Arizona Short Sale Addendum Part One: Introduction to Terms

April 20, 2012 By Jon Griffith Leave a Comment

As I encounter short sale listings from the buyer’s perspective, I run across many different variations of the Short Sale Addendum to the Purchase Contract. More often than not, in the additional terms and conditions of the short sale addendum, there are redundancies in language that confuse the contract.

Upon reading one such “custom” addendum, I was inspired to clarify the basics of a boiler plate Arizona Association of REALTOR®S Short Sale Addendum as it is written.

Shall we begin?

Lines 1-4: Identity

As with all other contract documents, this section outlines the Buyer, Seller, Property Address and Date. Pretty simple, yet often left blank by lazy real estate agents.

Note: A bullet proof contract will be complete and should indicate the level of excellence your agent strives to achieve.

Lines 5-6: Definition

“The following additional terms and conditions are hereby included as part of the Contract between Seller and Buyer for the above referenced Premises. (See how important it is to be thorough.) Delivery of all notices and documentation shall be deemed delivered and received when sent as required by Section 8m of the Contract.”

Pretty simple.

Lines 8-15: Short Sale Contingency (condition)

“Buyer and Seller acknowledge that there is more debt owing agianst the Premises than the purchase price. Therefore, this Contract is contingent upon an agreement between the Seller and Seller’s creditor(s), acceptable to both, to sell the Premises for less than the loan amount(s) (“short sale”). Buyer and Seller acknowledge that it may take weeks or months to obtain creditor(s) approval of a short sale. Nothing shall limit a Seller from accepting subsequent offers from subsequent buyer(s) and submitting the back up contract(s) to Seller’s creditor(s) for consideration. All parties understand and agree that Seller’s creditor(s) may elect to allow the Seller to sell the Premises only to the holder of the Contract with terms and conditions most acceptable to creditor(s).“

Again, quite simple, and quite clear that to lift the contingency, only one thing needs to happen and that’s that the seller and seller’s lender come to an agreement regarding the short sale. This information, contrary to popular bad-habit in the real estate community, is not incorporated into the purchase contract and therefore neither the buyer, buyer’s agent nor brokerage, nor buyer’s lender need to see the details of this agreement. Many people have a hard time grasping this concept. You’ll notice the stricken lines. This provision is in the addendum by default, but quite honestly, leaving these terms in causes huge headaches and essentially makes your offer as a buyer quite worthless. In order to show a buyer that a seller means business, I always advise this modification. We don’t want to give the lender any say over which contract will be approved, and we certainly don’t need to submit more than one offer to a scatterbrained lender at a time. That would prove disastrous and very confusing on their end.

Line 16-20: Documentation to Creditor(s):

Seller shall submit to creditor(s) a copy of this Contract, including this and other Addenda, and any other documentation required by the creditor(s) for approval of this sale within five (5) days after Contract acceptance. Seller agrees to diligently work to obtain short sale approval and will promptly provide the creditor(s) with all additional documentation required, including an appraisal, at Seller’s expense, if required. Seller instructs creditor(s) to provide approval status updates to Broker(s) and Buyer upon request.

What the…okay, this outlines one very important aspect of real estate contracts. Notice that contractually, your agent is not the one responsible for handling this task, yet it is what we offer you as a service because we are familiar with it, and we know that you don’t have the time nor patience to learn the process, and quite frankly, most people would give up before getting the job done. So we do it for you, but you are still the one responsible for making sure it happens. This is why it is absolutely critical that you respond quickly to any requests we have for documentation from you as you are contractually obligated to perform. If we ask for something from you that’s critical to fulfilling these terms, we’re doing so because we’re looking out for your best interests, and you need to trust that, and provide us with what we ask for quickly.

That wraps up the first half of the Short Sale Addendum:

Identity
Definition
Short Sale Contingency
Documentation to Creditor(s)

In the 2nd article in this series, I’ll go over the following topics:

Terms Upon Acceptable Short Sale Agreement
Buyer Cancellation
Legal and Tax Advice
Unfulfilled Contingency

And finally, I’ll wrap it up with the section that ends up causing the most confusion because of the many variations that agents write:

Other Terms and Conditions

Filed Under: Short Sales Tagged With: approval, buyer, contract, short sale

Inspections vs. Appraisals

October 31, 2011 By Jon Griffith Leave a Comment

In response to an article posted on DSNews.com entitled “Zillow: Prospective Home Buyers Overestimate Home Value Appreciation“ where the author writes about buyers being confused about the difference between inspections and appraisals, I thought I’d post a simple explanation should you be one of those prospective home buyers.

