Racing to Meet the Deadline....What Constitutes a 'Binding Sales Agreement' when Your Short Sale Approval Occurs AFTER April 30th?

By
Real Estate Broker/Owner with Lola Audu~Audu Real Estate~Grand Rapids, MI Real Estate

thinking womanI get a lot of e-mails.  I'm sure most of you do too.  However, from time to time, I'll click on an e-mail which looks like it may qualify as spam just out of sheer curiosity.  This e-mail arrived courtesy of Wells Fargo, a company which is currently processing tons of short sales.  It's excerpted below: (italicized bold portions are my additions)

 

********************************

April 30 is quickly approaching

 

The homebuyer tax credits have been pivotal in helping move inventory.  At this time, it appears that the government will not offer another extension.  Any first-time or move-up buyer who is interested in taking advantage of the tax credit must have a binding sales contract by April 30, 2010 - with the home purchase completed by June 30, 2010.  Our team is ready and eager to help your clients meet this deadline.

 

Short Sales remain significant factors in today's marketplace, allowing more prospective buyers than ever to become homeowners.  Because these transactions are more complex, it is imperative that real estate and lending professionals work efficiently as coordinated teams to help our customers.  To this end Wells Fargo has created a step-by-step REALTOR® Short Sale Guide, which you can access here.


We are committed to accelerating the short sale process.  In fact, for those loans we hold in our portfolio, we have already undertaken efforts to streamline the sales approval process.  The majority of the loans we service, however, are owned by other investors.  So in many cases, Wells Fargo must obtain the approval of the first and any second mortgage investors.   Our goal in these situations is to move the process along as quickly as we can.


****************************

The Question?

 

Is the definition of a binding sales agreement referencing the agreement between the buyer and seller applicable when a bank must approve the sale for the transaction to close?  In this case, the e-mail seems to intimate that the binding sales agreement includes their clearance of first and second mortgages.  

 

A subsequent call to another senior loan officer confirmed my uneasy suspicion.  This loan officer also agreed with the position that states that the sale is NOT binding until the bank signs off on it! There may be a significant disagreement about what constitutes a binding sales agreement for the purposes of the buyer's ability to legally claim the Tax Credit.

 

What's at Stake?

 

For the real estate community, a binding sales agreement occurs when there is a binding agreement between buyers and sellers.  The approval by the mortgage company is viewed as merely another contingency to the contract.

 

If the alternate view expressed by some lenders is ever deemed to be the correct definition of a binding sales agreement, this could prove troublesome for many potential home buyers who are staking their claims on homes which will require short sale approvals that may not be delivered prior to April 30, 2010 although they have an agreement with the seller AND may be able to close prior to June 30, 2010.

 

Curious...

 

What are your thoughts on this?  Has anyone explored this issue with the tax authorities? 

 

close

Re-Blogged 3 times:

Re-Blogged By Re-Blogged At
  1. Virginia Hepp - Mesquite NV REALTOR 04/12/2010 02:40 PM
  2. Lane Bailey 04/12/2010 03:55 PM
  3. Cheryl Ritchie 04/13/2010 08:37 AM
Topic:
ActiveRain Community
Groups:
Realtors®
Mortgages
Fraiche Aire
Almost Anything Goes
Bloggers Choice Selections
Tags:
short sales
home buyer tax credit
home buyer tax credit extension 2010
binding sales agreement

Spam prevention
Show All Comments
Rainmaker
596,362
Jim Hale
ACTIONAGENTS.NET - Eugene, OR
Eugene Oregon's Best Home Search Website

Lola -

When you file for the tax credit you are going to have to provide (attach) evidence of a closing before June 30 (a copy of the HUD-1) and evidence of having met the April 30 deadline (a copy of the sales agreement).

Here's what the instructions for Form 5405 say (for people closing after April 30):

"attach a copy of the pages from a signed contract to make a purchase showing all
parties’ names and signatures, the property address, the purchase price, and the date of the contract."

 

In other words, the buyer has to send copies of the pages of the sale agreement that establish price and terms and show signatures and date the contract was executed between the two parties (in my state that would be the date the last party agreed to the last offer or counteroffer and provided constructive notice to the other side).

There is no mention of any requirement to send copies of addenda or inspections or repair negotiations, etc.  There is certainly no requirement to provide any part of the short sale application or approval. 

In fact you don't even have to attach all the pages of the sales agreement - just the pages that indicate agreement.

 

The law does not require that the buyer get every issue of a transaction nailed down by April 30.  It merely says the buyer must have entered into a binding agreement.  The old lender in a short sale is NOT a party to the agreement any more than the new lender.

 

 

Apr 12, 2010 06:03 PM #37
Ambassador
2,694,336
Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

The IRS has made the matter of what constitutes a BINDING Contract of Sale for the "WORKERS" who file, perfectly UNCLEAR.

