Short sales are particularly tricky endeavors in the field of real estate but may present an opportunity for buyers to purchase properties at very affordable prices. Typically, the term “short sale” is used to describe a sale that takes place when the seller(s) has failed to pay the mortgage on the property in a timely manner. Subsequently, the lender or the bank, in an attempt to avoid a drawn-out, expensive process of foreclosure, offers up the property at a subsidized rate. The legal addendum that facilitates this type of sale is known as a short sale addendum, and typically describes the various terms and conditions instated by the lender or the bank.
Since these transactions involve a third party, i.e., a bank or a lender, they can be tricky to navigate and often result in lengthy, drawn-out negotiations. Additionally, there are a number of specifics and particulars that come with a short sale addendum, which is why buyers should exercise caution and comb through every detail to make sure they are aware of the conditions they agree to. To help you out, we’ve compiled a list of tips on things that should be taken into consideration when assessing a short sale addendum!
The Terms of a Short Sale Addendum
Short sale addendums typically differ from one another greatly, as they largely depend on the specifics of each particular property and the financial situation surrounding said property. As a result, they can include a number of terms and conditions that buyers should be aware of. The most commonly included terms are as follows;
- A notification that the sale will be a short sale, as well as notification of the involvement of third parties, i.e., banks and/or lenders, with a detailed explanation of their stake in the sale of the property, including reasons for short selling the property.
- A legal declaration that the sale will not be a short sale until and unless all involved parties provide, in writing, their consent to such a transaction.
- A timeline within which the short sale must take place, failing in which the original purchase agreement is canceled entirely. An exception to this is when consent is given by the bank(s) and/or lender(s) to extend the said timeline.
- A notification that the seller is legally entitled to terminate the agreement in the event that they are met with a higher bid or offer from another party.
- A notification that the buyer, at any point in the negotiation and legal processes, holds the right to terminate the agreement and withdraw from purchasing the property.
- A timeline within which the bank(s) and/or lender(s) may give approval for a short sale. Typically, buyers wait for two to three months on average to get approval for a short sale.
These terms are typically added given the nature of short sales. They are particularly long deals to close, as they involve a number of third parties and can be contingent upon things that are uncertain, such as;
- The seller finding a better offer from another bidder
- The seller managing to pay off the mortgage on the property
- The buyer withdraws from purchasing the property for a multitude of reasons
While the aforementioned outcomes are the most likely to occur in case a short sale falls through, they are hard to predict, given the wide range of possibilities that may occur. For these reasons, it is highly recommended to have a real estate agent or a lawyer with particular expertise and experience in dealing with such transactions to help smoothen the process and make it easier for the buyers.
Drafting a Short Sale Addendum
When drafting a short sale addendum, there are a number of sections that must be included to help make the deal as transparent and safe as possible. These are as follows;
- Section 1 – Clearly define the parties subject to the agreement, as well as the property and the date of the purchase agreement. Include the timeline within which the buyer may receive approval from the bank(s) and/or lender(s).
- Section 2 – This section pertains to inspections and other particulars that are contingent on the sale. Typically, a potential buyer(s) are permitted to begin inspections as soon as they receive approval of a short sale from the bank(s) and/or lender(s).
- Section 3 – Here, define the manner in which the money is to be sent from the buyer to the bank(s) and/or lender(s). This typically includes a timeline within which payments are to be made.
- Section 4 – Bank(s) and/or lender(s) typically add a disclaimer that says that they are not obligated to approve a short sale. Additionally, they may also add disclaimers that state that they may choose to withdraw from the deal altogether at any point leading up to the sale. The buyer may also insert such a clause.
- Section 5 – In the case of cancellations, bank(s) and/or lender(s) typically levy some sort of fees. This section establishes the particulars of said fees.
- Section 6 – This section establishes the seller(s)’ right to continue trying to find a better offer and/or pay off the remaining mortgage on the property.
The aforementioned sections are integral to drafting an accurate and legally binding short sale addendum. That being said, we highly recommend enlisting a real estate lawyer or agent when doing so, as it is a particularly tricky piece of documentation that requires a ton of expertise to get right.