Appraisals

An appraisal is a professional opinion of a home’s value. When you purchase a home using a lender, while in escrow, the lender will order an appraisal to ensure that the home is worth at least what you’ve agreed to pay for the home. If an appraiser reports a value lower than the contract price, your lender will not underwrite the deal unless you cover the gap with funds at closing. You could also negotiate a lower price, or simply walk away. Either way, it’s simply an opinion of value used to gauge the agreed upon price. In a cash deal, a buyer might waive the appraisal, but he or she may also want to conduct an appraisal to ensure they’re not over paying for the property.

Inspections

When you and the seller come to an agreement on the price of the home you are considered “under contract.” In the Arizona Purchase Contract there is a section called Due Diligence. This is where your inspection time frame is defined, which is typically 10 days, but always negotiable. During that 10 days, it is your responsibility as a buyer to conduct as many inspections on the property as you feel comfortable with. Usually a single general inspection is enough, but sometimes the general inspector recommends that you find a specialist to confirm potential findings. Inspections have nothing to do with the appraisal, although an experienced appraiser will often identify potential problems that a general inspector would also find. At the end of the inspection period, the buyer writes a notice to the seller (the BINSR) with their findings, asking for repairs, backing out, or accepting the property as it is with no changes.

Both the Inspection and the Appraisal are considered contingencies on the contract that can kill the deal. If the house doesn’t appraise, you won’t get lending, or can walk away or renegotiate the price. If the inspection reveals a plethora of potential problems, you can also walk away or ask the seller to remedy the problems prior to close of escrow.

Both are recommended for cash buyers. The appraisal is required when you get a loan to buy.

Filed Under: Real Estate Basics Tagged With: buyers, contract, home, property

Pre Approved Short Sale? No such thing…

October 11, 2011 By Jon Griffith Leave a Comment

When a short sale is approved by a lender, it is approved in writing with the names of the parties to the purchase contract included. This means that if there is a change in any way, shape, or form, to the contract that affects anything on the HUD-1 the approval letter that the lender has drafted no longer applies, and therefore, the approval no longer exists.

The term Pre-Approved short sale indicates a few possibilities:

The lender has evaluated the property prior to it being listed or prior to being notified of a purchase contract on the home, and have indicated a pre-approved sales price. In other words, “if you bring us this price, we’ll probably approve it.”
The lender has already issued an agreement to the seller for a lower net payoff, but the house is no longer under contract and a new buyer needs to step up to the plate.

Both are known as “pre-approved.” Neither guarantee a successful close of escrow. The first of these may be an unrealistic market value that nobody will ever pay for the home, so it won’t even sell, and therefore won’t enter into the short sale negotiation phase. The second of these indicates that the previous contract price and resulting HUD-1 managed to garner an approval, but now that there’s no buyer, that information is all new, and must be re-submitted to the lender for “re-approval.” That process can take as long as the initial approval. Sometimes it’s faster, but often it’s not.

Don’t be fooled by the term “Pre-approved.” It’s used as a marketing tool to attract buyers to a short sale. What it really should read is “Previously Approved at one point, but we gotta do it again.”

Filed Under: Short Sales Tagged With: approval, buyer, contract, short sale

Banks are NOT a Party To The Short Sale Purchase Contract

October 11, 2011 By Jon Griffith Leave a Comment

This one topic drives me bananas because I run into it just about every day of the week.

A short sale is the sale of a home for less than is owed the bank. In order for this to take place, the lender has to approve the contract which is between the buyer and the seller. Not the buyer and the seller and the lender.

It amazes me to no end that so many agents do not understand this fact, and the contracts that I receive for my sellers frequently contain language referring to the short sale approval that is irrelevant to the purchase contract.

