Short sale contingencies can be as simple as saying “subject to lender approval.” Such a shorthand contingency is, however, a very bad idea. Like any contingency, it is important to spell out both context and consequences. The context here is that the debt owing against the property is more than the purchase price. The consequence is that the lender must agree to take less than the loan payoff or there can be no sale.
Starting with context and consequences helps you see what the contingency must contain. The buyer and seller should acknowledge that the purchase price will not provide sufficient funds to payoff the loan and clear the title and that as result the transaction is contingent upon the lender approving of the sale. This is a third-party approval contingency because the lender is not a party to the real estate sale agreement.
As between buyer and seller, there is usually a binding enforceable contract upon acceptance. With a short sale, however, the contract is contingent on the seller’s creditors reaching approving of the sale. The time between buyer and seller acceptance of the sale contract and the lender’s agreement to take less than the loan payoff amount is a critical time.
In Oregon, during the short sale contingency, the most commonly used form for short sale addendums favors the buyer. OREF 027B allows for a buyer to terminate the contract with written notice, prior to the lender’s consent, for any reason. Absent such written notice, the contingency binds both seller and buyer until the lender approves the sale or the closing date occurs. Click here to view OREF 027B. If using another form, the nature of the contingency should be made clear: that the sale is contingent on the lender’s approval of the sale agreement on terms acceptable to both buyer and seller. Further, the form should include a deadline at which the buyer may withdraw if the bank is too slow in responding, so as to prevent being stuck in the contract at the lender’s mercy.
The short sale contingency will require some kind of written consent from the lender regarding the transaction and the seller’s obligation to the lender. Often lender consent will contain conditions that require the buyer and seller to modify their sale agreement. Lenders may demand as a condition of approval that the real estate commissions be reduced, that other creditors receive less than they are owed or that other transaction costs be reduced. Lender consent agreements are, therefore, key to a successful short sale. Click here to view a standard Lender Consent Agreement.
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