WHAT'S WRONG WITH THE FAR SHORT SALE LISTING AND CONTRACT ADDENDA - AND HOW YOU CAN FIX IT

By
Real Estate Attorney with THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY

The Florida Association of Realtors took the lead in making some semblance of consistency, order, and standardized forms for use by Realtors for Short Sale transactions. I doubt many Sellers or brokers realize the draconian conditions of the documents they are using. If you are among them, this article may open your eyes. Because the evolution of Short Sales in 2007 and 2008 has been so dramatic, the forms became problematic at the outset.  My belief, which is shared by many informed attorneys, is that that they need dramatic changes to better represent the rights and obligations of the Seller. 

For those of you that need a primer on Short Sales, I would direct you to my article BACK TO BASICS - A SHORT SALE PRIMER.

The Short Sale Addendum to Exclusive Right of Sale Listing Agreement  

The Short Sale Listing Agreement Addendum is the start of the problem.  (The body of the linked form is the FAR form and I have borrowed it from a broker who has it online.) 

Paragraph 1 says, in part the listing broker can provide any and all mortgage and /or other lien account and payoff information to prospective Buyers and /or their agents.  When I represent a Seller, the Seller usually wants to keep personal financial information private, regardless of the transaction being a short or regular sale.  Authorizing "any and all" mortgage information includes financial information about the borrower that should never be in the knowledge domain of the Buyer.  Further, if the Lender has advised the Seller or seller agent that it will take (for example) $250,000 for a release of the lien of the mortgage, why should that knowledge be in the domain of the Buyer?  That information is or should be private between the Seller and its Lender!  Disclosing the information takes any negotiating advantage away from the Seller.  With that information in the hands of the Buyer, the Seller is unable to demand a higher price (and in doing so perhaps covering future tax liability or post closing demands from the Lender for a deficiency that is now larger than it could have been if the Seller could have negotiated a higher price). Indeed as I will point out shortly, the FAR Listing Agreement Addendum encourages disadvantaging the position of the Seller.

Paragraph 2 says that the broker is "authorized" to include a Short Sale contingency in the purchase and sale contract.  Authorized is the wrong word.  Something akin to "must" would be more appropriate.

Paragraph 4 is mysteriously silent on what happens if the Lender reduces the commission it will allow.  Must the Seller honor the higher commission and thus have a remaining obligation to the listing broker for the difference?  I think so!

Paragraph 5 has many references to a "deficiency judgment".  There is no such thing in a Short Sale.  There is merely a non-judicial deficiency.  There is no judgment.  For an explanation of the differences see FORECLOSURE DEFICIENCY ORDER VS SHORT SALE NEGOTIATED PAYBACK. The FAR addendum also requires that the Seller may have to pay money into escrow (this must mean the closing agent's escrow account) to make up short falls in the settlement statement that the Lender is requiring the Seller to pay.  And worse again, the addendum requires the Seller to pay the Lender any short fall (deficiency) that the Lender may demand under terms the Lender can set.  The huge problem here is - what if the Seller can't meet those Lender demands or terms?  Then the Seller is in breach of the listing agreement! 

Short Sale Addendum to Purchase and Sale Contract

The Short Sale Contract Addendum, again linked here thanks to someone who put it online, is a carry over of the problems in the Listing Addendum.

Look at paragraph 1 and you will immediately see a missing important element.  Basic knowledge of the law says that a mortgage is a collateral instrument to secure the payment or performance of some obligation.  The mortgage is an independent obligation.  Usually in the context of real estate we talk about a "mortgage" as the obligation to pay money and it is a lien on the real estate.  The real legal utilization is different.  The first transaction is the lending of money, which is evidenced by a promise to repay called a Promissory Note.  Usually the obligation to pay (the Promissory Note) is "secured" with the pledge of collateral - usually the real estate.  So we have two independent instruments that can be independently sued upon.  See my explanation mortgage components at  Foreclosure Deficiency Judgment Compared to Deed In Lieu and Short Sale Scenarios.

What I am getting at is that the Short Sale Contract Addendum does not give the Seller the ability to negotiate the terms of the repayment or no payment of the promissory note.  The Short Sale Contract Addendum only deals with releasing the lien of the mortgage from the real estate.  The future fate of the Promissory Note is still over the Seller's head!  Again, if the Seller refuses to accept the terms offered by the Lender, the Seller is then in default of not only the Listing Agreement but the Purchase and Sale Agreement as well!

Now I suppose I am not making any friends at the FAR over this article, but I am far from alone in my opinion.  I was recently at a half day seminar for real estate attorneys on the Short Sale and foreclosure issues and this same issue was raised.  No one in the room said the analysis was wrong.

