Short Sale Advisory
As any agent who has handled short sales knows, they are different animals from regular sales.
There are many legal, tax, contractual, strategic and tactical considerations which must be taken into consideration by a seller or a buyer before deciding to proceed with a short sale transaction.
It is important that agents not only be aware of these issues, but also to advise their seller and buyer clients regarding those matters, and document their files as to having given such advice.
Why Do We Need a New Advisory Form For Short Sales?
In too many cases, sellers embark on a short sale, sign a listing agreement, spend weeks or months on the market, ratify a short sale contract, and then wait weeks or months more to hear whether the lender has approved a short payoff.
It is common practice for most lenders when accepting a short payoff in a "Term Sheet" or "Demand Statement" to (a) require that the Seller sign a new note, and possibly even record a Deed of Trust against other property owned by Seller; (b) state that the Seller remains liable for any amount forgiven by the Lender(s) as a result of the short sale; (c) state that the Lender(s) reserve their right to hold the Seller liable for that amount in the future; or (d) be silent as to future seller liability for that amount.
Whether the seller is liable for any amount forgiven by the lender in a short sale involves legal and tax considerations. Faced with those possibilities, many sellers for the first time seek legal and tax advice and THEN decide to cancel the short sale, per the terms of the Short Sale Addendum. The result is that many months of time have been lost for the seller to consider other options, and the agent(s) have wasted weeks and months, only to have the sale cancel at the end. Not a good result for anybody.
A similar problem faces buyers who enter into a transaction requiring a short pay-off by seller's lender(s). The process may take longer than the Buyer has planned and they lose patience with the process and want to cancel. Or, the buyer never understood that the bank may not approve the short sale, or that the seller may cancel at the end if the seller has a right to cancel if the lender may hold the seller liable for any indebtedness forgiven in the short sale
1. Listing Agents: Provide the attached Short Sale Advisory to your seller PRIOR TO the signing of the Listing Agreement. Take the time to discuss the matters raised in the Advisory.
2. Buyer Agents: Provide the attached Short Sale Advisory to your buyer PRIOR TO the writing of an offer on a property which has been identified as a short sale transaction. Likewise, take the time to discuss the issues with your buyer.
3. This Short Sale Advisory is designed for use with your clients. Do not attempt to get the client of a cooperating broker to sign this Advisory.
Short Sale Advisory Form follows below:
(Insert Broker Name)____________________________________
Short Sale Advisory
Property Address: _______________________________________________
Sellers facing mortgage difficulties have several options including a loan modification, short sale, foreclosure, deed in lieu of foreclosure and bankruptcy; each seller's situation is different. The Seller's decision as to which of these options are chosen may affect the Seller's taxes, credit rating, and/or future options. ______________________ and its real estate sales associates (collectively referred to as "Agent") cannot, and will not, provide tax, credit and/or legal advice regarding these possible options, or how any of these issues may affect any sale of the Property. Because of these important issues, prior to proceeding with a short sale, Sellers are strongly urged to consult with a Certified Public Accountant, credit consultant, and/or an attorney specializing in real property, taxation and bankruptcy issues. To the extent that Seller fails to obtain this necessary advice, Seller is acting against the Agent's advice and recommendation.
Seller and Buyer acknowledge and agree that Agent has advised Seller and Buyer that the sale of the Property could result in a "short sale". A short sale means that there is insufficient equity in the Property to pay off all of the liens, including deeds of trust, judgments, unpaid taxes and any other debts that have been recorded against the Property and/or the closing costs, including real estate commissions. Therefore the Seller's Lender(s) must agree to take less money than they are legally entitled to receive so as to enable the Seller to sell the Property to the Buyer for the terms agreed to in the Purchase Contract.
Seller and Buyer acknowledge and agree that as part of the short sale approval process the Lender(s) will issue a letter or other document detailing the terms and conditions upon which the Lender(s) will agree to a short sale ("Term Sheet"). The Term Sheet must be adhered to by all parties. A Seller is only entitled to the Lender-approved short sale if ALL of the terms and conditions required by the Lender(s) are fully met. There is potential liability for any party who tries to circumvent or "work around" those terms and conditions either through escrow or outside of escrow. All payments to be made by any party to anyone as part of the Buyer's acquisition of the Property must be fully disclosed to all Lenders and approved by all Lenders.
There may be significant legal and/or tax ramifications to the Seller as the result of a short sale. For example, the Term Sheet may: (A) Require that the Seller sign a new note, and possibly even record a Deed of Trust against other property owned by Seller; (B) State that the Seller remains liable for any amount forgiven by the Lender(s) as a result of the short sale; (C) State that the Lender(s) reserve their right to hold the Seller liable for that amount in the future; or (D) Be silent as to future seller liability for that amount. As such, Seller should not even consider approving the Lender's Term Sheet and/or proceeding with a short sale without first reviewing their legal and financial status with appropriate professionals, including but not limited to attorneys who specialize in bankruptcy issues and financial advisors who understand the tax implications of reducing the Seller's debt as part of a short sale.
Seller and Buyer acknowledge and agree that the Seller's Lender(s) are not obligated to approve the short sale and they are not obligated to provide any type of response regarding the short sale during any set period of time.
If the Seller has ceased making mortgage payments, the Lender(s) may file a Notice of Default and proceed with a foreclosure action notwithstanding the fact that there are ongoing short sale negotiations. Negotiating a short sale does not stop the foreclosure process. Seller and Buyer understand and acknowledge that the Agent cannot and does not guarantee that a short sale can be obtained from the Lender(s) and/or that the foreclosure process can or will be stopped. If a Notice of Default has been filed, Seller should immediately consult with a real estate and/or bankruptcy attorney.
Seller and Buyer acknowledge and agree that they have been advised that the sale may not close unless all of the lien holders agree to take the amount that is offered to them (as specified by the Term Sheet) which may be considerably less than the amount that is owed to them. Seller and Buyer further understand that escrow could be delayed for a substantial period of time as a result of resolving the various issues involved in a short sale. Therefore, Seller and Buyer acknowledge and agree that Agent cannot and does not guarantee that escrow will actually close or when it will close.
Seller and Buyer acknowledge and agree that they have a duty to exercise reasonable care to protect their own interests by conducting their own investigation and verification of all information that has been or will be provided to them regarding the short sale process and/or the Property. Seller and Buyer further acknowledge and agree that Agent cannot and will not provide any tax or legal advice regarding the legal or practical effect of a short sale transaction or a possible foreclosure. Seller and Buyer further acknowledge and agree that it is their responsibility to consult with their own legal and tax professionals regarding the effects of the short sale.
BY SIGNING BELOW, BUYER AND SELLER ACKNOWLEDGE AND AGREE THAT THEY HAVE RECEIVED, READ AND UNDERSTOOD THE ADVICE IN THIS TWO PAGE ADVISORY.