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