With short sales proving an attractive alternative to distressed homeowners and lenders alike, analysts predict that short sales will continue to increase in Massachusetts through 2012. Short sales are a unique type of transaction requiring a different approach in drafting legal contracts.

Massachusetts real estate attorneys and Realtors, however, are set in their ways when it comes to real estate contracts. For decades, we have used the so-called “standard form” offer to purchase and purchase and sale agreement, or some variation thereof. We have also developed a predictable process in which the parties sign the offer, conduct property inspections, sign the purchase and sale agreement, obtain financing, order title and get to closing.

With the recent proliferation of short sales, we have had to change the way we do things. Most agents and attorneys still do things the “old way” for short sale transactions, but they are doing themselves and their clients a disservice by doing so.

Offer Is Operative

I am seeing a shift to making the offer the operative contract in a Massachusetts short sale transaction. And for good reason. A short sale, by definition, is subject to a critical contingency: obtaining short sale approval from the seller’s lender(s). No short sale approval, no deal.

Why should a short sale buyer incur the expense of drafting a comprehensive (and contingent) purchase and sale agreement when there is no guaranty of getting short sale approval? Furthermore, short sale lenders will accept a signed offer from the buyer during the approval process.

When we were first doing short sales, there were many instances where we drafted up purchase and sale agreements, and then the short sale approval fell through. We had to charge the client for the drafting work or eat the cost. No one was happy.

Let me suggest a better way:

Build all contingencies into the offer to purchase, namely, short sale approval (with deficiency waiver) and financing.

Seller agrees to use best efforts in obtaining short sale approval.

Buyer agrees to be bound for set approval period (60 to 90 days), in exchange for seller taking property off the market and not accepting backup offers.

Negotiate deposit amount, usually 1% of purchase price. Buyer will obtain his financing and loan commitment during this approval period.

Negotiate extension rights, with corresponding protection for buyer’s financing/rate lock.

Upon short sale approval, purchase and sale agreement is signed within five to seven days, and the full 5% deposit is made.

Closing is within 30 days of short sale approval. (Most short sale approvals are only good for 30 days)

Waiver of home inspection or inspection prior to offer acceptance. Sellers should seldom agree to allow a home inspection contingency giving the buyer a right to terminate. If the buyer doesn’t want to pay for an inspection up front, he is not a serious short sale buyer.

Change Is Hard

I recognize that this is a departure from the “standard” forms. However, this method will decrease the time to obtain short sale approval and reduce expense. The parties are not waiting around for the P&S to be negotiated and signed, and the buyer does not have to pay for unnecessary legal work.

Under this process, the buyer must get his financing in order, ready to go by the time short sale approval comes through. Lenders must recognize the unique short sale process and work with borrowers to get a firm loan commitment issued timely. Also, there’s no need for a lender to insist that the borrower have a signed purchase and sale agreement for underwriting approval. Under the process that I have outlined and under established Massachusetts case law, the offer is a legal and binding contract and is sufficient for underwriting purposes. If a signed offer is acceptable to the short sale lender, it should be acceptable to the buyer’s lender.

With the continued proliferation of short sale transactions, I urge the Greater Boston Real Estate Board, the Massachusetts Association of Realtors and the Bar associations to come up with additional “standard” form riders to address the unique aspects of a short sale transaction.

Attorney Richard Vetstein is a real estate attorney in Framingham and author of The Massachusetts Real Estate Law Blog.