What is a Short Sale and what forms are required?

Short sales can be complicated and need specific forms and expertise to navigate properly.  Here are the basics:

First of all, what is a short sale?  1. SHORT SALE DEFINED. The term “Short Sale” is used in the real estate business to describe a situation where the current fair market value of the property is less than the debt owing against the property. In other words, the Seller can’t sell the property unless the creditors (“Third Parties”) agree to accept a payment that is less than (or “short” of) the amounts actually owed to those Third Parties. The Third Parties may include mortgage lenders, mortgage insurers, bankruptcy trustees, and federal, state and local taxing authorities (such as the IRS or State Tax Commission) or other lien holders.  THIRD PARTY APPROVAL CONDITION. A Short Sale requires the written approval of the Third Parties. Consequently, the Seller of the property and any Buyer is advised that even if they reach an agreement with each other for the purchase and sale of the property the Buyer’s obligation to purchase, and the Seller’s obligation to sell, are respectively conditioned upon Third Party Approval of the Short Sale as defined in the Short Sale Addendum Form 21 is the Short Sale Disclosure form. This form is used to explain to Buyers and Sellers what a short sale is and what to expect during the process.  Before embarking on listing a short sale become familiar with this form, and have your Buyer or Seller read it as well and sign the form acknowledging they understand.

Form 20 is the Short Sale Addendum.  This form is used in conjunction with a normal REPC.  The terms of this Addendum are hereby incorporated as part of the REPC, and to the extent the terms of this Addendum modify or conflict with any provisions of the REPC, including all prior addenda and counteroffers, these terms shall control.  There are terms of the Short Sale incorporated into this addendum explaining the approval process of Third Parties, and approval by Buyer and Seller of specific requirements in the short sale.  This addendum also explains the rights of Seller to accept back up offers, and Buyer/Sellers rights to cancel.  Section 8 provides for the contract deadlines including Due Diligence, Financing and Appraisal, and Settlement.  When preparing the offer for a short sale the deadlines in section 24 of the REPC should all read: SEE SECTION 8 OF SHORT SALE ADDENDUM.  Because no one knows what the deadlines shall be at the front end of a short sale, section 8 just discloses the days required to fulfill these deadlines after third party approval.  Section 6 speaks to Sellers rights to accept back up offers.  

Form 20A is the Secondary “Backup” Contract for Short Sale Addendum to Real Estate Purchase Contract  This form is used in conjunction with a REPC for a Back up offer.  It includes several Buyer acknowledgements: Read the sections as outlined in the addendum.  The main theme of this addendum is that the Seller may or may not submit the Backup Contract and any additional back up contracts to the applicable Third Parties for Third Party Approval.  And notice is given by Seller to Buyer within 4 days if their REPC is submitted to a Third Party.  Some Third Parties will ask for any and all additional contracts, and some will only review one at a time.

Form 20B is the Acknowledgement of Third Party Approval Addendum to Purchase Contract.  The purpose of this addendum is to give acknowledgement that the Third Party has approved the REPC short sale, and may contain an exhibit with Third party modifications.  The Short sale is not considered accepted by all parties unless this Addendum is signed by the parties and the Contract deadlines are updated and agreed upon.  For further explanation refer back to section 2 of the Short Sale Addendum.