A Short Sale Addendum is a document added to a purchase agreement when the owner of a property is selling it at a lower price than they owe on a mortgage.
This will ordinarily happen because they have failed to raise mortgage payments or owe more than the property is worth. The addendum adds all the particulars of the short sale into the purchase agreement. By using the addendum, the seller tries to recoup the most out of the property for the creditor/lender and avoids a considerable foreclosure process. They must, however, request approval to sell from the creditor, which might require proof of hardship such as loss of job, etc.
Short Sale Vs. Foreclosure
Even though the homeowner loses possession of the property in both a short sale and foreclosure, these two processes differ in several ways. The seller customarily initiates a short sale as soon as they determine that their mortgage is underwater (the property owner owes more than their property is worth). Then, the seller submits an application to seek the bank’s or lender’s approval to sell the property for a price lower than their mortgage or debt. The seller is responsible for finding potential offers in a short sale, but the lender remains in charge of negotiations and can accept or reject offers.
As a result, short sales are more unpredictable and might take longer than normal standard real estate sales. However, short sales are less harmful to a seller’s credit score, and one can qualify for another mortgage immediately.
In contrast, a foreclosure is initiated by the bank or lender. In a foreclosure, the lender takes legal action to seize the seller’s property after failing to fulfill their monthly mortgage payment obligations. A foreclosure significantly impacts a seller’s credit score and might necessitate him to file for bankruptcy. In addition, a foreclosure is considerably expensive and costs more in terms of money and time due to the repossessing and auction processes.
How Short Sale Functions
As earlier mentioned, a short sale is voluntarily initiated by the seller. The creditor or bank has to ascertain if a short sale is the right course of action.
The following five steps illustrate how short sale functions:
Gather sale equivalents around property
The first step is determining the property’s value to ensure the property is worth less than what one owes. This can be done by surveying the current real estate market prices of a property similar to or lesser than one’s property in terms of square footage and amenities. Next, one can opt to use the services of a real estate agent. He/she can help determine the trajectory of property value in the area; an exponential dip in value indicates initiating a short sale. If the property mortgage is worth less than the mortgage, one should opt to proceed with the short sale.
Write a hardship proving letter
Next, craft a hardship cover letter to communicate with the bank that there has been a significant change in the seller’s financial status, and thus, a short sale is a more viable option. Common acceptable changes are job loss, too many financial obligations, loss of income, illness, etc. This letter signals to the creditor that if a short sale is not approved, a foreclosure is likely to result in losing money, so they should get ahead of the situation and mitigate their losses.
Collect required financial statements
After, collect all the relevant documentation to support the hardship claim. Any document that can prove the claims in the hardship proving letter is accurate should be gathered for submission. These documents should be attached to the letter.
The creditor will often require the following documents:
- Tax return reports for the last two years, including W2s and 1099s.
- Paystubs and income statements for the previous two months
- Bank statements for the past two months
- A list of the seller’s expenses and financial liabilities
Attach other documents
Before submitting the letter to the creditors for approval, attach any other documents applicable at the time of initiating the short sale. This includes a listing agreement and/or a purchase agreement if a buyer is already in place. If the services of a real estate agent are being used, ensure they sign the documents. An authorization form from any linked third party, such as liens, should be provided. Attach these documents to the submission batch after they have been signed.
Send hardship letter and documents to the bank
It takes 10 to 45 days for revision once the seller sends the documents. Meanwhile, the seller must exhibit their property in a quest to find the most suitable purchaser for the highest price. Finally, the purchase agreement has to be sent to the bank for approval when the buyer has been found.
Get bank’s approval
Next, send the letter and all its attachments to the creditor. The review, appraisal, and approval process ordinarily takes up to 4 months (120 days) depending on the bank and the situation. Negotiations will normally take place through an assigned negotiator. The creditor can approve or reject the buyer’s offer at this point. Once the creditor is satisfied with the documentation and the offer is satisfactory, they will give the go-ahead by approving the sale.
Elements of a Short Sale Addendum
Once the short sale is approved, the short sale addendum is added to the agreement to be used in the transaction. The steps involved in a short sale will to some extent, resemble those of a standard traditional real estate sale. The steps show how a seller can use a short sale addendum to complete a real estate transaction by indicating the fundamental elements of a short sale addendum.
Collect the concerned documents
The short sale addendum should contain all the documents needed for a short sale.
The following documentation must be presented:
- A document acknowledging the transaction as a short sale, thus implying that another party (the creditor) has an interest in the sale of the property through the short sale addendum.
- Written approval from the associated mentioned third parties.
- A statement that clarifies that the short sale addendum is not binding until the seller presents the third party’s written consent and other agreement terms are met should be included.
Date of the agreement
The short sale addendum must indicate the purchase agreement it references by indicating the date of the agreement. Ensure the exact date is captured as this is a matter of official record. Referring to the agreement is essential because the purchase agreement terms and conditions are applicable to the short sale.
Seller and buyer’s names
The document should also identify the seller and the buyer. The full names of the involved parties must be clearly stated. Personal details such as physical mailing addresses should be provided.
Complete address of the property
The property being sold should be identified by indicating the location of the property. In addition, it should be clear the street address, city, and state. The information provided should match that given in the purchase agreement.
Short sale consent
A statement that states third-party consent must be provided for the short sale to take place must be included in the short sale addendum. In addition, the statement must indicate the number of days the seller has to present written sale content before the purchase agreement is termed null and void. It should also be clarified that the seller has the right to pursue other offers in an effort to obtain a higher price. Finally, the short sale addendum must also award the buyer the right to void the offer made through the purchase agreement.
The short sale addendum then indicates the closing date of the transaction. The addendum can refer to the purchase agreement’s initially agreed date or state the number of days after approval has been presented to the buyer that the transaction can be finalized.
Signatures of both parties
Lastly, the addendum must contain the signatures of all involved parties for it to be contractually binding. In addition to the signatures, each party must provide their name and date of signing. If there is more than one buyer, they must all sign and provide their details accordingly.
Following are some free downloadable templates for you:
Standard short sale addendum templates
Short sale addendum templates- by State
There are many risks associated with short sales. Therefore, it is recommended that legal counsel and representation be sought after before agreeing to any terms of the short sale. Consultations with experienced real estate agents and attorneys can save on time and money and mitigate associated liabilities. As a seller, one does not profit with a short sale, but it is a more viable option for setting a mortgage one can no longer afford.