A New Catch-22 in Short Sale Negotiation

There is a fairly new tactic that some lenders and their servicing agents are using in short sale negotiations. When a new short sale contract is submitted, these lenders now require the homeowner to list the property with an online auction company while the lender reviews the contract for approval. If the auction company receives a bid greater than the short sale contract price, the lender will deny the short sale contract and the homeowner agrees to sell the property to the highest auction bidder. The listing agent must also sign the document, agreeing to cooperate with the auction process and make the property available for showings.

If the homeowner refuses to list the property with the auction company, the lender will not consider any short sale contract for approval. This scenario has placed many homeowners in a “Catch-22” situation, because short sale contracts often do not permit the owner to continue marketing the property or to receive back-up offers. In this case, if the homeowners agree to list the property with an auction company, they will be in immediate breach of the short sale contract. But, if they refuse auction, the contract will be denied. Under these circumstances, we could never advise a client to breach a valid contract.

If you would like to avoid encountering this increasingly frequent issue, we suggest using the following addendum language in each short sale contract:

“The parties recognize that this transaction involves a short sale, in which the Seller’s lender will need to approve the terms and conditions of the Contract. Many short sale lenders are now requiring the Seller to agree to allow third party companies (such as auction companies) to also market the Property in an attempt to insure that the Purchase Price reflects the true market value. Accordingly, the parties hereby agree that the Seller may permit its short sale lender (or any third party engaged by the short sale lender) to continue to market the property and solicit other purchaser contracts for the Property. Seller is hereby authorized to execute contracts with any such third party purchaser(s) for the short sale lender’s consideration, and Purchaser understands that the short sale lender is free to reject the Purchaser’s contract and accept a third party contract if such contract is deemed by the short sale lender to be more favorable to the short sale lender, in its sole discretion. The Purchaser has therefore been advised to insure that the Contract Purchase Price is indeed the Purchaser’s highest and best offer, and understands that the short sale lender is free to accept subsequent higher offers.”

As always, should you have any questions regarding the foregoing, please contact your local real estate attorney or a member of the Berlin Patten team.

Berlin-Patten, PLLC

This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.

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