 

Apr 12, 2010 11:10 PM #38
Ambassador
1,888,601
Cindy Jones
Integrity Real Estate Group - Woodbridge, VA
Pentagon, Fort Belvoir & Quantico Real Estate News

Until the IRS starts rejecting the tax credit next year we may not know the answer to the question.  Though as agents we may look at  third party approval as a contingency the IRS may have a different interpretation. 

Apr 12, 2010 11:39 PM #39
Ambassador
917,142
Missy Caulk
Missy Caulk TEAM - Ann Arbor, MI
Savvy Realtor - Ann Arbor Real Estate

Good information. My understanding is that the contract is between the buyer and seller. When the bank accepts is a contingency.

If it closes before June 30th, they can apply for the credit. If not they are out of luck.

We shall see.

Apr 12, 2010 11:51 PM #40
Rainmaker
426,814
Leslie Ebersole
Swanepoel T3 Group - Saint Charles, IL
I help brokers build businesses they love.

I'm not being sarcastic, I am amazed at the variety of interpretations of "binding contract". "Binding" sounds like no contingencies, regardless of having anything to do with a short sale, and would include the resolution of all contingencies. Tom # 12 said "source of the source"...I just went to the IRS site and no help there! I'm sticking with a conservative interpretation and then will fall back on the "I'm a Realtor, not an attorney, home inspector, tax advisor..." etc.

Apr 13, 2010 01:22 AM #41
Ambassador
1,037,532
Joe Pryor
The Virtual Real Estate Team - Oklahoma City, OK
REALTOR® - Oklahoma Investment Properties

The IRS has a way of interpreting their rules, especially when it means money out. This in combination with 80% of our short sales with BOA spells doom for the tax credit. My question to buyers is, would you rather have an $8000 tax credit or would you rather buy an home which is at least $20,000 under value. When you go to sell the house which is the best number? 

Apr 13, 2010 01:38 AM #42
Ambassador
1,037,532
Joe Pryor
The Virtual Real Estate Team - Oklahoma City, OK
REALTOR® - Oklahoma Investment Properties

The IRS has a way of interpreting their rules, especially when it means money out. This in combination with 80% of our short sales with BOA spells doom for the tax credit. My question to buyers is, would you rather have an $8000 tax credit or would you rather buy an home which is at least $20,000 under value. When you go to sell the house which is the best number? 

Apr 13, 2010 01:45 AM #43
Rainmaker
114,887
Mary Ann Daniell Licensed Texas Realtor
Coldwell Banker United, Realtors - Subsidiary of NRT LLC - Killeen, TX

Bottom line, if there is any doubt that the transaction will close by June 30th, we need to be sure that buyers truly understand what is on the line if they enter into a short sale transaction prior to April 30.    If it closes by June 30th, the tax credit is theirs.  If closing goes past June 30th, the tax credit is lost.   Just as simple as that.

Apr 13, 2010 06:10 AM #44
Anonymous
Doug Turski, CPA Tax ONLY Advisor

this is a very interesting issue for agents; while a buyer and seller mutually agree and sign a contract, a meeting of the minds has occured thereby establishing a valid and legally binding contract.  If there are other conditions subsequent, those are viewed as "outs" to the contract causing the contact to be voidable.  If a taxpayer requested a IRS credit based on the timing of the signatures/meeting of the minds, the credit claim more likely than not is sustainable.  However, if an out occurs, the contract may be voided.  If voided, the credit would have to be repaid. 

Apr 13, 2010 06:30 AM #45
Rainmaker
619,499
Patricia Aulson
BERKSHIRE HATHAWAY HOME SERVICES Verani Realty NH Real Estate - Exeter, NH
Realtor - Portsmouth NH Homes-Hampton NH Homes

Thanks for the information today.

Patricia/Seacoast NH

Apr 13, 2010 08:34 AM #46
Rainmaker
1,302,728
Cheryl Ritchie
RE/MAX Leading Edge www.GoldenResults.com - Huntingtown, MD
Southern Maryland 301-980-7566

We discussed this in our sales meeting this morning so I am glad you wrote a post on it. I think it has to have no contingencies. My opinion.

Apr 13, 2010 08:37 AM #47
Rainmaker
387,585
Lola Audu
Lola Audu~Audu Real Estate~Grand Rapids, MI Real Estate - Grand Rapids, MI
Audu Real Estate~Grand Rapids, MI ~Welcome Home!

Thank you for all your thoughts.  On on hand, I'm glad to know that I did NOT miss a clear directive regarding this issue from the government/tax authorities.  And it seems that there are a number of legal and professional opinions on this topic as well.

It seems prudent to me to indicate to prospective buyers that they need to consult with qualified professionals regarding this issue.  This advise is already written in black & white in our sales contract but may be especially pertinent in the context of sales impacted by this regulation.

Apr 13, 2010 12:22 PM #48
Ambassador
1,498,405
Renée Burrows
Savvy Home Strategies Realty, LLC-REALTOR®-Estate-Probate - Las Vegas, NV
Las Vegas Real Estate Broker - www.urLVhome.com

WOW, I appreciate the thought provoking blog posts from both you and Lenn!!  I never thought of this in this regard!  Comments are excellent also so thanks for bringing this up and making us think!

