Understanding Short Sales

SHORT SALE DEFINED.
The term “Short Sale” is used in real estate to describe a situation where the current fair market value of the property is less than the debt owed on 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 written approval from the Third Parties. Therefore, the property Seller and any Buyer are advised that even if they agree on the purchase and sale of the property, the Buyer’s obligation to buy and the Seller’s obligation to sell are each subject to Third Party Approval of the Short Sale as defined in the Short Sale Addendum.

THIRD PARTY REJECTION OR CHANGES TO THE PROPOSED SHORT SALE.
Third Parties may reject a proposed Short Sale. However, if the Third Parties do not reject the proposed Short Sale, they will typically send the Seller a list of requested changes to the proposed purchase contract (“Third Party Modifications”). These Third Party Modifications may affect the Seller, while others may impact the Buyer. For instance, the Third Parties might not allow the Seller to pay any of the Buyer’s closing costs or may require that the transaction close by a specified date. The Seller and the Buyer are not obligated to accept any of the requested Third Party Modifications; if they do not, there will be no Short Sale. However, if the Seller and Buyer agree on the Third Party Modifications and include them in an addendum to the REPC, then the Short Sale transaction may proceed to closing.

DELAYS IN RESPONSE FROM THE THIRD PARTIES.
Most purchase contracts for Short Sales set a deadline for written approval by the Third Parties. The Third Parties may not meet that deadline or may not respond at all. The Seller and the Buyer should be prepared for significant delays in receiving any response from the Third Parties.

RIGHT OF THIRD PARTIES TO ENCOURAGE ADDITIONAL OFFERS.
As a condition for considering any proposed Short Sale, the Third Parties may require the Seller to keep the Property on the market even after the Seller and the Buyer have agreed to the terms of a proposed purchase contract. The Third Parties aim to obtain the highest possible price for the property. Therefore, some Third Parties require the Seller to keep the Property on the market and to promptly submit any additional offers from other Buyers that the owner may receive. The Seller and the Buyer should understand that the Third Parties may not respond to a proposed Short Sale transaction until they have had a chance to compare that offer with other purchase offers. This process may also cause significant delays for all parties.

RIGHT OF BUYER AND SELLER TO CANCEL.
Seller and Buyer are also advised that at any time before the Third Party Approval Deadline or the Third Party Approval, whichever comes first, as defined in the Short Sale Addendum, either party may cancel the proposed Short Sale transaction. (Usually in accordance with the terms and conditions outlined in the Short Sale Addendum.)

TAX AND LEGAL CONSEQUENCES.
Sellers (and Buyers) should be informed that participating in a Short Sale transaction might result in negative legal or tax consequences. You are encouraged to consult your attorney or tax advisor if you need specific legal or tax guidance.

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