In Arizona our state association (Arizona Association of Realtors; AAR) has strived to generate standard contract forms that provide consistency to business of buying and selling real estate. When the short sale of property became a significant factor in real estate sales the Short Sale Addendum to the real estate purchase contract became a part of the tools agents needed in a transaction. What was once a significant help in protecting buyers in a short sale transaction, has become liability in the process promoting buyers and buyer’s agents to write many contracts that were never destined to be executed. In fact this form has:
It is time we change the short sale addendum to address the changes in the market. It is time the short sale addendum provide fairness to both buyer and seller. It is time that the short sale addendum be modified to decrease the liability that faces an agent.
Owners with homes that are in the short sale process are often forced to stop payments in order to have the servicing agent (i.e. the bank) begin the short sale process. Both Fannie Mae and Freddie Mac backed loans require the owner of the home to be in default or in eminent threat of default before they allow the bank to begin evaluating the owner for the short sale process. This creates a time line that for the owner to successfully have a short sale transaction negotiated before the trustee sale. Most banks (ie. at the direction of the investor who holds the mortgage lien) will initiate foreclosure proceedings at the time the lien is 90 day late and set a trustee sale date about 30 days later. While agents can occasionally get a short sale transaction to process in less time than the foreclosure process, that is not typical. Even though I hear about sellers and agents who got approval in 10 days or 30 days, the realty is many short sales never close due to foreclosure. Why is that? When a buyer puts an offer on a home that will be in the short sale process, line 41 of the Short Sale Addendum allows the buyer to cancel ANYTIME prior to receiving the Agreement Notice from the Seller. This is a non-binding offer. Buyers will write offers on multiple homes and take the first one that comes through. More frequently than not, the offers that the buyer is no longer interested in are no longer addressed by the buyer’s agent. The seller mean while has been diligently working to get the short sale agreement notice from the lender. If offer is no longer viable and the seller’s agent finds this out, then that agent should inform the bank that the offer is no longer good and that they are seeking a new offer. This creates a situation where is they are in the foreclosure process and the trustee sale is coming up, the only way the bank will stop the trustee sale in most all cases is with a new offer ( and sometimes the bank will only allow a certain number of extensions or no extensions). If the offer is not canceled by the buyer’s agent (which does happen but not all the time) then the seller may not have enough time to get a new offer and the home can slide into foreclosure. Anyone who is involved with short sales on a regular basis has had this experience. There are more scenarios we could discuss that create conditions for trustee sale (the result of the foreclosure process) but my example above illustrates probably the experience most sellers have when the home is lost.
In today’s market the Short Sale Addendum is unfair to the buyer. Buyers can cancel at any time without any sort of commitment. Sellers have to put their property into the foreclosure process to get the short sale process started in the vast majority of short sales. The only defense the seller has when faced with a non-binding offer is to consider replacing the offer with a new buyer that is willing to commit at least staying through the negotiation phase. And by commitment, I mean opening escrow with a modest earnest deposit of say $1000 on a property that is not available for refund until the agreement letter or a mutually agreed time is written into the offer. I won't go into the specifics, except to say that the real estate transaction has always been based on a commitment by two parties to complete a transaction. In the short sale process as we know it today that commitment is not existent. Before I get to far afield of this specific point, I have often had pointed out that lines 13 - 15 provide the protection needed by the seller. This is a red herring.
First and foremost, banks are looking for the net that meets the requirements the investors have set for them. They don't evaluate contracts as to their quality or enforceability, just their bottom line. When a 2nd offer comes in, an assuming the first is non-binding, the seller’s agent has to help the seller decide what is best to do in the situation. If the bank is in document collection, accepting and presenting a new offer to the bank may be the best to do for the seller. But even if the 2nd offer is better, the seller’s agent must consider where they are in the process. When the financial evaluation is going on, a new offer may create confusion with the bank. Resets of the process are not unusual causing weeks of delay even under the best of circumstances. We all know that the quantity of homes under consideration by each negotiator is usually enormous. These weeks of delay can cause the buyer to lose heart (it’s a lot easier when there is nothing to lose) and drift away from the offer to another. If the offer has been presented by the bank to the investor, this could cause a significant glitch in the process with many weeks delay as the banks offer to the investor must be reworked. During this time unintended consequences can go rampant; BPOs that are no longer usable because they are older than 90 days; the investor may not allow any more extensions to the trustee sale date and the home goes into foreclosure; paperwork is lost; the file is passed to another negotiator based on the phase of the negotiation and then must go back in the process. More delays and more delays. Murphy's Law works overtime in this process.
What about contracts and how they are frequently modified to protect the seller or provide more protection to the buyer. Article 26 provides agents in Arizona with the right to write and modify real estate contracts. These are legal contracts and all of the ramifications of writing a legal contract apply. Typically we are concerned about saying to much outside our discipline of real estate, like advising someone on bankruptcy. But what happens when you do not adequately explain a paragraph and the implications when written by another agent in your discussions with your client? What happens when you accept a clause in the contact such as eliminating lines 13-15 of the short sale addendum when written in a non-binding offer and the buyer fails to perform and the seller goes into foreclosure? What happens when you write something in the short sale terms and conditions that the deal to fail or maybe your buyer's earnest money is tied up for a long period of time after you have canceled your offer? You might say, well just give to the seller and let them make the decision and recommend they go to legal counsel specializing in real estate. What I am hearing is that is insufficient to protect the agent. The error of omission can be as bad as the error of giving advice outside of your expertise. Agent’s liability is increase and sellers and buyers have protection that is maybe inadequate for the process.
In the short sale process, buyers have all the advantages with the standard short sale addendum focusing on providing them with the ability to cancel at anytime. Sellers can only be protected by performing significant surgery on the short sale addendum. An even then, when the agreement letter is presented and technically the offer become an executable contract, buyers often demure. They have bought another home or maybe they have buyer’s remorse and just don't like the home. Many will never even open escrow. When that happens the seller no recourse except to obtain another offer at the last minute if possible or try and force the buyer to open escrow and go through the motions which is really a waste of time.
My goal of this blog is not to discuss if distressed sellers are deserving of protection. It is not to say we should have or not a short sale transaction. it is to say that the process has to be changed such that we real estate transactions that are as close as possible to what I will call a straight sale where we have committed buyers and sellers, where buyers and sellers are on equal contract terms and where the real estate contract has meaning and the protection it provides to both parties is what we intended it to be.
In a future blog I will recommend changes to the short sale addendum.