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What is a Short Sale Addendum?

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A short sale addendum offers protection for buyers and sellers of short sales.

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Question: What is a Short Sale Addendum?
A reader asks: "Our agent said we need to sign a short sale addendum or the seller won't accept our short sale offer, but he hasn't given us this paperwork. Friends have warned us against signing a document like this because they say it works against us somehow. But what can we do if the listing agent refuses to take our offer? And just what is a short sale addendum anyway? Do we really need such a thing to make an offer on a short sale?"
Answer: Whether you use a short sale addendum to accompany your offer will depend, in part, whether that form is available and commonly used in your state. Many state REALTOR® associations endorse the short sale addendum but not all of them do.

In fact, some of the verbiage in a short sale addendum may vary from state to state. Since I am most familiar with the California Association of REALTOR'S® short sale addendum, let me explain the pros and cons of that particular document.

Short Sale Addendum Section 1

Because a short sale is contingent upon the seller's lender agreeing to accept less than the amount owed, the short sale addendum clarifies the contingency.

It also sets forth the time period that the buyer is willing to wait for short sale approval by inserting a blank line for a date, with 45 days as the default. Short sale approval typically takes from 30 days to 3 to 4 months or longer. Although the seller must reasonable cooperate with the lenders, the seller is not obligated to close the short sale if the lender requires a contribution from the seller.

Short Sale Addendum Section 2

This part gives the buyer 2 options regarding inspections and contingencies. This period can begin either:

  • Immediately upon acceptance, or
  • Upon short sale approval by the bank(s).

Short Sale Addendum Section 3

This section pertains to the buyer's earnest money deposit and lets the buyer choose from 2 options:

  • Release the earnest money deposit to the payee upon seller's acceptance as stated in the contract or
  • Withhold the earnest money deposit until short sale approval.

When I represent Sacramento buyers, I ask for the deposit to be held by the buyers, unless the seller specifically states the offer will not be considered without a release of deposit.

When I represent the seller, I absolutely want the buyer's deposit to be released. Without a release of deposit, it's too easy for buyers to walk away when a better deal comes along.

Short Sale Addendum Section 4

Section 4 says there is no guarantee that the seller's bank will approve the short sale. Furthermore, the seller's bank may demand to see all the offers and may choose a different offer. However, the buyer and seller are free to reject a short sale bank's terms.

Short Sale Addendum Section 5

This section explains that the buyer and seller may incur certain costs pursuant to the contract. Some of those costs may be the responsibility of the parties if the short sale lender refuses to pay them and, if either parties cancels, other fees may be due as a result of the cancellation.

Short Sale Addendum Section 6

When I represent a short sale buyer, I draw an addendum to the purchase contract that removes Section 6 from the short sale addendum. When I represent the seller, I generally expect the buyer to sign the short sale addendum without removing this section.

That's because this section lets the seller continue to show the home and send other offers to the bank. This means if the seller receives a higher offer, the seller can ask the bank to accept the higher offer in-lieu-of the offer the seller has signed.

Short Sale Addendum Section 7

Section 7 states that the sellers are advised to seek professional advice about how short sales affect credit, including legal or tax consequences.

In conclusion, if the seller requests a short sale addendum, as a buyer, you may run the risk that your offer will not be considered if you do not sign the short sale addendum. For more information, you may want to discuss this with a real estate lawyer.

At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.

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