Thursday, September 3, 2009

The Long and Short of a Short Sale, Part 4

Continuing our posts on short sales, this post discusses the most common clauses in the contract, and how you, as a buyer or seller, should attempt to negotiate the clauses.  (Please keep in mind you need an attorney or a real estate agent, or both, to advise you personally.  I am talking here in very general terms.)

All real estate contracts have contingencies in them on both sides.  A contingency is the "if" in these statements:
I will sell you this house IF ______________.
I will buy your house IF ________________.
Contingencies can be for anything you can dream up.  However, most residential contract contingencies fall into a handful of categories.
Sellers Contingencies:
To protect the seller, the primary contingencies revolve around money and the settlement date.  The seller says "I will sell you the house IF you give me $___________ by__________(date)".  If the buyers don't bring the money to closing, or don't show up, the sellers can terminate the contract without penalty  (although there may be a penalty to the buyers). 

In a short sale situation, sellers should also have a contingency for "Third Party Approval" - meaning they need to get approval from their lender(s) to be able to sell the property, since the proceeds will not cover the mortgage.  If the sellers can not obtain the approval, then they can terminate the contract without penalty.
Buyers Contigencies:
To protect the buyer, contingencies almost always include: (a) financing (if they can't get a loan, they can't buy the house); (b) appraisal (if an appraiser doesn't certify that they are paying market value-or less-for the property, then they won't buy the property); (c) the dates, particularly the date of settlement; and finally (c) that the buyer needs to be getting the deed to the property, free and clear, with all rights and enjoyments of ownership (in Virginia, this is called a General Warranty Deed).  In addition, we often see buyers ask for a contingency to do a home inspection and/or environmental testing on the property; and, if the property falls in an area that has a Property Owners Association, then Virginia provides the right to buyers to receive and review a package full of information about the restrictions and fees associated with that POA.  In a short sale situation, we may also see language built into a contract that allows the buyers to terminate the contract because the "short sale approval" hasn't been received within a certain time frame. 

To improve chances of a short sale, sellers want a contract that has no buyer contingencies. 
To provide the maximum protection and lowest risks, buyers want maximum contingencies.

If I am representing a seller:

  • PRICE: I want a contract price that represents at least full market value; and in general, I want the highest price possible to entice the bank to approve the sale, and also because in some cases, sellers are being asked to pay the deficit between the mortgage payoff and the proceeds of the sale.  The higher the proceeds of the sale, the less my client would be liable for.

  • FINANCING: I will attempt to obtain a cash contract, with no inspection or appraisal contingencies for the buyer.  If that is not possible, I will want a full loan commitment, with the only contingencies being seller contingencies.

  • DEPOSIT: I want a high earnest money deposit, and I want it to be deposited into the escrow account as in a normal contract.

  • SHORT SALE APPROVAL: I want the longest possible timeframe to get the short sale approved.

  • PROPERTY OWNER DOCUMENTS: Since this contingency can not be waived by the buyers, I want any POA documents delivered to the buyer early on, with an addendum that they will pay the cost to replace them if they terminate the contract and do not return them.

If I am representing a buyer:

  • PRICE: I want a contract price that reflects no more than the market value in "as is" property condition...preferrably with a financial  benefit to my client because they are having to deal with the uncertainties and frustrations of a short sale.  (Generally, if the bank orders a BPO/Appraisal of their own, and the contract price is within 10% of the fair market value, then they will accept it; of course, I hope my buyer will be paying at least 10% less than fair market value).

  • DEADLINES: I want a full home inspection and financing and appraisal contingencies, and I don't want my buyer paying any of those "hard costs" (out of pocket) until we've gotten the approval from the seller's lender (which is the thing that takes the longest in this process).

  • DEPOSIT: I want the "consideration" for the contract to be in the form of a Note Payable, rather than actual funds, until the seller's bank has approved the sale.  This is because EVEN if my buyer defaults, their money is still in their own pocket - and the seller will have to sue them to get the deposit.  Most sellers in this situation will not take court action to obtain cash from a buyer that didn't buy the house.  However, if my buyer DOES NOT default, but has made a hard money deposit into an escrow account, and the buyer choses to exercise a right of walking away from the contract under one of the contingencies, then my buyer may have to fight the seller - perhaps even in court - to get their money back.

  • SHORT SALE APPROVAL: I want a short timeframe to get the short sale approved, in an effort to increase the speed of each action on the other side of the transaction.

  • OUT CLAUSE: I want an addendum that says my buyer can serve a UNILATERAL notice to the seller that he is terminating the contract FOR ANY REASON, up until the time that the short sale approval is received.  This is so that my buyer can continue looking for other homes while he waits for the approval on this short sale.  That way, if it is not approved, the buyer didn't miss out on anything (interest rates, pricing, market supply) while he waited.  (Please note this is not part of any standard addendum in our region... and many agents will wrongfully tell you it is implied.  Again, your agent matters. Read what you sign - regardless of what your agent says, the written agreement dictates the enforceable terms.)

In this post, I sound a bit like a 2 year old, I want what I want....and I do put up a good fight if it seems reasonable.  However, in the game of real estate it is not about getting all of what you want, it is about getting enough of what you want and all of what you need; and about balancing the needs and wants of the primary parties. 

Balancing the two sides is where an experienced agent with good negotiation skills comes into play.  But, sometimes you simply don't know how good your agent is until it is too late.   So, in my next post, I will share examples of things I have seen, failures and successes.  These examples will help you know how to balance your interests.

I invite you to read the earlier posts in this series.  Start with this post:  A Short Sale, Anything But Short.  Then, stay tuned to The Real Estate Whisperer for important real estate news from the front lines...Get your news AS the market is changing!


It probably goes without saying, but, if you are thinking of buying or selling in Northern Virginia, I hope you'll call ME first to see if I can assist you. Also, no matter where you are in the country, feel free to contact me. While I can not give real estate advice outside of Virginia, I can connect you with a proven professional in your area. I belong to many networks, including REO and short sale expert networks, and we have members throughout the country.

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