During recent months, there has been an uptick in WRA Legal Hotline calls relating to short sales. The hotline FAQ article this month revisits short sale FAQs and includes myriad short sale resources available from the WRA.
Primary and secondary offers
Lender approval
A seller is in a short sale situation and has an accepted offer, but the seller does not yet have the lender’s approval for the short sale. Another offer is written. Can the bank just reject the accepted offer and accept the second offer?
The broker may help the parties understand that the offer to purchase is an agreement between the buyer and seller. The lender’s approval of the short sale involves an agreement between the seller and the lender. Although the lender has the power to agree to the short sale, the lender is not a party to the offer to purchase and cannot “reject” the buyer’s offer. The lender may, however, decline approval of a proposed short sale. If the seller is unable to obtain lender approval per the agreed upon short sale contingency, the contingency typically indicates what happens next and how the contract will be resolved. Each lender approval/short sale contingency may be different, so it is important to carefully read the specific provision.
Secondary offers
The seller has a short sale situation and has an accepted primary offer. If another offer comes in, can the seller accept that offer as primary and send it to the lender too?
The seller may accept secondary offers when there is an accepted primary offer, whether the primary offer is subject to lender approval of the short sale or not. Standard of Practice 1-7 provides in relevant part that “REALTORS® shall recommend that sellers obtain the advice of legal counsel prior to acceptance of a subsequent offer except where the acceptance is contingent on the termination of the pre-existing purchase contract.” Clearly the safest practice from the seller's standpoint is to make any subsequent offers secondary offers — with each one also subject to the approval of a short sale by the seller’s lender. The WRA SSO Short Sale Addendum to the Offer includes a provision regarding the seller continuing to market the property and accept secondary offers; see lines 23-27. The seller can submit the offers to the lender at the same time for the lender’s consideration provided the lender will entertain multiple offers.
Don't forget the SSO
The property listed in the MLS did not note in the public or private remarks it was a short sale. When the agents spoke with each other prior to writing the offer, the listing agent said the house is a short sale and that the cooperating agent should include the Addendum SSO. If a seller has a verbal preapproval of a short sale from the lender, does the offer have to include a short sale addendum?
A short sale addendum should be used in all situations where a short sale is anticipated, regardless of whether the bank already has verbally preapproved a short sale or not. Quite often, a bank will not approve a short sale until an accepted offer to purchase is received. The WRA Short Sale Addendum form is crafted to have benefits for both the buyer and seller navigating a transaction subject to lender approval of the short sale.
Does the listing broker have to disclose the short sale? If the bank has not approved the short sale but the sellers know that they will be short to pay off the mortgages, is a short sale addendum still needed?
When a broker is required to disclose, the short sale may be a moving target. In some instances, a seller may be in the position to bring funds to the table to close the transaction; in other instances, the lender may release the lien on the property and enter into a payment plan with the seller for the remaining debt. If not disclosed earlier, once the broker knows the seller cannot meet the obligations per the contract, the broker will have an obligation to disclose this material adverse fact in writing.
When buyers want to bail
When the buyer has an accepted offer on a property with a short sale seller, and the seller does not yet have the approval for the short sale from the lender, can the buyer withdraw his offer before the time frame required by the lender to approve the short sale?
The buyer’s ability to withdraw the offer depends on how the lender approval contingency was drafted. A short sale offer may be drafted to either allow a buyer to withdraw at any time, at any time after a deadline or only for a certain period of time. When the WRA Addendum SSO is used in a transaction, there is an optional lock-in period for the buyer. In part of the offer, the time frame negotiated allows the seller peace of mind that so long as the seller receives the lender’s short sale approval, the buyer will be locked in to the offer. Given the optional nature and the different short sale contingencies, an individual buyer and seller must review the contract terms to see if and when the buyer has the right to withdraw the accepted offer.
Closing, not commission, is the priority
The seller will be short to close. The proceeds will be sufficient to pay the taxes, utilities and outstanding mortgages, but there will not be enough money left to pay the full amount of the commission. Can the broker say to the seller that the broker can’t proceed with the closing, or can the broker walk away from the transaction?
In some short sale transactions, there may not be enough funds for the seller to pay the lien holders and the commission as negotiated at the time of closing. A broker cannot put his or her interest in commission ahead of the duty to help the parties complete the transaction. Although the listing contract provides that the broker’s commission is due at closing, the broker cannot stop the closing just because the seller does not have enough money to pay the full commission at that time.
Once the listing is entered into, the broker has a contractual duty to the seller to provide brokerage services for the duration of the transaction. The listing broker should do whatever he or she can to help the seller meet the terms and conditions of the offer. If the seller has enough funds to meet the contract obligations and provide a clear title, the closing should proceed. If the funds fall short, the seller may work with legal counsel and try to borrow needed funds, convince lien holders to accept less than the full amount due, and find other ways to meet the seller’s closing obligations.
Once the transaction closes between the buyer and seller where the sellers came up short on commission, how can the broker pursue commission or file a broker's lien on another property that the seller owns?
The listing broker has many possible ways to address the shortage in commission; they include consider renegotiation of the commission, create a payment plan for the seller, have the seller give a promissory note, take a lien on another property owned by the seller, or go to court to obtain a judgment for the commission. In residential transactions, there are no broker commission liens.
Resources
Tracy Rucka is Director of Professional Standards and Practices for the WRA.