Apr 13, 2010 03:31 PM #49
Rainmaker
1,311,038
Joan Whitebook
BHG The Masiello Group - Nashua, NH
Consumer Focused Real Estate Services

Looks like it is time to get an opinion letter from the IRS.  I don't know if the IRS will agree with the lenders on the short sale issue.  It should be interesting.  Best advice is to have buyer check with an attorney, an accountant and the IRS>

Apr 13, 2010 03:39 PM #50
Rainmaker
596,362
Jim Hale
ACTIONAGENTS.NET - Eugene, OR
Eugene Oregon's Best Home Search Website

 

Okay, Guys-

You got me.  I'm not a tax professional.  And I'm not currently playing one on TV.

But I have been a tax consultant in the past.  And I can read the IRS website.

I'm not buying a house this year.  But I have helped several clients claim this credit....without compensation and certainly with a disclaimer.  It may possibly be one of the easiest things having to do with tax returns in many years.

 

If I were claiming either of the the tax credits this year, I'd plan on getting my sales agreement signed on both sides (and acknowledged where required) prior to the end of the April.

Then, regardless of the type of sale, I'd make darn sure it closed (i.e. recorded) prior to the end of June.

Then I'd plan on attaching the following to my Form 5405 (for the tax credit) and my Form 1040X (Amending my 2009 return) (or my 2010 income tax return when filed) in compliance with the IRS instructions for the credits:

* A copy of the (first and last?) pages of my sale agreement (showing parties, dates and signatures...including the acceptance and acknowledgment) showing the agreement was made prior to the first deadline..

* A copy of the HUD-1 showing the transaction closed prior to the second deadline.

That is all the IRS is asking for.  That's all I would send them.

I would not send them a short sale lenders approval.  (Any more than I'd send them the new loan lender's approval.)

I would not send them a repair addendum, a sellers disclosure or anything like unto them.

I'd figure, if the IRS wanted to see them, they would have asked for them.  They haven't.

 

Apr 13, 2010 05:08 PM #51
Rainmaker
596,362
Jim Hale
ACTIONAGENTS.NET - Eugene, OR
Eugene Oregon's Best Home Search Website

Let's give Congress a little credit....for these credits. 

After all, they're not the brain-child of someone who "knows nothing of our industry".  The author is Sen. Johnny Isakson (R-GA) a former multi-office real estate broker. 

In November, Congress wrote this extension/expansion bill the way they did (with two deadlines instead of one) precisely in order to (1) give a deadline for the execution of the agreement and (2) give the 11th hour transactions plenty of time to close without new lenders, escrow companies, and county recorders going nuts in the last few weeks and days.

They had heard about the jam-up the fast-approaching November 30 deadline was creating.  They did not want a repeat performance.

They were not trying to make this harder.  They were trying to make it easier.

The IRS has been trying to do the same (even as they are trying to stamp out fraud).

For those who are willing to read plain English:   They  have all succeeded. 

 

I don't think an agent should give a lot of advice about this subject.

But an agent had better find out how this works and make sure s/he executes REALTOR tasks in a timely manner so that a client isn't hanging out there not having met the deadlines.

That's where an agent's concern needs to be focused.  That's where you can't blame your non-compliance on some professional with another kind of license. 

Apr 13, 2010 05:08 PM #52
Rainmaker
575,347
Terry & Bonnie Westbrook
Westbrook Realty Broker-Owner - Grand Rapids, MI
Westbrook Realty - Grand Rapids Forest Hills MI Re

Nice clarification the pressure is on for the end of the tax credit

Apr 14, 2010 01:31 AM #53
Rainmaker
733,632
Adam Malachi
A 2 Z Realty LLC - Castle Rock, CO
QSC,CDPE,CIPS,CNE,CRB,CRS,GRI,MRE,SFR

Wonderful post! Great information's and clarification!

Thanks for sharing.

Adam

Apr 16, 2010 05:20 AM #54
Rainmaker
615,243
Kathy Toth
Ann Arbor Market Center Keller Williams - Ann Arbor, MI
Ann Arbor Real Estate Experts - Kathy Toth Team

Attorney at title company confirmed that the contract between the buyer and seller is fully executed and the contingency of the short sale approval is part of the process. If the buyer gets one answer from an accountant that ther are not eligible for the credit, then move on to another accounting expert. June 30th will be here fast - thanks for sharing Lola.

Apr 16, 2010 07:30 PM #55
Anonymous
gayle bartlett

So Short sale approval contingency seems like a no go... then what about a mortgage contingency, appraisal contingency, home inspection contingency... seems like if all of these are not meet by April 30th... it all is a no go... Right?

Apr 27, 2010 05:17 AM #56
Show All Comments

What's the reason you're reporting this blog entry?

Are you sure you want to report this blog entry as spam?

Rainmaker
387,585

Lola Audu

Audu Real Estate~Grand Rapids, MI ~Welcome Home!
Can I assist you with a real estate concern right now?
*
*
*
*
Spam prevention

Additional Information