New Trends Emerging In Massachusetts Short Sale Legal Practice

by Rich Vetstein on January 24, 2012 · 6 comments

in Foreclosure, Massachusetts Real Estate Law, Offer To Purchase, Purchase and Sale Agreements, Realtors, Short Sales

The Offer to Purchase Has Become Much More Important

With a glut of distressed property still on the market and lenders realizing foreclosures aren’t very cost-effective, analysts are predicting a healthy spike in short sales for 2012. Short sales are quite unique in terms of deal dynamics, and should be handled differently than the typical transaction.

Massachusetts real estate attorneys and Realtors, however, are set in their ways when it comes to real estate contracts. For decades, we’ve been using the standard form Offer to Purchase and Purchase and Sale Agreement from the Greater Boston Real Estate Board or some variation thereof. We have also developed a predictable process in which the parties sign the Offer, conduct property inspections, sign the Purchase and Sale Agreement, obtain financing, order title, and get to closing.

With the recent proliferation of short sales, we have had to … yes, that dreaded word, CHANGE, the way we do things. Some agents and attorneys still do things the “old way” for short sale transactions, but they are doing themselves and their clients a disservice by doing so.

In this post, I will outline —  and explain — the “newer and better” way of handling the legal contracts in a Massachusetts short sale transaction.

The Offer to Purchase: Now The Operative Contract Document

We are seeing a shift to making the offer the operative contract in a Massachusetts short sale transaction. And for good reason. A short sale, by definition, is subject to a critical contingency: obtaining short sale approval from the seller’s lender(s). No short sale approval, no deal. Experienced short sale attorneys and real estate agents (and their clients) don’t want to spend the time and incur the expense of drafting a comprehensive (and contingent) purchase and sale contract when there is no guaranty of getting short sale approval. Furthermore, short sale lenders will accept a signed offer from the buyer during the approval process.

When we were first doing short sales, there were several instances where we drafted up purchase and sale agreements and then the short sale approval fell through. We had to charge the client for the drafting work or eat the cost. No one was happy.

The better way has proven to be the following:

  • Build all contingencies into the Offer to Purchase, namely, Short Sale Approval and Financing (we’ll talk about home inspections later)
  • Use a standard rider with short sale contingency language, with a deficiency waiver
  • Seller to use best efforts in obtaining short sale approval
  • Buyer agrees to be bound for set approval period  (60-90 days) in exchange for seller taking property off the market and not accepting back up offers. Negotiate deposit amount, usually 1% of purchase price. Buyer will obtain his financing and loan commitment during this approval period.
  • Negotiate extension rights, with corresponding protection for Buyer’s financing/rate lock
  • Upon short sale approval, purchase and sale agreement is signed within 5-7 days and full 5% deposit made
  • Closing within 30 days of short sale approval. (Most short sale approvals are only good for 30 days)
  • Waiver of home inspection or inspection prior to offer acceptance. Sellers should never agree to allow a home inspection contingency giving the Buyer a right to terminate. If the buyer doesn’t want to pay for an inspection up front, he is not a serious short sale buyer.

Change Is Hard…

I recognize that this is a departure from the “normal” way we document residential real estate contracts, but trust me, it’s a better way, and will actually decrease the time it will take to obtain short sale approval, because the parties are not waiting around for the P&S to be negotiated and signed and the buyer (and his attorney) don’t have to do unnecessary work.

Another important piece here is that the Buyer must get his financing in order, ready to go by the time short sale approval comes through. Lenders must recognize the unique short sale process and work with borrowers to get a firm loan commitment issued timely. Also, there’s no need for a lender to insist that the borrower have a signed purchase and sale agreement for underwriting approval. Under the process that I’ve outlined and under established Massachusetts case-law (McCarthy v. Tobin), the Offer is a legal and binding contract for the sale of the subject property and is sufficient for underwriting purposes. If it’s ok for the short sale lender, it should be ok for the buyer’s lender.

Help Is An Email Away

If you are a Realtor and need some guidance on the new Short Sale Offer, email me here and I will send you the form Rider. Also, if you need a referral for an excellent short sale negotiator, I highly recommend Andrew Coppo at Greater Boston Short Sales LLC.

__________________________________________________________

Richard Vetstein, Esq. is an experienced Massachusetts short sale attorney. For more information, please contact him at info@vetsteinlawgroup or 508-620-5352.

  • Pingback: Why Is The Massachusetts Association of Buyers Agents Scaring Would-Be Short Sale Buyers? | The Massachusetts Real Estate Law Blog

  • http://www.synergy-metrowest.com/ Martin Kalisker

    The Massachusetts Association of Realtors has recommended that their Loss Mitigation Certified Agents utilize this short sale addendum for many years.  Unfortunately, many agents still believe that their client is the lender and continue to market the property and even get offers up to and including the date of the short sale approval.  If both sides were commited to the transacation, fewer deals would fall apart.

  • Christine Smith

    Interesting, As you say, the Offer is a binding contract and you can write in all the contingencies you need. Normally inspections are done after Offer and I just would not want my client to risk money on the inspections without a signed offer at least because the Seller could then accept another Offer in the interim. But there are probably ways to work around that.

  • http://www.massrealestatelawblog.com Richard Vetstein

    Christine, you can do a quick home inspection right after the Offer. Again, under my approach, the seller agrees not to accept any backup or competing offers. 

  • Audrey

    Subsequent to the offer, how much information is the bank allowed to request about the buyer in a short sale?  If the buyer has a preapproval letter that says that the buyer can close on the house, can the bank ask for further proof of the buyer’s finances?  Isn’t that violating the buyer’s privacy rights, if there are any such rights between the short sale buyer and the seller’s lender in the short sale process?

    • http://www.vetsteinlawgroup.com Rich Vetstein

      Audrey, typically a pre-approval letter is sufficient. However, if you are concerned about privacy issues, you can ask the lender to sign a confidentiality agreement.

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