THE SHORT SALE ADDENDUM: A COMPLICATED BUT IMPORTANT DOCUMENT

November 30th, 2012 at 7:23 pm

Given the number of short sales we see, the Short Sale Addendum (SSA), is one of the most important documents we use. Unfortunately, it also one of the most complicated and most misunderstood. As a result, I thought it a good idea to walk you through the way it works so you can properly explain it to your clients.
As you know, the SSA’s boilerplate language provides that the transaction is contingent upon receiving lender approval within 45 days of acceptance. It then provides that, if the (1) seller has not received the lender’s approval by that date, or (2) the buyer has not received a copy of that consent from the seller by that date, the contract may be cancelled. It specifically provides that “[i]n either case, Buyer shall be entitled to return of any remaining deposit…” The main question that arises in this context is whether the contract can be cancelled before day 45 if, for example, the buyer finds another property or the seller changes their mind and wants to seek a loan modification. The technical answer is no, since until that “Short Sale Contingency Date” arrives, there is no cancellation right. That right is specifically created only if approval is not received by that date.

In truth, this issue cannot be read independently of paragraph 2 of the SSA. The boilerplate of that paragraph provides that the time periods for buyer’s inspections do not begin until after bank approval is received. Of course, we know that is the way most contracts are written because buyers do not want to spend money on inspections until they know that the bank has approved the deal. However, by leaving those terms in place, it means that, technically, your buyer has no cancellation rights until either approval is received or the 45 days passes. After all, the SSA explicitly says he doesn’t have the short sale contingency until day 45 and, if the inspection periods haven’t started, he doesn’t have those cancellation rights either. So, the only way to fix this is either shorten the short sale contingency date in paragraph 1A or check the box in paragraph 2(ii) which makes your inspections begin at acceptance. In those cases, cancellation rights will start earlier and can be used if necessary.

Of course, even if you leave the boilerplate, a conversation with the listing agent should still get you out of the deal if you want. After all, while the seller can hold you in for the time being, you will be able to cancel on the short sale contingency date if approval is not received, or based on your inspections if it is. So, the fight seems silly, but we wanted to explain this because it has been coming up.

The other issue we see with regard to this form is the question of what happens when the bank asks for changes to the Purchase Agreement. As you know, the lender’s approval typically comes with a term sheet that may not be consistent with the parties’ agreement. In this case, the SSA is very clear: “[N]either Seller or Buyer is obligated to change the terms of their Agreement to satisfy Short Sale Lenders’ consent or term sheet(s).” (SSA, paragraph 1E.) As a result, in the common event that the bank asks for changes, even if they are minor, another cancellation right arises. The parties already have an agreement, subject to lender approval, and are under no obligation to change it just because the bank asks them to.

As always, let us know if you have any questions about this document.

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