We live in a changing marketplace. The new normal oftentimes reflects a housing market that includes buyers who may have lost or sold their homes due to difficult and precarious circumstances, sellers that may currently be in financial distress, along with sellers and buyers on the opposite side of the table that do not understand either.
As a valued and trusted real estate professional, you can ease fears, proactively provide relevant information and make the home buying or selling process a smooth feat that all sides can triumphantly finalize. To help you competently navigate your clients through a short sale, here are answers to 6 not easily Googled but Frequently Asked Questions (FAQs) that are important for you to understand when representing either party involved in a short sale.
What Your Clients Will Expect You to Know About Short Sales
1. Why is this short sale not short?
A home that is listed as a short sale, may or may not be a “pre-approved” short sale. Not every mortgage bank uses the term “pre-approved short sale” but whatever the term, this simply means that the mortgage holder(s) has evaluated the homeowner’s financial distress in light of the market value of the home and has give a preliminary “thumbs up” to selling the home short of what the homeowner owns. In such instances, the listing price usually reflects the amount that the bank has already pre-approved and the listing agent can typically give you a projected time of when your offer will receive an answer. When the short sale has not been “pre-approved”, then the mortgage holder has usually not identified if the homeowner’s circumstance is acceptable for the home to be sold short of what is owned nor has the list price been authorized by the mortgage holder(s). Thus, when submitting an offer on such a home, the mortgage holder is essentially starting the entire approval process from scratch and the listing agent may not be able to offer any concrete dates on when your offer will be answered. Obviously, these are the longer situations
RESAAS provides agents and brokers with networking tools to gain referral business, receive qualified leads, market listings and stay top-of-mind with clients.
2. As a buyer, will I lose my earnest money if the short sale is not approved and closed? If you uphold your end of the deal within the terms and time constraints of the contract, you should not, based on the special language we have included in the contract.
Secondly, be sure to also add protective language into the contract that obligates earnest money to be returned to your client if the home short sale goes awry. An example of such a special stipulation is:
"All parties acknowledge that this Agreement may not prevent a mortgage holder from foreclosing on this property. In the event a foreclosure sale does occur, this contract will be declared null and void with all earnest money returned to the buyer. Buyer and Seller acknowledge that each may incur costs due to their respective rights and obligations under this Agreement [i.e. loan application and appraisal fees, inspections, home repairs, termite letters, etc.]. The parties hereby agree and affirm that any such costs remain the sole responsibility of the party incurring them and neither has a claim against the other, or against any other party to this Agreement, for such costs should any of the following occur: (1) Seller's lender fails to consent to the proposed short sale; (2) one of the parties terminates this Agreement in accordance with a specific right to terminate set forth in the Agreement or (3) the property is foreclosed upon."
Please consult with your local attorneys for guidelines and applicability of this stipulation.
3. The utilities are off in the property. How will I have my home inspection?
Since you are under contract to purchase the home, typically that written agreement, along with written permission from the seller is sufficient for the various utility companies to authorize a temporary turn-on.
When you represent a seller that does not intend to keep the utilities on, you can help expedite the process (because time is of the essence!) by inserting language into the contract that gives the buyer permission to turn on the utilities.
Here is an example but be sure to consult with your local attorney for legal advice:
"Buyer acknowledges that utilities may or may not be on at the time of inspection. Seller has no obligation to provide utility services for Buyer’s inspections. Should the buyer choose, Seller grants Buyer permission to turn the utilities on at his/her own expense."
4. Do I have to spend money on inspections and utilities to be turned on without knowing if the mortgage holder has affirmed if they will even entertain my offer? I would hate to lose potentially thousands of dollars to find out that the mortgage holder is foreclosing on the home or is requiring a higher offer.
The optimal solution is that we submit your offer, receive preliminary, written approval from the mortgage holder(s) and then you proceed with your due diligence.
Here is a sample of a special stipulation that you should run by your local attorney before inserting:
"Not withstanding any other provision in this Agreement to the contrary, any contingency or Due Diligence period set forth in this Agreement shall begin to run, not from the Binding Agreement Date, but from the date Seller notifies Buyer in writing that any and all of Seller’s lenders and lien holders have approved the terms of the sale set forth in this Agreement. If such notification causes the end of any contingency period to extend beyond the Closing Date set forth in paragraph 6 hereof, said Closing Date shall automatically be extended 14 business days, unless Buyer notifies Seller in writing that the Closing Date extension shall be for a specified period of less 14 business days."
Ideally, once the mortgage holder issues preliminary approval, all will go well and lead to the short sale closing. But that perfect scenario does not always happen. So prepare your clients that even if preliminary approval is obtained, there is still a chance that the whole deal may collapse, unfortunately meaning the money paid during due diligence will be for a home that may never be purchased as a short sale.
5. I am afraid to list my home as a short sale because if it does not close as hoped, the buyer can then sue me since he may think I gave him the “runaround.”
As your listing agent, we will explain in our marketing materials as well as the Purchase & Sale Agreement that the final sale of this property is dependent upon bank approval and completion. There are many steps involved in the short sale process that are handled by the mortgage holder, which are outside of your control and we will apprise the buyer (or the buyer’s agent) of this.
The following is an example of such a stipulation but be sure to consult with your local attorney for direction before using this:
"Buyer acknowledges that the sale of the Property will not generate sufficient cash to pay off the secured loans on the Property and the other obligations of Seller with respect to this purchase and sale transaction. Seller's obligations under this Agreement are therefore contingent upon Seller’s mortgage lender(s) agreeing to: (1) take a reduced payoff on its secured loan(s) in an amount sufficient such that the purchase price of the Property pays off the reduced amount of the secured loans(s), any other liens, judgements and other encumbrances on the Property, the real estate omission(s) owing to the Broker(s) and the other expenses of sale for which Seller is obligated under this Agreement without Seller having to pay any additional sums; and (2) release Seller from any claim, cause of action, suit or judgment for the amount of the reduction in the payoff on said secured loan(s). If any of the lenders or lien holders indicate to Seller or Listing Agent in writing or verbally that they are unwilling to agree to the concessions required of them in the Agreement, Seller shall immediately notify Buyer of the same, and Seller may unilaterally terminate this Agreement without penalty by giving written notice of such to Buyer."
6. I lost my last home in a short sale, is it true that I can buy my next home in 2 years?
Perhaps. Subsequent VA loans may be obtained without a wait period depending on the lender’s qualifications and the circumstances surrounding the short sale if you are a veteran or service member. But more lenders than not, enforce a two-year waiting period for VA loans.
If you had a conventional loan, the mandatory wait period may range from 3 to 7 years, depending on what your former loan-to-value was and again what the policy of the current lender is.
If you purchased your last home with a FHA loan, there is usually a three year wait in the case of a short sale, similar to a foreclosure.
But in all instances, specific lenders may make exceptions so it is important to get them involved prior to starting the looking process.
Although, the policies and terms of short sales can change depending on the mortgage holder, you should find that these common client questions and answers transcend each situation to position you as an agent-in-the-know. Happy selling!
Please Note: The content of this guide does not constitute legal or financial advice and should not be relied upon as such. If you need legal advice on a specific matter, please contact a lawyer or for financial advice, please contact a loan officer.
Connect with Lee Davenport at http://www.agentsaroundatlanta.com/p/more-about-lee.html