Short Sale Contracts Need This Term
You must have a provision in the sales contract that makes it contingent on the approval of the short payoff by the lender(s) and lien holders. In other words, the contract will not be performed unless everyone who needs to get paid from the sale will settle for the net proceeds. If you do not have that in the contract, the seller is signing an agreement that says the property will be sold for a specified price, period. So, if there is not enough money to pay off all the debts, the incorrectly written contract would say that the seller would need to bring enough money to closing to complete the sale.
Since you are working with a seller who has had a financial setback, allowing the seller to sign a contract without this contingency would be a disaster. I go to every short sale seminar I can because I am an educational junkie. I went to a short sale seminar the other day where the instructor told the Realtors that they could not write in a contingency like this, because creating this wording was the unautorized practice of law. The instructor went on to say that the Realtor could not even advise the seller to write it in, because if they got the words wrong there could be some liability.
It is important for Realtors to avoid the unauthorized practice of law. However, you have to protect the seller from signing a contract that is not contingent on the approval of the banks and other lien holders.
The simple solution is to include an addendum, like the North Carolina Short Sale Addendum the contract. An even better addendum is the California Short Sale Addendum. All the Realtor has to do is place words like “The Short Sale Addendum is part of this contract” in the body of the agreement at the place where you insert the references to the addenda that are made part of the contract. Then, fill in the blanks in the Short Sale Addendum. If you want to get formal, you can say “The Short Sale Addendum dated (insert date) executed by the Buyer and Seller concerning the subject property is incorporated herein by this reference as though it was fully set forth.” I like the short version.
Incorporating a document or addendum as part of a contract is something Realtors do all the time, and it is not the practice of law because you are just incorporating standard wording on a standard contract. It is the same as filling in the blanks in the basic contract form.
California has the best Short Sale Addendum, available from the California Association of Realtors. North Carolina just adopted one that does the job. One of the problems with the North Carolina addendum is it tells the buyer that the seller can leave the property on the market for “back up” offers. The part warning the buyer that the property will remain on the market is great. The part calling it a “back up” offer does not set the proper expectation. When a second offer comes in, it has to be presented to the bank. What happens when the bank sees that the second offer gives them more money than the first, particularly if the second buyer is well qualified? The second offer will not be a back up offer, because the bank will disapprove the first offer and accept the second. You have to give the North Carolina authors some slack because this is North Carolina’s first attempt at a short sale addendum. They have not needed one before this. California has gone down the short sale road before.
If you do not have an addendum that is approved for use in your area, check with your broker in charge to see if you can use the one from California. If not, contact your favorite closing attorney and get them to prepare and addendum for you.
One of the issues that comes up in short sales is when to deposit the earnest money. That depends on the terms of the addendum. There is a choice in the California addendum, so you check whichever box is applicable. My preference is to deposit the earnest money check when the short sale is approved by the lender. The reason I like this option is that it emphasizes to the buyer that the sale is not approved until the lender signs off on it. If you do not have a contractual provision to hold the earnest money uncashed, the normal rules apply. For example, in North Carolina the earnest money has to be deposited in the bank within three days of when the contract is signed by the buyer and the seller.
Be absolutely sure that the Short Sale Addendum is part of the contract, and explain why to everyone involved.