Short sales can be the most frustrating of all residential real estate transactions. A short sale occurs when the seller does not have enough equity in the home to pay the mortgages and expenses. In this case, the parties have to wait for the Seller’s bank to approve the contract by the Seller proving that he cannot afford the home and the contract presented is the best for all parties. The main complaint is the long delays in getting the Seller’s lender approvals – approvals can take 90 days and sometimes over a year, if at all. It is best if the buyer and the seller are aware of the issues surrounding a short sale be sure they have the time and perseverance to overcome the myriad of obstacles that may arise. If the factors below are present in your short sale at the outset, please let your attorney know so they can be dealt with ahead of time, although most issues will not be readily apparent. Also be aware that because the seller is usually in distressed financial condition, obtaining relief against them after the closing is almost impossible if there are post-closing issues. Also know that you, as the buyer, will be responsible for taking the property on an “as is” basis because of the agreement the buyer and seller sign with the seller’s bank at closing, known as the Arm’s Length Agreement (ALA). The ALA may also restrict the period in which you may resell the home, such as 30 -90 days from the closing date and may also prevent renting back to the Seller, among other things.
Please note the following special delays/risks associated with short sales:
• Unknown time for approval by sellers lender or rejection of the contract
• Factors that make it unlikely that the Seller will get approved
• More than loan requiring short sale approval
• Mechanics liens or other judgments against Seller clouding the title
• No true hardship being claimed by Seller or Seller still making payments
• Inexperienced or overwhelmed person negotiating with Seller’s bank
• Seller going through divorce or bankruptcy during the process
• Home lost to the judicial court foreclosure process
• Uncollected assessments leading to lockout (eviction) by the association
• Utility shut off or winterization preventing completion of bank appraisal
• Poor property condition or Real Property Disclosure showing defects complicating loan underwriting process for Buyer
• Purchaser not qualifying for a loan because of their financial situation, property condition or a condominium/homeowner association issue
• Seller taking appliances or fixtures during the pendency of the short sale process
• Seller failing to maintain the property during the pendency of the short sale process
• Seller’s tenant failing to leave prior to the closing
• Short sale lender requiring Purchaser cash contributions paid to the lender
• Short sale lender making a counteroffer above the purchase price to Buyer (valuation issues)
• Seller rejecting the short sale offer because it requires cash contributions or deficiency judgment
• Failure of the Seller to cooperate with the process or changing their minds
• No survey provided
• The seller cannot make required municipal repairs
• Seller requests Buyer to pay Seller’s customary costs to meet short sale lender’s net requirements
Once the lender takes back the property in the foreclosure process, the property is then called Bank Owned or REO (real estate owned). Several other considerations exist for Buyers of REO property which may prove frustrating for Buyers. Note, however, these transactions have fewer issues than the short sale purchase, but typically the price may be higher for an REO property.
Please note the following special delays / risks associated with REOs:
• The home may be winterized and inspections are difficult or delayed.
• The home has utilities shut off causing delays in the appraisal and inspection.
• In properties with HOAs, the Buyer can be held liable for six months of back assessments and legal fees for the collection activities of the association.
• Closing may be delayed because the deed from the prior owner to the bank is delayed.
• The home has deferred maintenance and the Bank will not make concessions or repairs.
• There are resale restrictions for a period of time after the sale.
• The property is sold “As Is”
• No survey is provided.
Gregory A. Braun concentrates his practice in real estate law, serving individuals buying and selling houses and condominiums, builders, developers, and investors. Greg provides counsel to these clients in areas including FHA submissions, short sales, lending issues and foreclosure workouts/bankruptcy, compliance with federal, state and local development requirements, construction, insurance, corporate and tax matters, including 1031 exchanges. The firm offers a host of legal services, please visit www.myreallaw.com for details. Greg can be contacted at firstname.lastname@example.org, 847-424-1005