Short Sale Addendum (Form 45-2)

The Texas Real Estate Commission (TREC) Short Sale Addendum (Form 45-2, promulgated 02-19-2021) is a critical document used in real estate transactions involving a short sale, where the property is sold for less than the outstanding mortgage balance, requiring lender approval. This write-up explains the key components of the addendum, with a focus on Paragraph D, to clarify its application and process for agents handling short sale transactions.

Key Components of the TREC Short Sale Addendum

The Short Sale Addendum is incorporated into a sales contract to address the unique contingencies of a short sale, particularly the need for third-party (lender) approval. Below is an explanation of its key elements, with emphasis on Paragraph D, based on the discussion provided.

  1. Purpose of the Addendum
    • The addendum modifies the standard sales contract to account for the lender’s role in approving the short sale.
    • It protects both buyer and seller by setting clear expectations for timelines and contingencies related to lender approval.
    • It ensures the buyer is not indefinitely bound to the contract if the lender delays or denies approval.
  2. Paragraph D: Termination Due to Lack of Lender Approval
    • What it Means: Paragraph D specifies a deadline (e.g., September 15th in the example) by which the lender must approve the short sale. If the lender does not provide approval by this date, the contract automatically terminates, and the buyer is entitled to a refund of their earnest money.
    • Practical Application:
      • The date in Paragraph D is an estimate, as the timeline for lender approval varies by bank. Agents should communicate this to the buyer’s agent (BA) to manage expectations.
      • If the approval process extends beyond the specified date, the parties can amend the addendum to extend the deadline, ensuring the contract remains active while awaiting lender response.
      • Regular updates (e.g., weekly) to the buyer’s agent are recommended to maintain transparency, even if the update is simply, “No news from the bank.”
  3. Short Sale Process and Contract Execution
    • Execution of the Contract: Contrary to common misconception, the sales contract is executed immediately between the buyer and seller, with the Short Sale Addendum included. However, the transaction enters a “holding pattern” until the lender approves the short sale.
    • Lender Approval: After the contract is signed, the seller submits the buyer’s offer to the lender for review. The lender may accept, reject, or counter the offer.
    • Amending the Effective Date: Once the lender approves the short sale, the “effective date” of the contract is amended. This triggers the start of key contractual periods, such as the option period and financing contingency period, which do not begin until lender approval is secured.
    • Flow of the Process:
      1. Buyer and seller execute the contract with the Short Sale Addendum.
      2. Seller submits the offer to the lender for short sale approval.
      3. Upon lender approval, the effective date is amended, and standard contract timelines (e.g., option period, financing addendum) begin.
      4. If the lender does not approve by the Paragraph D deadline, the contract terminates unless extended by amendment.
  4. Common Misunderstandings
    • Misconception: Some agents believe the contract is not executed until the lender approves the offer. In reality, the contract is signed upfront but remains contingent on lender approval.
    • Role of Paragraph D: The deadline in Paragraph D is not for the lender’s initial review or counteroffer but for final approval to proceed with the sale. If the lender accepts the offer but requires additional time for final approval, the deadline can be extended via amendment.
    • Buyer Protections: The addendum ensures the buyer can exit the contract with their earnest money refunded if the lender does not approve the short sale by the specified date, mitigating the risk of being tied to an unapproved transaction.

Best Practices for Agents

  1. Set Realistic Expectations: Inform the buyer’s agent that the Paragraph D deadline is an estimate and may need adjustment based on the lender’s response time.
  2. Provide Regular Updates: Communicate weekly with the buyer’s agent, even if there is no progress, to maintain trust and transparency.
  3. Monitor Deadlines: Track the Paragraph D deadline and proactively discuss amendments with both parties if the lender’s approval is delayed.
  4. Document Communication: Keep records of all interactions with the lender and buyer’s agent to ensure clarity and accountability.
  5. Understand Lender Variability: Each lender has unique processes and timelines for short sale approvals. Be prepared for delays and maintain flexibility.

The TREC Short Sale Addendum (Form 45-2) is a vital tool for managing the complexities of a short sale transaction. Paragraph D provides a critical safeguard for buyers by allowing contract termination if lender approval is not received by the specified deadline. By executing the contract upfront and amending the effective date upon lender approval, the addendum ensures a structured process while accommodating the lender’s role. Agents should focus on clear communication, proactive deadline management, and thorough documentation to navigate short sales effectively.For further questions or clarification, consult with your broker or legal counsel to ensure compliance with TREC regulations and best practices.

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