Avoiding Lender Fraud

Avoiding Lender FraudAs a Principal Managing Broker, I am asked about the proper response to handling seller financial incentives to the buyer. There are only two ways to handle financial incentives from the Seller to the Buyer without stating specific inspection items in the addendum. Loan officers from various companies continue to ask our brokers to write a Form 34 that simply says, “Seller shall credit Buyer $5000 toward their allowable closing costs and pre-paids at closing”. This is easy for them, because they don’t have the liability we do. As the ring master of the transaction a real estate broker always knows the exact reason why a Seller would be crediting a Buyer money. The loan officer can say they didn’t know what it was about should the loan later go into default and the transaction is investigated. When we write an addendum as stated above it is clearly an intent to hide the fact that the compensation is due to problems found on the building inspection. The Buyer will sign a document from their lender at closing that speaks specifically to disclosure of material facts about the property. So if the brokers and the principals are a party to such an addendum they will all have liability concerning fraud if the loan defaults and is investigated.

Below I have outlined the two responses that push us as far as we can go without getting into the gray area of possibly committing fraud. These two responses are within the requirements set forth by the Department of Financial Institutions.

Form 34: “In lieu of any repairs, Seller will credit the buyer $5000 toward their allowable closing costs and pre-paids.” (It is up to the underwriter to ask for any additional inspection information. We met the burden of the law, because we wrote “In lieu of any repairs”.

Form 35R: (Inspection Response Form) “Seller shall credit Buyer $5000 toward their allowable closing costs and pre-paids.” (It is up to the underwriter to ask for any additional inspection information. We met the burden of the law, because we wrote the credit on an inspection response form).

Put Our Knowledge On Your Side

Property-Seller Disclosure Statement


Like many other states, Washington requires that the Seller must provide the buyer with a property disclosure statement if the sale involves a property containing up to four dwelling units, unimproved land that is zoned residential, or a mobile or manufactured home. The only exemptions to this law include transactions where the Seller received the property through a foreclosure purchase, a gift from a family member, or transfer from a personal representative who is settling an estate.

Many residential building companies require as a condition of sale that a buyer waive their right to receive a completed transfer disclosure form. The common misconception is that if the Seller doesn’t fill out the form, and the Buyer waives their right to receive the completed form, that the Seller no longer has any obligation to disclose material defects. The Seller must disclose in writing any known material defects, regardless of whether or not the Buyer waives receipt of the disclosure form. There is no “free walk” on disclosure. If it is material, and you know it, you must disclose it!

Real Estate Licensees have no duty to investigate or inspect a property for defects. When a Real Estate Licensee representing a Seller is made aware of a defect that is not on the Seller’s Disclosure Statement they must immediately make the Seller aware of it and recommend that they disclose it to the Buyer if there is already a pending sale, or amend their Disclosure Statement if the property is actively on the market. If the Seller will not comply, the Real Estate Licensee is left with one option, and that is to resign. The reason for this is that the Licensee is literally left between a rock and a hard place when a Seller chooses not to disclose a material defect. The Licensee has an obligation of confidentiality where their Seller is concerned, but they also have an obligation to prospective Buyers of disclosing any material defects that are not already contained in the Seller’s Disclosure Statement.


How can a listing agent represent both parties in a transaction?

There is confusion surrounding agency and exactly who the listing agent should represent when the Buyer comes directly to them without the representation of another agent. Assuming the listing agent had no previous relationship with the Buyer, their representation should remain with the Seller.

When you really think about it this is the logical route, and the Buyer will see this too. The Law of Real Estate Agency

The listing agent has first been employed by the Seller to represent them in the sale of their property.  The Buyer views the property with the listing agent knowing full well the listing agent represents the Seller.
It is often the broker/agent who puts forth the idea of the Buyer receiving agency representation from the listing agent.

The least problematic way for a listing agent to sell their own listing is to act as a facilitator for the Buyer. This allows the listing agent to act as the selling agent/facilitator for the Buyer without compromising their agency to the Seller. This is accomplished by simply explaining to the Buyer that the listing agent will take care of all the selling agent responsibilities for the Buyer.What the listing agent will not do is to give the Buyer advice on price or anything else that would compromise the best interest of the Seller.

The listing agent then gives the Buyer “The Law of Real Estate Agency” pamphlet to read about the different types of agency. If after reading the pamphlet the Buyer feels comfortable with the listing agent representing the Seller and acting as a facilitator on behalf of the Buyer, the listing agent will have the  Buyer sign an agency disclosure form that set forths that the listing agent represents the Seller. The Buyer can then go forward in having the listing agent prepare their offer.  If the Buyer is uncomfortable with the listing agent acting only in the Seller’s best interest, they can bring in another agent/broker of their choice to represent their interests.

Visit:  CBBain.com (Washington) or CB Seal.com (Oregon) to search for homes, find an office or to find a broker.