December 7, 2013 - Sellers’ Concessions Revisited and New York State Bar Association Opinion 993
The New York State Bar Association Committee on Professional Ethics, in handing down Opinion 993 compels us to re-visit the issue of Sellers’ Concessions which the Richmond County Bar Association, most pointedly, had exhaustingly and satisfactorily vetted out over the past six (6) years. Rather than revisiting the findings of Opinions 817 and 882, which most real estate practitioners should be quite familiar with, this Article is intended to address Opinion 993, and the points made therein.
Opinion 993 was prompted by a joint inquiry made by a local Bar Association together with a local Association of Realtors, seeking guidance as to how a Contract should be crafted in order to be in compliance with Opinion 817 and its progeny. Opinion 993 correctly states that a Sellers’ Concession disclosure must be contained in the Contract of Sale, not in a Rider, but within the Contract.
The inquiry goes on to state that with full and proper disclosure of the Sellers’ Concession in the Contract, this has created “problems with various Lenders”. Respectfully, if full, accurate and transparent disclosure has created problems for the Lenders, perhaps it is the Lenders who should be re-thinking the issue of Sellers’ Concessions, rather than the attorneys who are drafting the Contracts, based upon terms that are presented to them while endeavouring to do so with full, accurate and transparent disclosure.
Opinion 993, in my humble opinion, misses the point. It attempts to draw a distinction between a situation where there is an a) increase in the purchase price and the concomitant amount of the Sellers’ Concession, and b) one where a Seller actually bears an economic cost reflected in the Sellers’ Concession. The Committee finds there to be a distinction, noting that the first scenario is the one where full, accurate and transparent disclosure is warranted.
Throughout the past six (6) years, as a real estate practitioner, that the issue of Sellers’ Concession has come up in the course of real estate brokers, primarily, putting together a real estate transaction, it has always been structured as being an increase in the purchase price and the concomitant amount of the Sellers’ Concession. Why? Because the primary objective has been to fictitiously increase the purchase price by a sum certain amount, while at the same time, providing for a Sellers’ Concession in the same sum certain amount, thereby resulting in a net zero gain to either party. The first question the Seller will typically ask is how much am I “netting” as a selling price, which amount is the gross selling price, as increased by the Sellers’ Concession, less the sum certain concomitant Sellers’ Concession amount, which therefore discounts, in all instances, the possibility that the transaction was structured whereby a Seller actually bears an economic cost reflected in the Sellers’ Concession. This is further corroborated by the fact that it is expected that the Purchaser will bear the increase in the transfer taxes attendant to the fictitious increase in the selling price.
In the landmark decision, LaSalle National Bank, N.A. v. Shearon, 23 Misc.3d 959 (2009), our own eminent Justice Joseph J. Maltese properly opined that Sellers' Concessions concede nothing. He went on to say that "a Sellers’ Concession as it is utilized in this transaction, is a misnomer with no foundation in logic or mathematics because the Seller concedes nothing to the Purchasers. In this case, the Sellers inflated the price of their home from $335,000 to $355,100 to allow the Shearons to borrow additional funds to close the transaction. The Sellers conceded nothing other than to act as co-conspirators to circumvent the Banking Law restrictions on the closing costs to mortgage ratios and to manipulate the public records of the true sales prices and market data. The manipulation of the true property value in the public record takes on particular significance because the sales prices are used as comparative prices in real estate appraisals that are used to evaluate other similar sales of homes in the area, as well as in estates, matrimonial matters and partition actions. This false data has been partially responsible for the inflated value of homes in low and middle income areas. By utilizing the Sellers’ Concession the true sales prices are inflated. The farce of this Sellers’ Concession is best illustrated where the Purchaser pays the Seller for any increase in the Seller's real estate transfer taxes resulting from the "so called" Concession. Indeed the Sellers did not even concede the additional tax liability associated with the higher listed "sales price."
Accordingly, and contrary to the findings in Opinion 993 where the Committee opined that the Attorney’s obligation as to full, accurate and transparent disclosure in crafting a Contract of Sale can vary from transaction to transaction, I would opine, in light of Shearon, that all Contracts of Sale require the same full, accurate and transparent disclosure, because to vary from this position only places the Attorney in harm’s way.
Rather than the Attorney having to conform to the resistance being met by the Mortgage Industry as to the issue of Sellers’ Concessions, it is time for the Mortgage Industry to recognize Sellers’ Concessions for what they really are, which are fictitious increases in a selling price with a zero sum gain to either party, designed exclusively as a tool to allow for a Purchaser to obtain a larger Mortgage than he or she would have otherwise been able to procure without a Sellers’ Concession.
But is this not what Justice Maltese prophetically stated as being one of the primary causes of the “mortgage meltdown”? Something to think about.
Download the article HERE.