How long the distressed property market will last is hard to say. It is clearly a market aberration and, therefore, one would not expect it to last very long. While it does last, real estate agents who deal with distressed property will have to adjust. Paradoxically, that means adjusting to a hot market in the worse real estate market in memory. Hot markets are driven by investors hoping to buy low and sell high. Ordinary homebuyers may also be attracted to the market. That means, as it did at the height of the bubble, more people chasing the same properties. That in turn, as during the original bubble, means dealing with escalator clauses, multiple offers, frenzied buyers and sharp business practices.
Multiple offers, including agency and license law implications of being involved in multiple offers, are covered in the Multiple Offers section of Writing the Deal. The mechanics of dealing with multiple offers in the short sale context are, however, very different. To understand why that is the case, one must focus on the dual contract nature of a short sale. Although rarely appreciated by agents, a short sale actually involves two agreements that is, two contracts. The first is a standard purchase and sale agreement between seller and buyer. The second is a loan satisfaction agreement between the seller and the seller’s lender(s).
What the industry calls a “short sale addendum” is really just a real property contract contingency. It is no different in that respect than a 72-hour contingency or other contingency that must be satisfied before a party is obligated to perform the contract. The industry has dealt with buyer-side contingencies for years. What is different about a short sale is that the contingency conditions the seller’s obligation to sell, not the buyer’s obligation to purchase. In a short sale, the seller’s obligation to transfer title is contingent on the seller obtaining their creditor’s consent to lower the payoff on the seller’s mortgage or note so the seller can deliver clear title. To do that, the seller must reach an agreement with their lender(s) about satisfaction of the debt the seller owes the lender.
It is common in the industry to think of the interaction between seller and lender as one of the lender “approving” of the sale, but that is not what is going on. The lender is not a party to the sale and their approval of the sale itself will have no affect whatever on the seller’s obligation to the lender under the mortgage or note. What the lender is approving is not the sale, but a modification to their mortgage or note. The fact that lenders will almost always demand changes in the underlying sale agreement as a condition to agreeing to modify their mortgage or note does not make the lender a party to the sale itself.
It is important to understand the two agreements nature of short sales before trying to understand the impact of multiple offers in short sale situations. The first impact of having two agreements is that because the lender will consent to only one deal, the short sale addendum itself effectively works as a backup offer contingency would in an ordinary real estate transaction. The short sale addendum by itself protects the seller from becoming obligated to transfer title in more than one deal. That means the seller can accept as many offers as they like as long as each uses a short sale addendum that makes the seller’s obligation to sell contingent on the seller and lender reaching an agreement on the mortgage or note.
In short sales, there is no need to have offers in backup position as is done in ordinary sales. Every offer is in backup position, regardless of the order accepted, because the seller’s obligation to convey title is contingent in every offer. The impact of this simple truth is spelled out in paragraph #5 of the short sale addendum most used in Oregon where the buyer is warned that the listing will remain “active” and the seller will continue to consider and submit to the lender(s) competing offers. This warning in the short sale addendum is a multiple offer warning.
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