Today, a lawyer's look at short sales with our Attorney Richard D. Vetstein.
Sam blogged about short sales last week. I will go one step forward and predict an increase in short sales for 2012, with distressed homeowners and lenders opting for the more cost effective method of disposing distressed realty. With some early success, I’ve been advocating for a better way to legally document short sale deals. It’s better for real estate agents, attorneys, sellers and lenders alike.
The Offer to Purchase: Now the operative contract document
I am seeing a shift to making the offer the operative contract in a Massachusetts short sale transaction. And for good reason. A short sale, by definition, is subject to a critical contingency: obtaining short sale approval from the seller’s lender(s). No short sale approval, no deal.
Why should a short sale buyer and incur the expense of drafting a comprehensive (and contingent) purchase and sale agreement when there is no guaranty of getting short sale approval? Furthermore, short sale lenders will accept a signed offer from the buyer during the approval process.
When we were first doing short sales, there were many instances where we drafted up purchase and sale agreements and then the short sale approval fell through. We had to charge the client for the drafting work or eat the cost. No one was happy.
The better way has proven to be the following: • Build all contingencies into the Offer to Purchase, namely, Short Sale Approval and Financing • Use a standard rider with short sale contingency language, with a deficiency waiver • Seller agrees to use best efforts in obtaining short sale approval • Buyer agrees to be bound for set approval period (60-90 days) in exchange for seller taking property off the market and not accepting back up offers. Negotiate deposit amount, usually 1 percent of purchase price. Buyer will obtain his financing and loan commitment during this approval period. • Negotiate extension rights, with corresponding protection for Buyer’s financing/rate lock • Upon short sale approval, purchase and sale agreement is signed within 5-7 days and full 5 percent deposit made • Closing within 30 days of short sale approval. (Most short sale approvals are only good for 30 days) • Waiver of home inspection or inspection prior to offer acceptance. Sellers should never agree to allow a home inspection contingency giving the Buyer a right to terminate. If the buyer doesn’t want to pay for an inspection up front, he is not a serious short sale buyer.
Change is hard
I recognize that this is a departure from the “standard” forms. However, this method will decrease the time to obtain short sale approval and reduce expense. The parties are not waiting around for the P&S to be negotiated and signed, and the buyer does not have to pay for unnecessary legal work. Buyers’ lenders need to adapt by getting a firm loan commitment issued timely without insisting that the borrower have a signed purchase and sale agreement for underwriting approval. Under the process that I have outlined and under established Massachusetts case law (McCarthy v. Tobin), the Offer is a legal and binding contract and is sufficient for underwriting purposes. If a signed offer acceptable to the short sale lender, it should be acceptable to the buyer’s lender.
Call to action
With the continued proliferation of short sale transactions, I urge the real estate organizations and the bar association to come up with additional “standard” form riders to address the unique aspects of a short sale transaction.
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