Short Sales – Revised Forms And New Resources

SHORT SALES – REVISED FORMS AND NEW RESOURCES
By K. Michelle Lind
Posted: August 2008

A short sale is a real estate transaction in which the sales price is insufficient to pay the liens encumbering the property and sale costs, but the seller is unable or unwilling pay the difference. With the current market conditions, short sales continue to be commonplace and a much discussed topic in the industry. These transactions raise numerous issues, such as:
• How brokers can adequately represent their clients
• What should be disclosed about the short sale and when
• How the property should be identified in the MLS
• What the brokers can do to deal with commission reductions
• How brokers can more effectively communicate with lenders
• What terms should be included in the contract to structure the transaction
• When subsequent offers should be submitted to the lender

These issues are difficult to address because documentation and eligibility criteria for short sales vary depending on specific lender and investor guidelines. Further complicating the issue, many lenders are struggling with staff that have a lack of experience with short sales. Thus, many brokers report that short sale transactions are often difficult and many fail to close escrow.

Improving the Short Sale Process
Nonetheless, there are things that a listing broker can do to increase the chance of a successful short sale transaction. First, remember that generally speaking, the lender seeks to obtain fair market value for the property. Second, be aware that most lenders will not agree to a short sale unless the seller is insolvent or will either agree to make a cash payment or execute a promissory note at closing. In addition, a listing broker should:
• Obtain all pertinent information from the seller regarding their situation with the listing
(liabilities, liens, trustee’s sale date, etc.)
• Perform a comparative market analysis to determine the property’s fair market value
• Calculate all costs of sale
• Advise the seller to explore their options other than a short sale (retain the property, loan modification, deed in lieu of foreclosure, foreclosure, bankruptcy)
• Advise the seller to obtain legal and tax advice
• Incorporate the AAR Short Sale Addendum to the Listing Contract in the listing agreement
• Obtain written authorization from the seller to contact the lender and immediately contact the lender’s loss mitigation department for short sale package instructions
• Advise the seller to draft a hardship letter and to gather the necessary financial documentation for the short sale package
• Check the MLS rules regarding short sale disclosure requirements
• If an offer is received, insure that the AAR Short Sale Addendum to the Residential Resale Purchase Contract is incorporated into the contract
• Notify the lender of any contract and subsequent offers
• Ensure that the escrow agent is aware that the transaction is a short sale
• Communicate and follow-up on details frequently

AAR Revised Short Sale Addenda
The AAR short sale addenda will also assist in educating the parties and improving the process. AAR was one of the first associations in the nation to develop standardized short sale forms. These forms have been used since August 2007 and have been very effective overall. However, an AAR short sale workgroup, chaired by James “J.T.” Tsighis and comprised of short sale “experts,” suggested a few improvements to the forms, which have been adopted. The revised forms will be available for use on August 1, 2008.

Short Sale Addendum to Listing Contract
A major change to the Short Sale Addendum to the Listing Contract form is the addition of the
following language, which should be initialed by the seller:
“Seller acknowledges that Broker is not qualified to provide financial, legal, or tax advice regarding a short sale transaction. Therefore, the Seller is advised to obtain professional tax
advice and consult independent legal counsel immediately regarding the tax implications and
advisability of entering into a short sale agreement.”

The Addendum also:
• Defines “short sale” and requires the seller to acknowledge that there may be
disadvantages to a short sale.
• Notifies the seller that a short sale may adversely affect their credit score.
• Informs the seller that even if the creditor agrees to a short sale, the creditor may not
agree to forgive the debt entirely. Therefore, the seller is advised to consult independent
legal counsel and be certain of the terms of any short sale agreement before making a
decision.
• Advises the seller that a short sale in which the debt is forgiven is a relief of debt and may
be treated as income for tax purposes. Therefore, the seller is advised to obtain
professional tax advice.
• Obligates the seller to cooperate with the listing broker and lender to determine the
amount of debt owed on the property.
• Obligates the seller to promptly submit all requested documentation to obtain the lender’s
approval of a short sale.
Finally, the seller is advised to explore options other than a short sale.

