Shorty Schooled on New Addendum

Dear Forms Guy: I hear that the Short Sale Addendum (form 2A14­T) changed this past July 1. Is that right? Sincerely, Shorty

Dear Shorty: What you hear is right. The Short Sale Addendum has been substantially rewritten in response to input from brokers and attorney who do significant numbers of short sales. Sincerely, Forms Guy

Shorty: Can you tell me about the changes?

Forms Guy: Sure. For starters, the definition of a ‘short sale’ in paragraph one has been modified slightly so that it will include what are known as ‘strategic short sales,’ which are sales where the lender is willing to release its lien on the property and take less that what it is owed even though the seller has sufficient liquid assets to cover the deficiency. Paragraph 1(b) now reads: ‘Seller does not or may not have sufficient liquid assets to pay the costs of sale …’

Shorty: I thought when I advertised a property in MLS as a potential short sale that I was representing the seller who did not have sufficient assets to pay the costs of sale. Is that not the case?

Forms Guy: Good question, Shorty. If you read the definition of a short sale in the MLS rules carefully, it states that the seller does not bring sufficient liquid assets to the closing to cure all deficiencies, not that the seller does not have sufficient assets. According to NAR staff, the MLS definition of a short sale could include a ‘strategic short sale.’

Shorty: Okay, what else has changed?

Forms Guy: Paragraph 3 has been modified to clarify that the contract is contingent not only on lienholder approval of the short sale contract but also on the seller’s acceptance of the lienholder’s proposed terms for approving the sale.

Shorty: That’s a big change isn’t it?

Forms Guy: In my view, no. The requirement that the seller accept the lienholder’s terms was implicit in the old Addendum. The new Addendum simply makes this requirement explicit. However, there is a big change in paragraph 4. The old Addendum gave the buyer the right to terminate the short sale contract anytime prior to receipt of lienholder approval. The new Addendum permits both the buyer and the seller to terminate the contract prior to the seller’s notification to buyer that the seller has accepted the lienholder’s terms for approval of the short sale.

Shorty: Why the change?

Forms Guy: This change reflects the practical reality that a seller may decline to go forward with a short sale simply by refusing to accept the lienholder’s proposed terms, and will permit a seller to terminate the contract in a straight­forward manner.

Shorty: My experience has been that most buyers don’t want to do a lot of due diligence until they know the short sale has been approved. Given the big delays in getting a short sale approved, it’s been a problem figuring out the timing of the Due Diligence Period. Does the new Short Sale Addendum address this problem?

Forms Guy: Yes. In paragraph 5 of the new Addendum, the end of the Due Diligence Period and the Settlement Date have been tied to the date that the seller notifies the buyer that the seller has approved the lienholder’s proposed short sale terms. The Due Diligence Period will end 15 days following the seller’s notice to the buyer unless the parties agree otherwise, and the Settlement Date will be 30 days following the seller’s notice to the buyer unless the parties agree otherwise.

Shorty: Great, but how will we fill out the blanks in the Offer to Purchase and Contract for the date that the Due Diligence Period ends and the Settlement Date?

Forms Guy: Good question, Shorty. A ‘Note’ at the end of paragraph 5 instructs the parties to insert ‘See attached Short Sale Addendum’ in those blanks instead of dates.

Shorty: Will the blanks in my forms software be long enough for me to insert that wording?

Forms Guy: Yes. NCAR’s approved forms software vendors have been instructed to lengthen both lines to permit that phrase to be inserted.

Shorty: Are there any other changes?

Forms Guy: Yes, but before I go over them, I would like to respond to what you said about buyers not wanting to do due diligence before short sale approval has been received. Paragraph 5(b) of the new Addendum notifies a buyer of the advantages of doing due diligence on the ‘front end’ rather than waiting on short sale approval.

Shorty: Why would a buyer want to do any due diligence before they know that the short sale has been approved?

Forms Guy: For one thing, if the buyer waits to do inspections until after the short sale has been approved and then determines that the property is undesirable based on the inspections, the buyer will have wasted a lot of time. For another thing, if inspections done early in the process reveal defects in the property, although the lender is unlikely to agree to repair the defects, the buyer is in a better position to negotiate a more favorable purchase price.

Shorty: Okay, I understand. What are the other changes?

Forms Guy: Paragraph 6(a) draws a distinction between the listing agent’s duty to present additional offers to the seller and the obligation to inform lienholders of additional offers and contracts once the seller has submitted a request for a short sale. This is consistent with the Real Estate Commission’s position on disclosure of offers to short sale lienholders.

Shorty: Is that all?

Forms Guy: No. Paragraph 6 of the new Short Sale Addendum handles multiple contracts on the property differently than the Back­Up Contract Addendum (form 2A1­T). The distinction between ‘primary’ and ‘back­up’ contracts doesn’t exist in a short sale situation, so the structure of the Back­Up Contract Addendum just didn’t work well with short sales. Paragraph 6(b) of the new Short Sale Addendum requires the seller to disclose whether there are existing contracts on the property and Paragraph 6(c) makes it clear that the seller may enter into contracts with other buyers, or substitute a different contract for lienholder consideration, or withdraw the buyer’s contract from consideration. Of course, as noted earlier, the buyer or seller can terminate the contract at any time up until the buyer has been notified that the seller has accepted the lienholders short sale terms. But so long as neither party terminates the contract, paragraph 6(d) also requires the seller to keep the buyer posted on all developments affecting the contract, such as the seller’s acceptance of another contract, or short sale approval of another contract, or seller’s closing on another contract.

And because it’s not necessary or even appropriate to use the Back­Up Contract Addendum with the new Short Sale Addendum, a ‘Note’ has been added under the names of both the Short Sale Addendum and the Back­Up Contract

Addendum instructing agents not to use the Back­Up Contract Addendum in a short sale situation where there are multiple contracts.

Shorty: Wow, that’s a big change.

Forms Guy: I agree, but again, it reflects the reality that short sales work differently than ‘traditional’ sales.

Shorty: What happens if there are two contracts on the property and neither of the buyers terminates their contract? The seller can’t sell the property to both of them!

Forms Guy: Good point, Shorty. Paragraph 6(e) states that if it’s not sooner terminated, the contract becomes null and void if the seller closes on another contract, and the buyer is entitled to a refund of any earnest money deposit.

Shorty: Is that all?

Forms Guy: One last thing, Shorty. A new ‘Bankruptcy’ paragraph has been added that requires the seller to represent whether the seller is in bankruptcy and to notify the buyer if the seller files for bankruptcy after the contract is formed.

Shorty: Thanks for all the info, Forms Guy!

Forms Guy: You’re welcome, Shorty. I hope this new Short Sale Addendum works well for you. And thank you for your efforts in helping get distressed properties through the system. I know it’s tough and sometimes thankless work, but you’re playing an important role in getting our economy back on its feet. v

Key Details on Forms Changes

Effective July 1, several NCAR forms in addition to the Short Sale Addendum have been updated. A summary of the changes is available on the Legal Department page of NCAR’s website ncrealtors.org under ‘Standard Forms’ and ‘Summary of Forms Changes.’

The revised forms are available in the ‘Forms and Contracts’ section of our site, and they have been sent to each of NCAR’s forms software providers to incorporate into their respective forms software programs. Questions about the rollout date for a forms software program should be directed to the vendor.

There is a 60­day grace period during which NCAR members may transition to the revised forms. Older versions of forms that have been updated should not be used after Aug. 31, 2012.