Training for Short Sales & Mortgage Loss Mitigation to Stop Foreclosure

Don’t Let the Buyer Misunderstand a Short Sale

March 15, 2009 by  
Filed under Short Sale Do's & Don'ts

misunderstood-70Many Realtors have never done a short sale. If they represent buyers, they do not know what to tell them to explain the short sale home buying experience. If you are listing a short sale, be an information resource for the buyer’s agent. Or, send them here as this site provides complete Realtor education on short sales.

The first point to explain about a short sale is that you do not know how long it will take the lender to review the sale. You may have some experience with the same lender, but that does not mean they will be as efficient this time as they were last time. Estimate 45 to 60 days for the review if you do not have any experience with that lender. If the buyers are relocating for a new job that starts in two weeks, they will need to have other living arrangements. So, you need to have a longer than normal time in the contract for the closing date for a short sale home. Take your estimate of how long it will take the lender to review the sale, then add 30 days for the buyer to close the sale.

The agent for the seller needs to stay in touch with the agent for the buyer during the short sale process. You need to have some reports of progress, and tell the agent for the buyer what is being done to move the transaction along. Remember, the buyers do not know whether they bought a house or not, so they are on edge as this is not the typical home buying experience. Let them watch the progress so they can feel that something is being done.

The second point is that negotiating on a short sale is different. The sellers might sign anything at any price, because they want to get rid of the house, out of trouble and possibly avoid foreclosure. This is particularly true if he seller pays no income tax on the amount the payment to the lender is short. You do not have a deal that can close until the lender approves it. Just because the seller agreed does not mean that you can count on that price for as the final sale price of the short sale home. Most of the negotiating is with the lender.

The third point is a short sale is not a sure thing. The lender may not approve the short sale, or if the seller cannot pay the mortgage, the lender may foreclose. The buyer can make it a sure thing by paying enough to fully pay off all the liens, but I have never had a buyer who wanted to do that.

The fourth point is that the house stays on the market in a short sale. Paragraph 6 of the Nort Carolina Short Sale Addendum says that other “offers may be received by the Seller’s agent, which must be presented to the Seller pursuant to North Carolina law. Such offers may be accepted by the Seller as backup contracts and forwarded to Lienholders for review and approval.” The buyer needs to know that the house is still for sale until the contingency for lender approval is eliminated, and the buyer may have to outbid the other offers. Using the term “backup” is not as clear as it should be. If you were a lender who is losing money and the first offer makes you $20,000 less than a second offer, which one would you approve and which one would you disapprove? Since the short sale does not close without the lender’s approval, having the lender disapprove the first offer makes the second one more than a backup offer.

I am working on a short sale in a townhouse in North Raleigh where there is a first mortgage and a line of credit as a second loan. We have had five offers. I started the lender review process with the first offer that was extremely low, but it gave me an opportunity to get on the waiting list. The seller signed it, with the short sale addendum, and we submitted it to both lenders, as both of them would be short in the payment. By the time the file was assigned to a loss mitigation negotiator, we had gone through four more offers. The last one was good enough that only the second loan is a short pay. By the time the last offer came in, the second loan had agreed to accept $2,000 on a prior offer, but I had no approval on the first loan, so the contract still had a contingency. The best offer fully paid the first loan and gave the second loan more than $3,000. Maybe the key to financial recovery is good marketing and better negotiating skills in short selling a home, so that more money is returned to the banks and the homes sell for higher values to support the neighborhood values.

By the way, every time we received a better offer on this townhouse, we went back to the previous offer and gave them a chance to submit their “last, best and final” offer. You need to give all buyers, and all buyer’s agents, every opportunity to be the successful purchaser in a short sale. The Realtors work hard trying to get a house for their clients and you need to give them every chance to get a commission. For more on negotiating when there are multiple offers, see my book Create A Great Deal, the Art of Real Estate Negotiating.

The fifth point is to tell the buyer not to spend any significant amount of money on the short sale until the lender has approved the short payment. The California Short Sale Addendum is one of the best. It is right in specifying that the time limits in the contract run from the time that the lender approves the short sale. Normally, the time limits run from when the contract is signed by the buyer and seller. In a short sale, you should start the time for inspections, loan applications and other contingencies from when the lender approves the sale.

I had a short sale in North Raleigh where the agent for the buyer was an old friend of mine. She did not pay attention when I told her the house was still on the market and that other offers could outbid her clients. The buyer paid for an inspection of the property about a week after the seller signed the contract. I should have been more emphatic in stopping the inspection, but I thought no one else would make an offer on the short sale home as it backed up to a noisy road. When another offer outbid her client, and her client would not raise his price, I did manage to get the buyer reimbursed for the cost of the inspection. But, she is still mad at me. So, learn from my experience and emphatically make sure the buyer does not do anything until the lender has accepted the short sale.

