved. Another way buyers can demonstrate that they used reasonable care to determine if a special assessment is under consideration or has been approved is to include a special stipulation in their contracts. The special stipulation should require the seller to provide, provide, within the first five days or so of the commencement of the due diligence period, minutes of the meetings of the six most recent meetings of the board of directors of the community association. 5Surprise
Special Assessments Arising After the Binding Agreement Date
Who Should Pay?
In some cases, notice of a large special assessment is often sent and approved after the Binding Agreement Date but prior to closing. What is the fair way to decide who should pay? The CAD includes a procedure, including a right to terminate under specific condition, where the parties pre-agree. See the CAD for details at F.iii (c). An amount above which the buyer has the right to terminate must be filled in.
Source: Weissman, Seth. The Red Book on Real Estate Contracts in Georgia (pp. 768-777). 6th Edition 2021.