The Short Sale Addendum (SSA) is a document specifically designed to deal with the unique circumstances that a short sale creates. The basic premise of the Short Sale Addendum is to set a deadline for the acceptance of the short sale by the lender and to delay the start of certain Contingency Periods within the Residential Purchase Agreement (RPA). This is about as much as the average buyer or seller knows about the SSA. There is a lot more to it. Let me step you through this Addendum.
1A of the contract deals with what I discussed above. It states that the contract is contingent upon lender approval and sets a deadline for this approval. The standard duration is 45 days, however, this can be extended to any number of days agreed upon by the buyer and seller and usually is. As the listing agent, I will advise my client counter a SSA that only allows for a 45 day contingency. From experience, I know that the lender will generally take 60 days or more to approve the short sale. The significance of this is that once the timeline is up, the buyer can legally walk away from the contract. This is a huge waste of time for a seller that may have a deadline to sell the home before it goes into foreclosure. A buyer that is willing to allow 60 or 90 days for this process is more dedicated to the transaction.
The other relevant item in this first part of the SSA is that neither party is obligated to change the terms of the contract (RPA) to meet lender requirements. For example, if the lender comes back with a different price the buyer OR the seller may legally cancel the contract in writing with no further negotiations. For this reason, I make sure the offers being presented to lenders are going to make sense for them to approve.
Part II speaks to the time periods within the Residential Purchase Agreement (RPA). It states that unless otherwise agreed upon, (This is a key phrase throughout the Short Sale Addendum) the contingency periods such as Appraisal, loan and inspections will not start until the buyer receives written acceptance of the sale from the lender. This keeps the buyer from spending money on inspections and appraisals until they know the lender will approve the sale.
Part II goes on to explain that other timelines agreed to in the RPA such as pre-approval, deposit requirements and proof of funds for not be delayed until lender approval. This is to ensure that the buyer is qualified and can close the transaction.
This section of the SSA deals with the buyers deposit check. In a non-short sale transaction, the buyerâ€™s deposit check or Earnest Money is required to be placed in an Escrow Account within 3 days of the Seller accepting the offer. However, Part III of the SSA states that the 3 days begins after the lender approves the offer unless the box is checked that states â€œAs specified in the agreementâ€. This means that the buyer has no funds being held in escrow.
When I am the buyerâ€™s agent, I donâ€™t check this box. Having my clientâ€™s money in an escrow account before the offer is approved by the lender is both a poor use of my clientâ€™s money and ads additional risk. In order to remove money from escrow, both the buyer and the seller must approve the release of the funds. If my buyer decides to back out of the transaction, even with just cause, the seller may feel wronged and delay or deny the release of funds. This may cost the seller in the long-run but in the mean time my client has funds that are tied up and canâ€™t be used until the situation is resolved.
Now as the sellers agent, I definitely try to get the earnest money put into the escrow account as soon as possible. A buyer that has funds in escrow tends to be more dedicated to the purchase and gives my client a little leverage if not just perceived leverage. I will never advise my client to hold a buyers funds captive in escrow unless they have been wronged, have incurred loss due to the buyers actions and it is in my clients best interest. An example of this would be my last short sale transaction. The buyers backed out of the contract after lender approval without just cause. We could have held their funds in escrow and sought damages. However, this would have delayed the sale to any other buyer and my clientâ€™s home may have been foreclosed on. Instead, I found a new buyer that would pay the same price for the home which was already approved and we were able to do what is called a buyer swap. We closed the deal 30 days later!
Sections IV and V
These sections are disclosures/acknowledgments to the buyer and seller dealing with possible costs and the understanding that the lender must approve the short sale and that there are no guarantees that they will. For the sake of your time this is all I will say regarding these sections. There are no options to consider here.
This is an important item of the SSA. In general, it states that after the seller has accepted an offer they may continue to market the home for backup and additional offers. It further states that the seller may present additional offers to the lender. While this is great for the seller it is a huge negative for the buyer.Â A buyer could be waiting months for an approval only to have a higher offer come in and bump them out. In practice, I have not found this to be the norm but it is important to know that it is a possibility. It is important to remember that this can be omitted from the contract with the use of an addendum.Â When I am the buyerâ€™s agent, I definitely try to have this option removed from the offer. As the sellerâ€™s agent, I will want to keep this option in the contract. If an offer comes in that is significantly higher I want to have the option to present it to the lender.
This is the last section of the Short Sale Addendum and it is specifically directed at the seller. It advises the seller that a short sale can have a negative impact on the sellerâ€™s credit and advices them to seek professional advice. This is advice that needs to be heard and acted on by the seller. It is imperative that sellers know their options and the effects that a short sale will have on them.
So there you are. This is the nuts and bolts of the Short Sale Addendum. This document can radically change dynamics of a short sale. I hope you found value in this information. Your questions and comments are most welcome.
Please send them to EricS@steven-anthony.com
Realtor, GRI, SRES
Steven Anthony Realty