Concealing the Existence of Vacation Rentals

QUESTION: I have a real estate firm at the beach and we provide property management services as well as traditional brokerage services. One of my property management clients decided to list his property for sale. However, he asked me to continue marketing vacation rentals for next year. A few weeks ago, we received an offer through a broker affiliated with another firm. When we countered the offer, we attached the Vacation Rental Addendum and disclosed the existing vacation rental agreements relating to the property. We also checked the box in the Offer to Purchase and Contract to indicate that the Vacation Rental Addendum was part of the contract. The Buyer signed the Vacation Rental Addendum and initialed the change in Form 2-T. However, a few days later, the buyer’s mortgage broker called me and asked us to remove the Vacation Rental Addendum from the contract and submit a new contract without any boxes being checked. He told me that the buyer can get a lower interest rate from his lender if the property is considered a second home and not vacation rental property. Should we go along with the mortgage broker’s request?

ANSWER: Based on the circumstances you described, you should refuse the mortgage broker’s request. Essentially, the mortgage broker is asking you to mislead the buyer’s lender. Going along with his suggestion could be regarded as participating in loan fraud and you should be extremely careful to avoid that possibility. If the buyer truly does not intend to rent the property (after honoring any existing leases that end within 180 days after closing), the buyer should let his lender know that fact, and the lender’s interest rate should be set accordingly. Neither the buyer nor his mortgage broker should ask you to conceal the existence of leases from the lender.

Under North Carolina’s Vacation Rental Act, a seller must disclose to a buyer the time periods that the property is subject to a vacation rental agreement “prior to entering into any contract of sale.” The Vacation Rental Addendum was created when the Act was passed as a means for sellers of properties subject to vacation rentals to fulfill their disclosure obligation. We strongly encourage its use. However, the Vacation Rental Act does not require that the seller’s disclosure be attached to the sales contract, and the seller may therefore make his required disclosure in some other way. In that circumstance, we do not believe that you would have any obligation to disclose the existing vacation rental agreements to the buyer’s lender. However, if there are “red flags” indicating that the buyer is concealing facts from his lender, you should proceed with caution. If you have doubts about what to do, we suggest that you consult with an attorney for more specific guidance.