As a MA Short Sale Lawyer, I have seen many short sales fail for a variety of reasons. In Western Massachusetts, one of our impediments is our strict use of the standard Realtor Contract and our local closing customs. Following is a list of suggestions and some reasoning behind each provided in the hopes that these ideas may catch on in MA (and elsewhere as they may be applicable outside of MA) and lead to more Short Sale success stories:
Problem 1: Inspections after contracts are signed/and /or after short sale approval
It is customary in much of Western Massachusetts to make an offer and sign contracts that provide for a ten day inspection period. In short sale transactions in Western Massachusetts, this ten day inspection period is often delayed until the Seller has obtained "Short Sale Approval". This frugal custom can be disastrous to Short Sellers and the professionals working for them! In Short Sale transactions, the inspections should be completed prior to finalizing the sale price on the purchase and sale agreement for a number of reasons:
1. If there are repair issues and the contracts are already signed and submitted to Seller's Lender for approval; Seller's Lender may not change the price. If these inspections do not take place until after the Short sale is approved, the Seller's Lender will absolutely not change the price and the deal is as good as dead. By completing inspections prior to finalizing the contracts, the Buyer has an opportunity to lower the price in accordance with the repair issues. Also as a plus, the Seller can use the inspection report to further justify the sale price.
2. Buyer's delayed inspections may cost the Buyer opportunities in the event that they do not proceed with the short sale due to an inspection issue. Consider that in an ideal world a short sale approval can take 60 days and countless hours of processing to obtain. If a Short sale is obtained on day 60 of the contract and the Buyer performs an inspection on day 70 only to back out of the deal due to X and Seller has no funds to fix X, Buyer has wasted an entire season of house hunting. Not to mention the possibility of losing the opportunity to take advantage of the current low interest rates and the opportunity to purchase many other homes that came and went on the market. . .
3. Buyer's delayed inspections and ultimate withdrawal over an inspection issue may have just cost your Seller the opportunity to sell their home short. Let's face it, the collections machine never sleeps. In most instances we only have so much time to sell a property short before the bank forecloses. We cannot take this unnecessary chance that our deal may blow up over an issue that can be addressed on the front end of the transaction. If the parties cannot agree, the seller must move on to a more reasonable flexible Buyer. . .
Problem 2: Automatic Seller Pays Provisions
The standard contracts and addenda in Western Massachusetts require that the Seller automatically pay for certain items that can come up in the sale of residential real estate. These items include the following: Termite issues (Seller is on the hook for the 1st $1,000 in termite treatment or repair), title V (septic) issues (Seller is on the hook for the $300 to $500 test and up to $10,000 in septic system repairs) and title issues (Seller is on the hook for the 1st $2,000 in title issues). The Sellers that I am dealing with often do not have the funds to pay for any of these issues.
The answer under these "Short Sale" circumstances is that the Buyer needs to pay for all inspections at their own risk and adjust their sale price accordingly. There simply is no money in these transactions for these Seller pay provisions.
Problem 3: Customary Charges that the Banks won't Pay for
Although I have often said that when it comes to negotiating in real estate transactions, it doesn't cost anything to ask, when it comes to Short Sales, I feel that I keep submitting all of the costs and fees that I would normally expect the Seller to pay for in a real estate transaction and the Banks just keep saying NO! These fees include the final utilities for the Seller and certain closing costs that a Seller is typically charged. as the Seller's attorney I have on many occasions "eaten" some of these fees myself, just to get the deal done. Sometimes the feast of such fees and costs is so great that the Realtors slash their commissions to help make it happen.
Unfortunately due to the frequency that Banks are cutting the Realtors commission to 5% and cutting the attorney fees as well, the practice of absorbing these fees just isn't working and can lead to disaster at the time of closing. There are a few different categories of these fees and an ideal way that we can agree to handle each one:
1. Adjustment Issues: Sometimes the bank won't pay the final water bill. Sometimes the bank won't pay more than X in taxes; sometimes the bank won't pay the final electric or other municipal service fee, trash, sewer, etc. . . I am sick of paying these fees out of my fee! Let's go back to the beginning of these transactions and look at where we are with these charges on day one, take our best guess as to what they will be in 60 days and deduct that amount from the negotiated price. We could simply change the rules with regard to adjustments and state that "Buyer agrees to be responsible for up to $1,000 or $2,000 in adjustments or other Seller costs at time of closing." Then just reduce the sale price by that much. . .
2. Along the same lines, there are some settlement charges that a Seller usually pays in Western Massachusetts, but the same principles would apply elsewhere: For example, in Massachusetts the Seller must pay for their overnight fees for payoffs, discharge recording fees and discharge tracking fees. For 2 mortgages this would be approximately $340; and the banks are not paying these fees. Let's place a provision in the contract that says the Buyer will pay those fees and move on. . . again, I don't want to pay these fees and neither do the Realtors. We can however, contract for the Buyer to pay these fees. . .
3. A pet peeve of one of the Realtors that I work with is that in short sale listings he gets stuck paying fees related to fulfilling the "smoke detector certificate" requirement in Massachusetts. Because our Short Sellers have no money, the Realtors often pay the bill for the smoke detector inspection ($50 +/-) and often the costs of batteries and several replacement smoke, carbon monoxide and/or fancy photo-electric smoke detectors. This can be a few hundred dollars in expenses and it is just not fair for the Realtor to have to pay. In the contract addendum we use, it states that if the Seller's Lender will not pay for these smoke certificate items, the Buyer must pay. . . problem solved.
The key to the vast majority of all of these issues is that we have to treat short sales like the banks treat their bank owned properties. Because they are a bargain, the contracts for bank owned properties place more of the requirements and costs to the advantage of the seller. They have their own over-riding Bank addendum that knocks your standard contract ands local customs on their ear. We need to do the same thing with these short sales. We need our contracts to require that the Buyers inspect the property now; set the price for an "as is" sale; and in that price subtract another $1,000 to $2,000 cushion as needed to pay for any municipal utility costs, unpaid taxes, Seller closing costs, title v inspections and smoke detector certificates and supplies so that when we get the approval and the bank refuses to pay for any of these things, we may still succeed with our sale!