Originally posted on the Massachusetts Real Estate Law Blog

A short sale is special type of real estate transaction between a homeowner, his mortgage holder, and a third party buyer. In a short sale, the homeowner’s mortgage company agrees to take less than what is owed on the outstanding mortgage, thereby being left “short.” In some but not all cases, the lender will agree to wipe out the entire debt. Many people believe that short sales offer bargain basement prices, but lenders will do their best to get as close to fair market value as possible so as to minimize their loss.

Short sales are a unique type of transaction and far different from the typical transaction between parties of equal bargaining power. Likewise, the legal aspects of a short sale are unique.

Short Sale Approval Required

The most important legal issue in a Massachusetts short sale is to recognize the very nature of the transaction:  there is no short sale without the consent of the mortgage lender. Thus, albeit obvious, the offer and purchase and sale agreement must reflect that the buyer’s obligation to close is contingent upon the lender’s approval of the short sale.

The Waiting Game

Another significant issue is timing. The typical time-line on a short sale can vary greatly from 45 days to 6 months or more from accepted offer to closing. The approval of a short sale and the negotiation for the reduction in the mortgage balance can be a time-consuming process. There is a long, but manageable, list of documents that must be submitted by the seller/homeowner before a lender will approve a short sale.

Thus, in a short sale, the trigger date, which starts the clock for the typical deadlines, is the short sale approval. The closing, inspection, and mortgage contingency deadlines dates in the offer and purchase and sale agreement should start “x” days from the short sale approval. There should also be a end date for obtaining short sale approval and protection for the buyer’s rate lock so the agreement is not left completely open-ended and delays won’t adversely affect the buyer’s financing.

Buyers Bring Your Tools

Also, cash strapped sellers are usually unwilling to do any repairs in a short sale situation. Inspections may be performed and “outs” may be negotiated for significant repairs, but most buyers must ultimately accept the property “as is.”

Short Sale Addendum/Rider

The deal agreements must be tailored quite specifically to a short sale transaction. A sample Massachusetts short sale addendum/rider form from the Massachusetts Association of Realtors can be found here. Springfield short sale attorney Nyles Courchesne has posted his form. I have my own unique form. A form, however, is no substitute for an experienced short sale attorney and guidance through the complicated short sale process.

Get Experienced Advice and Watch For Scams

Lastly, there’s a growing perception that short sales are akin to the old Wild West. There are also reports of scams and illegal and unethical behavior by realtors such arranging for illegal buy backs to the defaulting homeowners. I suggest reading Metrowest Realtor Bill Gassett’s advice on realtor ethical issues in short sales.

Given the unique nature of the Massachusetts short sale transaction, the sage advice is to work with ethical Realtors and short sale attorneys who have experience with short sale transactions.