Must-knows for short-sale buyersREThink Real Estate
Inman News™, March 17, 2011
By TARA-NICHOLLE NELSON
Question No. 1: I made an offer for a house that was a short sale. After my offer was accepted and the contract had been sent to escrow, I noticed the house still listed as "active" on the multiple listing service. The listing agent claimed that he kept receiving inquiries on the property, and used that to push me to remove inspection and loan contingencies. He said he would only mark the home "pending" once I had removed contingencies.
Is it possible for the seller to accept a second buyer's offer after accepting mine (even if the later offer comes with a higher price? Don't they need me to sign a release before they do that?
If they do accept another offer and go with the second offer, do I have any legal right for compensation? (I believe this would be a "breach of contract" case, but can you confirm it?) --Mike
Question No. 2: The broker on a short-sale house has not acknowledged my offer and will not sign the papers. He says he wants to wait and see if the first offer goes through first. Isn't this an unlawful way of doing things? I do not know if I am a backup buyer or just left out in the cold. Is there anyone I can contact regarding this unethical way of doing things? --Charles
A: Talk about two sides of the same coin! One of you is in contract on a short sale and concerned about whether a second, higher offer could usurp their position. The other is trying to usurp a first-position contract on a short sale. A little education about this area of the short-sale realm will answer both your questions.
Short sales differ from "regular" sales in that a short-seller is selling a home at a net price (after the seller's closing costs) below what the seller owes on the home. As a result, all mortgage lenders and holders of liens on the property must approve the sale before it can take place.
Procedurally, what happens is a buyer makes an offer on the property and the seller accepts that offer and generally requires that the buyer agree to a short-sale addendum, which significantly alters the normal flow of the contract, as well as the legal rights and obligations of both parties -- mostly in order to work in the fact that there's at least one extra party to the contract besides the signatories who must sign off before the deal can be done.
In some cases, the buyer must sign the standard short-sale addendum used by the agents in the area and an addendum required to be signed by the bank(s) involved on the seller's side, who will not consider the short-sale application without the document being signed.
Ultimately, the short-sale addenda prevents the contract from being finalized so as to prohibit the seller from considering or accepting other offers until after the bank(s) and other lien holder(s), if any, agree to the terms of the transaction.
That is, when you are a short-sale buyer, you are notified upfront that the seller does not have the power to create a binding contract -- not unless and until the bank(s) and lien holder(s) sign off on the price and other terms of your offer, including your qualifications.
The short-sale addenda -- both the boilerplate forms brokers and agents use and the bank versions -- add in the banks' and lien holders' approval as a required condition of the contract. Mike, normally, the buyer's contingency periods for inspection and loan don't even begin running until after the bank(s) involved have approved the sale.
While it is strange that the listing agent would pressure you to remove contingencies so soon in a short-sale situation, it is also highly possible that he was waiting to collect additional offers or waiting to make sure that you were actually able to do the transaction as early as possible in the sale.
It sounds like you are without your own broker or agent in the transaction -- if you were, the chances you would have been pressured into prematurely paying for inspections and appraisals, etc., would have been far, far reduced.
In a "regular" non-short sale, the seller cannot kick a buyer out of place in preference of a later, higher offer once the property is in contract, though in a short sale the bank may actually require that the seller submit any and all offers to purchase the property that are received prior to the bank green-lighting the transaction, so that the bank can take the highest offer and minimize its losses.
Mike, the bottom line for you is that, strictly because your transaction is a short sale, it is highly possible that the seller may retain the legal right to boot your offer out of first place for a higher offer up until the point that the bank approves your offer.
However, Charles, unless their mortgage lender requires them to, it is not the case that the seller is obligated to do anything with your backup/second-in-time offer -- neither is the listing agent's behavior unethical, in your situation, as the agent is being upfront and honest with you about the seller already being in contract.
For both of you, I'll advise you as I advise any and every buyer in a short-sale situation: Do not count your chickens until the bank approves your contract! That is, until the bank has approved your offer, do not spend money on an appraisal, do not spend money on inspections, and do not stop looking for a home.
If you do, you do so at your own risk -- the risk of losing the cash you've spent if the bank does not approve your offer for any reason.
The seller -- to answer your second question, Mike -- does not owe you any compensation for breach of contract, unless you were already notified that the bank had already approved your offer.
Tara-Nicholle Nelson is author of "The Savvy Woman's Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Tara is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com. Ask her a real estate question online or visit her website, www.rethinkrealestate.com.
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