Why Should an Experienced Short Sale Attorney Review My Offer to Purchase PRIOR to the seller signing it?
The Offer to Purchase is an integral part of the short sale, perhaps even more so than in a traditional sale, and especially in Massachusetts. Massachusetts, unlike most states, is a two contract state. The first contract is the Offer to Purchase and the second contract is the Purchase and Sale Agreement. The Offer to Purchase is a legally binding contract and therefore any terms contained in the Offer to Purchase must appear in the Purchase and Sale Agreement. Thus, all of the MOST important terms of a short sale agreement should be contained in the Offer whenever possible. In a standard real estate transfer an attorney typically will not be involved with the Offer process. However, with a short sale, you may want to reconsider that practice. If you are working with a real estate agent inexperienced with short sales, he or she may not understand the importance of structuring the Offer with terms specific to a short sale, and further, may not understand the importance of reviewing the Offer with an attorney experienced in short sales prior to accepting the Offer.
Our practice, here at Hornung & Scimone, is to conduct a detailed intake with a potential short sale client as soon as or even before their property is listed for sale. As part of that intake process, we investigate and determine the Seller’s financial status, living situation, condition and occupancy status of the subject property, how many and what type of mortgages are on the subject property, what lender the mortgages are held by, whether the homeowner has received any notices of foreclosure or if an auction has been scheduled, the outstanding amounts owed on those mortgages and what the likely sale price will be. The importance of all of these factors is two fold. First, the information collected allows us to evaluate important factors about the lenders we will be working with to approve the short sale, such as how long a lender commonly takes, whether or not they typically grant full debt cancellation, or whether they typically require a promissory note for the remaining balance. Second, the information collected allows us to advise the homeowner about the possible consequences of a short sale, including but not limited to tax consequences, credit consequences, and possible future liability on the homeowner. This wealth of knowledge should be considered before accepting any Offer to Purchase.
To protect a Seller and give the short sale the best chance of approval, Offers to Purchase should always be negotiated pursuant to the status of the specific Seller. An Offer should always require the Buyer to conduct their home inspection within 7-10 days of acceptance of the Offer, go to Purchase and Sale within 14 days of acceptance of the Offer, and apply for their financing within a certain time frame, just like a standard transaction. So often we see all of those items stated as “contingent upon receiving short sale approval”. This is a great disservice to a Seller and a Buyer. When a short sale application package is submitted, it requires information specific to the Buyer. When approval is granted, it typically requires a closing within 30 days, sometimes sooner, and is SPECIFIC to that Buyer. Imagine a scenario where an Offer is accepted that does not require the Buyer to do their inspection, purchase and sale, or financing application until AFTER the short sale is approved. The Seller, listing agent, and attorney now work diligently to get the short sale approved over the next 90-120 days and succeed in an approval for Buyer, John Smith, to close within 30 days. The Buyer now schedules his home inspection to take place in a week. If the home inspection goes poorly and the Buyer backs out, the Seller is out of luck and the short sale approval is void. The Seller must then start over and hope to get another Offer and get the short sale approval again prior to foreclosure. Even if the home inspection goes well, the Buyer has now lost a week’s time, but moves on to applying for his or her financing with three weeks to complete the process start to finish. This is a difficult task, even for the most experienced lender. To make matters worse, a lender involved in the process of a short sale usually requires 3-5 days to review the HUD, shortening the available time frame even further. Let’s say its three days until the expiration of the short sale approval letter and the Buyer’s lender simply cannot complete the closing by the scheduled date and requests an extension. The Seller cannot grant the extension without the approval of the short sale lender. The short sale lender is not willing to grant the extension. The Seller is again out of luck and now the Buyer is as well, having both waited 120-150 to complete the transaction and not being able to close. Not to mention the mortgage lender, real estate agents and attorneys who have invested hours of work into the transaction and will likely never be paid for their efforts. And so the process begins again, back on the market, looking for a new Offer and hoping it comes in before the dreaded Notice of Foreclosure arrives. Unless, of course, you are one of the really unlucky ones who had already received that Notice and only had one chance at a short sale before your auction took place. Thus, the moral of the scenarios presented above is that the Offer is an essential part of the transaction and the sooner you have involved your attorney, the better.