A sixth expectation for a short sale is that the lender is going to try to negotiate to get more money. One potential aggrivation in a short sale is a lender who takes a long time reviewing a short sale, while the values in the area are going down. Then, the lender wants more money to approve the short pay. If the lender comes back quickly with a higher counter offer, it is easier to present to the buyer, as the comparable values may support it. If the lender comes back after an extended period of decline in the values, it is harder to get the buyer to accept the counter offer, because it is harder to have the comparable values support it. Also, it is harder for the appraisal for the buyer’s loan to come in at the purchase price. Luckily, the values in Raleigh are not declining, or just barely declining, so I do not have this problem. But, you need to set the expectation for the agent for the buyer that there may be a counter offer from the bank.

A short sale is a different type of transaction altogether, so you need to explain the differences to the buyer’s agent and the buyer so that they have a home buying experience that is as pleasant as possible.

Comments

13 Responses to “Don’t Let the Buyer Misunderstand a Short Sale”
  1. This is a very informative article and gives a lot to think about when engaging in a short sale. Everyone should remember that there is someone in the transaction that is not as informed and all questions should be answered and answers should be emphasized.

  2. Minoo says:

    representing a buyer in a short sale, the negotiator wants to know whether I am realted to the buyer, and if the buyer is profiting from this purchase.
    what is it to them if the buyer is my relative, since they are, what is the ramification of being the relative, and what does it mean profiting

    • Tim Burrell says:

      Frequently there is a requirement that the seller is not related to the buyer, as there have been underhanded dealings that have caused the bank to be treated unfairly. I have never heard of a requirement that the Realtor for the buyer not be related to the buyer. You are right, that makes no sense, as the buyer’s agent is always going to try to get the best deal for the buyer, whether they are related or not. It may be that the negotiator misunderstood the requirement, so try to talk to a supervisor.

      • Michele says:

        Better check again. Chase is requiring that NO ONE in a transaction be related. We have a buyer whose agent is a relative. Fine print on approval letter, buyer cannot be related to agent. This was never told to anyone upfront, nor did Chase bother to read the Disclosure included in the contract.

  3. Paj Cha says:

    I made an offer 4 months ago in which Bank of America accepted my offer. I believe I offered $25K more than the currrent value of the home. I had hoped to open escrow shortly after. It was just a matter of waiting for an official short sale approval letter from BofA. A couple weeks passed and I saw no letter nor heard any response from my agent because she didn’t know what had happened either. Another week passed and I find out that Bank of America changed negotiator on us. The new negotiator now is requesting an additional $3000 which is something I do not have. I believe that the property for which I bid on (which was very high) may not even appraise to that value. I already bid my maximum when I made the initial offer. What are my options now especially because the house continued to depreciate in value? Why would the bank suddenly change negotiator on us? What would they gain by doing that? Are the negotiators who represent the banks even knowledgeble and skilled in these matters? Appreciate a response.

    • Tim Burrell says:

      Your options are to increase your price and close the sale, refuse to increase the price and give them a counter offer (then see what happens) or walk away. The additional cost could be financed, so it is not that much of a stretch. Then, if the property does not appraise, you could go back to the short sale negotiator to see if they will amend the price then. The most frequent reason that they change negotiators is that one of them has too many files to handle, so they give some of the case load to someone else. The second biggest reason is that the negotiator quits.

  4. Alexandra says:

    I found a short sale home which has a signed contract between buyer and seller. However, I would like to offer a higher price than their contract price. Can we go directly to the bank and make the verbal offer to outbid the current contract price?

    • Tim Burrell says:

      You do not go to the bank, you make the offer to the seller. The seller’s agent is obligated to present your offer to the bank in most states. Do not do a verbal offer, they are worth all the paper they are written on :-). Make a proper written offer with an earnest money check and present it to the agent for the seller.

  5. Your blog is so informative ? keep up the good work!!!!

  6. Pat says:

    We put in a backup contract on a short sale and we were told that the seller would either accept or reject the backup offer wihin 72 hours and that either way the bank would not see our offer unless the first contract did’nt work out for some reason. I was wondering if this is correct. And also it has been about a week and a half and we still have no answer either way from the seller.

    • Tim Burrell says:

      It depends on the real estate laws and regulations for the state you are in. Here in North Carolina, the Real Estate Commission is clear that all offers need to be presented to the lender. Their logic is that an offer is a material fact that the lender needs to know. Just think how angry the lender would be if there was a much better offer out there and no one told them about it. Realtors in some states do what the Realtor in your situation is doing. If I were the listing agent and I had a better back up offer, I would present it to the lender to keep myself out of trouble. The short sale is contingent on the approval of the lender. So, the lender can disapprove the first offer and accepts the back up offer. One thing you should consider is most back up addendum documents say the first contract can change their contract and you cannot object, i.e. if the first offer wants to make their terms better, they can.

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