The real estate agent’s job is to market and sell your house. The role of short sale negotiator (who is quite often your real estate agent) is to speak on your behalf to your lender to ensure that the offer that you’ve been advised to accept will cut the mustard, so to speak. The benefit to you is that you don’t have to spend time on the phone (and I mean lots of time) dealing with incompetent bank employees in the midst of your current financial crisis, and that it most likely won’t cost you a cent to have this done for you.

Regarding the terms of the purchase contract in a short sale, the lender is no more a party to the sale of the home than an inspector or appraiser is party to the sale of the home. The relationship between the seller and the seller’s lender is one by which the seller is asking their lender to allow them to pay off the loan without recourse for less than the amount that is owed. This is called settling a debt, and leads to debt forgiveness, but the two agreements can be looked upon as separate agreements.

One agreement involves the terms and conditions between the buyer and seller, and one agreement involves the terms and conditions between the seller and the seller’s lender. Each agreement can sway the terms of the other, but they are not connected.

Filed Under: Short Sales Tagged With: buyer, contract, home, short sale

Digital Signatures are Treated Like The Plague

August 10, 2011 By Jon Griffith Leave a Comment

There’s no helping the banking community out of their pit of ignorance. (Sorry, was that too much editorialization?) Let’s rewind. Banks structure their organizations such that each department is completely oblivious to each other, and moreover, the way business is done in the real world.

E-mail. Digital Signatures. E-mail. Did I mention E-mail?

Digital signatures have been legal for a long time, and we use them every day to ratify contracts between two parties. In the case of a short sale, the bank’s involvement goes no further than a contingency on the contract. They aren’t a party to the transaction. They aren’t liable for anything that has to do with the sale of the house. They aren’t involved in any of the details of the sale of the house, AT ALL.

What they ARE involved in is the settlement of debt for which the house has been pledged, which has nothing to do with the agreement between the buyer and the seller.

So why is it then, that many banks are rejecting contracts that are legally ratified between a buyer and a seller because of the “type of pen” that was used. Face it, digital signatures are a modern replacement for pen and paper (which, by the way, is extremely easy to scan, photoshop, and forge.) It’s much more difficult to forge a digital signature than it is to forge a handwritten signature.

So the question goes out to all of you out there in the banking world. Why, if you aren’t a party to the sales contract, are you rejecting offers that are completely legal, just because you didn’t like the method by which it was made legal?

Comments are welcome here. :)

Filed Under: Bank Antics Tagged With: buyer, contract, digital signatures, house

What’s That Status Mean?

April 20, 2011 By Jon Griffith Leave a Comment

Not every property that is “on the market” for sale in Arizona is listed in the Arizona MLS. There may be reasons for holding onto what we call “pocket listings” but for the most part, when we list your home for sale, it’s done so where the widest variety of professionals have access to the information, namely, the Arizona Regional Multiple Listing Service (ARMLS).

When a property is initially listed, it shows up on the MLS as “Active.” If the data is syndicated, then it will also show up on most popular web searches such as Zillow, ListHub, and Realtor.com to name a few.

There are 4 categories of Active that we use in the Arizona MLS to denote specific situations. Unfortunately, most public web searches do not distinguish between those types of active properties, and thus, your searches may reveal properties for which there are special conditions that ultimately mean that it’s time to move on to the next property.

Recently, I have been receiving a few inquiries every week regarding properties that appear active on a public search, but are actually already under contract. For example, listings that require short sale approval remain active until there is a contract, at which point the listing will typically become Active with a contingency. On the Arizona MLS, that property reflects a status of AWC-I (Active with contingency, seller’s written instructions.)

In other words, this property is under contract already. Best bet? Move on to the next one and keep your eye out for a status change in the future. In some cases, the seller of that property may take a backup contract, and in other cases, the contract may completely fall out and be returned to Active status.

Making Sure You Have the Right Info

One of the best ways to ensure you have the right information about properties that you’re searching for is to utilize a property search that ties directly into the Arizona MLS, providing you with up to the second, accurate information rather than 24-hour delayed information.

Give it a try today. It’s free.

Filed Under: Buying A Home Tagged With: contract, information, property, short sale approval

Loan Status Report Replaced by Pre-Qualification Form

February 24, 2011 By Jon Griffith 1 Comment

The Arizona Association of Realtors, in an effort to solve some of the financing problems through the timeline of the transaction, is instituting some changes to the purchase contract and the associated financing documents involved. Currently, and until February 28th, we still have the old contract and what’s known as a Loan Status Report.