Short Sale Addendum to Residential
Resale Purchase Contract
When the parties execute the Short Sale Addendum to the Residential Contract, they are agreeing that the contract will be contingent on an acceptable short sale agreement. This contingency is similar to the buyer’s financing contingency. However, both parties acknowledge that it may take weeks or months to fulfill the contingency by obtaining the lender’s approval of the short sale. Due to the questions about the seller’s right to accept back-up offers while a contract is being evaluated by the lender, the following language was added to the Addendum:
Nothing shall limit a Seller from accepting subsequent offers from subsequent buyer(s) and submitting the back-up contract(s) to Seller’s creditor(s) for consideration. All parties understand and agree that Seller’s creditor(s) may elect to sell the Premises to the holder of the Contract with terms and conditions most acceptable to creditor(s).

The Addendum also obligates the seller to submit a copy of the contract and any other documentation required by the lender for approval of the sale within five days after contract acceptance. The seller agrees to diligently work to obtain short sale approval (again, similar to the buyer’s obligation to diligently work to obtain loan approval) and promptly provide the lender with all additional documentation, including an appraisal at the seller’s expense, if required. If the seller and the lender enter into a short sale agreement, the following terms apply:
• The seller must immediately deliver notice to the buyer that the seller and the lender have entered into a short sale agreement. This notice is defined in the Addendum form as the Short Sale “Agreement Notice.”
• The date of seller’s delivery of the Short Sale Agreement Notice to the buyer is deemed the date of contract acceptance for purposes of all applicable contract time periods. In other words, although the parties have entered into an enforceable contract, the time periods do not begin to run until the seller has delivered the Agreement Notice. Thus, all time periods provided, including the Inspection Period, begin on the day following delivery of the Agreement Notice.
• The buyer is obligated to promptly open escrow and deposit the earnest money upon receipt of Agreement Notice.
• The buyer will be responsible for all loan costs.
• The buyer waives the seller’s warranties, except that the seller warrants to maintain and repair the premises so that at close of escrow the premises will be in substantially the same condition as the date of contract acceptance.
• Unless otherwise provided, close of escrow will occur thirty days after delivery of the Agreement Notice.
• A new provision was added to the revised form in which the parties agree to cooperate with the lenders and sign additional disclosures and addenda required by the lender as a condition of approval of the short sale, provided that neither party incurs additional costs or liability.

The notice to the seller regarding obtaining legal and tax advice was emphasized in the revised form. The provision, which must be initialed, now reads:
Seller acknowledges that Broker is not qualified to provide financial, legal, or tax advice regarding a short sale transaction. Therefore, the Seller is advised to obtain professional tax advice and consult independent legal counsel immediately regarding the tax implications and advisability of entering into a short sale agreement.

The Addendum provides that the buyer is entitled to cancel the contract at any time before receipt of a Short Sale Agreement Notice from Seller. And, in the event that the seller and lender are unable to reach an acceptable short sale agreement, the seller must notify the buyer and the contract is cancelled due to the unfulfilled short sale contingency.

NAR Short Sale Resources
The NATIONAL ASSOCIATION OF REALTORS® (NAR) has also recently introduced resources to assist with short sales. The NAR Risk Management Committee formed a national Short Sale workgroup of which “J.T.” Tsighis was an active member. The workgroup developed the Short Sale Blue Print and the Short Sale Workflow presentation. These educational tools are designed to assist brokers in handling short sales. The Short Sales Workflow is intended to give brokers a comprehensive overview of the short sale process (listing, marketing, negotiating and closing properties subject to a potential short sale). The Blue Print is a guide to the short sale process.

These resources along with the Short Sale workgroup report are at
www.realtor.org/MemPolWeb.nsf/pages/shortsales .
Additionally, the NAR board of directors approved recommendations to the NAR Model MLS
Rules and Regulations and to Multiple Listing Policy Statement 7.23 addressing short sales. The
MLS policy changes, which are optional, may also be reviewed on the NAR website at the above
link.

K. Michelle Lind, Esq.
Michelle is general counsel to the Arizona Association of REALTORS® (“AAR”) and a State Bar of Arizona board certified real estate specialist. She serves as the primary legal advisor to the association, provides legal direction in the development of standard forms, is involved in legislative advocacy, and assists in the association’s educational efforts. Please note that this article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.