How to Fix the Addenda

Around the same time the FAR forms were being drafted I was also drafting similar forms for use by my clients and their brokers - and we still use them unchanged because they specifically give the Seller the right and ability to say no to the Lender in a Short Sale transaction.  This is a very important right necessary to make the Trilogy of the negotiation work.  See my article on the SHORT SALE TRILOGY.

The fix for the Listing Agreement Addendum and Short Sale Contract Addendum is to include language that opens up the ability of the Seller to make good faith negotiations with the Lender(s) for the terms of the release of the lien on the real estate, without a penalty or payment obligation to the broker if the negotiations fail.  For example, language like, "This Contract is contingent upon an agreement between the Seller and Seller's creditor(s), acceptable to both, to sell the Premises for less than the loan amount(s)" would make a world of difference.  Determining what is "good faith" is always a problem, but so is "diligent and continued efforts" as already contained in the FAR Exclusive Listing Agreement language.  Contract obligations are to be conducted in good faith under Florida law, so there is nothing new here.  If a reader wants a copy of the forms I have created I will try to honor your requests - just leave a comment to this article requesting them.

Time for a Fix

The old saying, if you are going to do it you might as well do it right, fits well.  The FAR took the responsibility to create these addenda.  Now they need to update them to be aligned with the evolution of the Short Sale process and the respective parties' rights and obligations.  Remember what I said before you think I am condescending in my remarks - I opened this article with the statement that the forms became problematic because of the rapid evolution of the Short Sale process.  But now that the process seems to be taking on some standards, the addenda should be repaired to properly and fairly represent the interests of all the parties to the transaction.

UPDATE!!!! - THE FLORIDA ASSOCIATION OF REALTORS RELEASED A NEW SHORT SALE FORM IN JUNE 2010 THAT ADDRESSES THE CONCERNS WITH THE CONTRACT SHORT SALE ADDENDUM ADDRESSED ABOVE!

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make.  This article is for information purposes and is not specific advice to any one reader. 

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660  RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide!  Shortsales@Florida-Counsel.com  New Website www.Florida-Counsel.com

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Rainmaker
1,142,210
Bryant Tutas
Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL
Selling Florida one home at a time

Richard, This is a very timely post. I was just studying the addendum today and it is very poorly written. I completely agree with your changes. I believe FAR was rushing to get something out there and just didn't take the time to get it right. Kind of like the bail out!!!!

Feel free to send your good buddy Broker Bryant revised addendums :)

Nov 01, 2008 10:28 AM #1
Rainmaker
542,671
Brian Sharkey
SharkeyRE LLC - Port St Lucie, FL
SharkeyRE - #SouthFloridaBroker

Richard,

Thank you it's always good to read your blogs.  I am working on a disclosure agreement for listing a property in LP or Short Sale and believe that I would be best served if I just disclose to everyone the new statute.  What do you think?

Nov 04, 2008 10:27 AM #2
Rainmaker
281,288
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Brian -

I think I am not clear on your question.  Am I to assume the reference to LP means that the listing is in foreclosure?

Assuming so....

Disclosing that the statute exists is not the purpose of the statute.  In fact you as the listing agent need to make no disclosures under the statute if you are just providing the services under your Exclusive Listing Agreement contract (coupled with a proper addendum) and to properly list it under the MLS rules. 

The statute comes in where there is a service to acquire the equity in the house (not financial equity necessarily) to prevent or control a foreclosure, any lease back or other "saving" scenarios.

Realtors, Mortgage Brokers, and Attorneys have specific exemptions for "doing their job" under the statute.  Cross the narrow line and the disclosures kick in.

 See: FLORIDA-FORECLOSURE-FRAUD-BILL-UPDATE

Nov 04, 2008 10:43 PM #3
Rainmaker
525,052
Wendy Rulnick
Rulnick Realty, Inc. - Destin, FL
"It's Wendy... It's Sold!"

Richard - I appreciate your thoughts on this. Whom do they/we hire to write these addenda? Oi.  Also, I am going to start adding a listing addendum stating I will not agree to whatever commission cut the lender deems appropriate. 

Nov 05, 2008 09:10 AM #4
Rainmaker
525,052
Wendy Rulnick
Rulnick Realty, Inc. - Destin, FL
"It's Wendy... It's Sold!"

Oh yeah, Richard, would you be so kind as to email me your addendum?  Awesome!

Nov 05, 2008 09:18 AM #5
Ambassador
1,723,125
Jon Zolsky, Daytona Beach, FL
Daytona Condo Realty, 386-405-4408 - Daytona Beach, FL
Buy Daytona condos for heavenly good prices

Wendy, not agreeing to the Lender cutting hte commission can ill the deal. You put 6%, Countrywide only pays 5, you do not agree, you do not have a deal. I do not see the point of doing short sale if you are ready to kill it from the get go.

