Short Sales have dominated our marketplace as of late and in response to this, many Realtors are now familiar with the new GCAAR Short Sale Addendum (form # 1362). However, there are issues in the Addendum which should be reviewed and understood by all parties, including the participating Realtors.
In order to understand the new Addendum, one must first understand the differences between “Conditions Subsequent” and “Conditions Precedent”. Most contingencies are drafted as Conditions Subsequent, which means that the Contract is ratified and in full force and effect, subject to a condition (such as a home inspection or loan commitment). If that condition is not satisfied, one or both of the parties may elect to terminate the ratified Contract. This is distinguished from a Condition Precedent, which is a condition that must be satisfied prior to the Contract becoming binding upon the parties. The GCAAR Addendum is drafted with a Condition Subsequent, which means that if the required lender approval of the short sale is not obtained within the time frame set forth in the contract, either the Buyer or the Seller may elect to cancel the Contract.
Some agents have attempted to draft their own version of an Addendum, which can be a risky course of action. Often it is drafted to provide that the Contract is not ratified until lender approval is obtained. By utilizing that type of an Addendum, either the Buyer or Seller would be free to walk away from the deal at any time prior to lender approval because the Contract would not be binding upon the parties until it is ratified.
Another issue of concern with short sales is whether time frames in the Contract should run from the date of contract ratification, or from the date of lender approval of the short sale. If it is the intention of the parties to start the time for home inspections or similar conditions after lender approval of the short sale, then the new GCAAR Addendum should be modified. As written, the GCAAR Addendum does not delay the time for satisfying contingencies until after lender approval of the short sale. Thus, buyers would be required to satisfy certain contingencies even before the lender approved the short sale.
Finally, from the Seller’s position, the new Addendum is slightly dangerous because the contingency provides that the transaction is subject simply to creditor approval of the short sale. However, what if that approval includes conditions onerous to the Seller, such as pledging other collateral and signing an unsecured promissory note at an exorbitant interest rate? To protect the Seller, the Addendum should provide that it is subject to written approvals “on terms reasonably acceptable to the Seller.”