When you apply for a mortgage, the mortgage lender provides you with what’s known as a Loan Status Report that defines the terms of the loan and is to be included with a purchase contract in order for the contract to be complete. This is going away. We will no longer be required to have a Loan Status Report as part of the Arizona Purchase Contract.

In lieu of the LSR, a new form has been created which is called the Pre-Qualification form. One of the problems that I have faced as a listing agent when a buyer’s agent submits a contract is that often I’ll receive a contract without the LSR (remember, if there’s financing, the LSR is required currently) or the LSR won’t be signed. Sometimes those purchase contracts have short response deadlines and without the LSR, valuable time is wasted and sometimes contracts expire.

Starting February 28th, we’ll not only be using the Pre-Qualification form, but we’ll also be using the new purchase contract which has a revamped finance section and other various changes for the better. One of those changes comes in the form of an agreement by the buyer’s lender to provide a Loan Status Update to the seller within 5 days of contract acceptance. There is no longer a requirement to provide the Loan Status Report, but there is a section on the new contract which allows the buyer to indicate whether or not a Pre-Qualification is included. Obviously, a contract requiring financing without a Pre-Qualification form isn’t going to be a strong offer and may simply be ignored by the seller.

I’m okay with this. I have had enough of a challenge a) explaining to a new buyer what a Loan Status Report is, b) chasing down buyer’s agents for Loan Status Reports, and c) writing addenda to extend contract expiration dates to make time to do so, that it’s about time we have a better flow of information.

Make sure you grab a copy of the Pre-Qualification form so you know what to expect when you start searching for the right mortgage.

Seller Q&A: How do we handle a backup offer on our house?

January 25, 2011 By Jon Griffith 1 Comment

Q: We were fortunate enough receive and additional offer on our property, but we’re already under contract. How do we accept the backup offer without causing problems?

Answer

In Arizona, we have what is called the “Additional Clause Addendum” which includes additional terms to modify the purchase contract slightly in the event someone has a special condition or contingency. In this particular case, in order to accept the backup contract on your home, it needs to be made clear to all parties that it is in fact a backup offer, and not a concurrent accepted contract (in other words, a sticky situation.)

A contingency on a contract is a condition written into the agreement that must be fulfilled in order for the contract to be enforced. For instance, if a buyer says, “We’ll buy your home, but not until ours sells,” or the seller says, “we’ll agree to sell at your price, but only if the bank gives us approval.”

In the backup offer, the contingency is “we’ll accept your purchase price, buyer, but only if the first contract cancels, otherwise, you can cancel your backup at any time until that point.”

Line 9 – 17 of the Additional Clause Addendum make provision for this, and should be included with your purchase contract if you are accepting a backup offer. It reads:

BACK-UP CONTRACT – CONTINGENT UPON CANCELLATION OF PRIOR CONTRACT: Buyer acknowledges that Seller is currently obligated by a prior contract to sell the Premises to another buyer. This is a back-up Contract contingent upon cancellation of the prior contract. Seller retains the right to amend, extend, or modify the prior contract. Upon cancellation of the prior contract, Seller shall promptly deliver written notice to Buyer. Upon Buyer’s receipt of written notice of cancellation of the prior contract, Broker named in Section 8r shall open escrow and Buyer shall deposit any required earnest money. The date of Seller’s written notice to Buyer shall be deemed the date of Contract acceptance for purposes of all applicable Contract time periods. Buyer may cancel this backup Contract any time prior to receipt of Seller’s notice of cancellation of prior contract.

Fully disclosing that the seller has already accepted another buyer’s offer is critical. Having two accepted contracts on one house will get you into hot water. In the clause, Section 8r of the purchase contract is referenced, which is simply where the Buyer’s real estate broker is defined in the purchase contract.

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Seller Q&A: How do we handle a backup offer on our house? Q: We were fortunate enough receive and additional offer on our property, but we're already under contract. How do we accept the backup offer without causing problems? Answer In Arizona, we have what is called the "Additional Clause Addendum" which inc...

Filed Under: Selling A Home Tagged With: Additional Related Articles, buyer, contract, house