Just a thought (and I might be wrong)

Nov 06, 2008 03:27 PM #6
Ambassador
1,723,125
Jon Zolsky, Daytona Beach, FL
Daytona Condo Realty, 386-405-4408 - Daytona Beach, FL
Buy Daytona condos for heavenly good prices

Richard,

Very good post. i am sure I have your addendums from the deal that your office has some for my client, but I will check tomorrow.

WHen we use FAR forms, I assume that they are legally good (if I may say that). I am not an attorney, and I do not read it the way you do.

It is not the biggest pleasure to find out that they are sloppy at best. Thanks for showing it to us.

Thanks

Nov 06, 2008 03:30 PM #7
Rainmaker
525,052
Wendy Rulnick
Rulnick Realty, Inc. - Destin, FL
"It's Wendy... It's Sold!"

Jon-  It's not a good business decision for me to cut it to whatever-  anything - 2 or 0%.  To me, that's like building a deck on someone's house, then being told you're only getting 50% for your work after you've paid for the wood, nails, paint, insurance and labor.   I've got to have some protection. Yes, most lenders cut 1%, but some cut 2%, who knows what they'll do next? In that case, I might stipulate the Seller must pay x amount of difference.

Nov 07, 2008 12:25 AM #8
Anonymous
Jay Ross

I have MANY problems with the SS listing and the SS Addendum to Sales Contract.  here's a few: You are required by the SS listing agreement to represent your customer EVEN IF THE BANK PAYS YOU ZERO!  I also sent a formal complaint to FREC because houses are being listed BELOW the bank approved price...FREC did NOT agree that this was false advertising and did nothing.  And finally, I believe the Seller's mortgage balance MUST be disclosed, if it advertised as a SS.  It is a "material defect" in the title if the Seller can not pay it off at closing.  Anyone agree?

Please send me your forms.  Thanks, Jay Ross JayRoss.HBR@gmail.com

Nov 13, 2008 03:00 AM #9
Anonymous
John McConnin,

spot on.  Great work.   

Nov 17, 2008 07:09 PM #10
Anonymous
Rodney Forbes

Richard,

Thanks for the great post. I'm a realtor in the West Palm Beach area and I get these questions all the time.

I'd love to get a copy of the forms you use.

Thank you,

Rodney Forbes

Rodney@ForbesRealtyOnline.com

 

Dec 03, 2008 11:19 AM #11
Anonymous
Michael

Richard,

I am considering a home SS, as I will shortly be out of income due to a layoff.

I would love to have a copy of the forms you use. I do not want to get stuck for

money's I cannot pay. Thanks so much for your time.    

Mar 25, 2009 03:14 AM #12
Anonymous
Wendy

Richard,

 Your comments are clear and supportive of recent panel short sale panel experts who presented in Orlando this week.  I am interested in a copy of the forms you have created.

Thanks!

Jun 19, 2009 12:57 AM #13
Rainmaker
281,288
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Wendy - give me your email via my Contact info and I will email them to you.

Jun 19, 2009 10:54 AM #14
Anonymous
MARY LEPAGE

I RECENTLY HAD A DEAL FALL THROUGH BECAUSE OF 1099 ON INVESTMENT PROPERTY SELLER REFUSED TO CLOSE THIS 1099 WAS NOT MENTIONED IN SS APPROVAL IT THERE ANY RECOURSE FOR SELLER HE IS REFUSING TO CLOSE .i AM VERY INTERESTED IN DOCUMENTS YOU COMPILED ALSO.oNE LAST THINGS ARE YOU PART OF RITTER ZARETSKY AND LEIBER IN MIAMI?

Oct 30, 2009 01:07 AM #15
Rainmaker
281,288
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Mary

I am not part of the Miami Zaretskys. 

The 1099 will result if there is forgiveness of debt.  This is usually a good thing.  If the seller does not want a 1099 he can pay off the loan in full.

Getting a 1099 and also getting forgiveness is possible - but not reporting the forgiven income by the taxpayer is tax fraud.  See my articles about it at SHORT SELLER STILL MUST DECLARE INCOME ON SALE!

Nov 01, 2009 01:44 PM #16
Anonymous
Mickey

Would like e mail of forms you refer to.  Thank you.

Nov 18, 2009 12:38 PM #17
Anonymous
Donna Bhatia

Very timely article for me.  I had a lot of the same thoughts and comments.  Would you please send me the forms  you created.  Very appreciated and

best regards,  donna

Jul 27, 2012 02:27 PM #18
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