Can Short Sale Bank Pocket Insurance Check ?

8 Replies

I am currently waiting on a SSA from a bank.  The home is sold as is and the inspection/appraisals are "n/a" on the dates and deadlines section.  I know the bank has collected the insurance check for a roof and glass replacement.  My intent is to get the bank to apply the insurance funds before the closing for repairs that my buyer will complete.  I will let the bank know I am aware of the funds via the due diligence documents after SSA.  Is it legal for the bank to pocket the insurance checks (insurance fraud?)?  Is there a way to force the bank's hand in applying the funds to the repairs?  If you have been successful please answer with the process and verbiage applied to the situation.  I am aware that the leverage for the funds occurs if the bank accepts my offer.   If they counter then the appraisal came in higher than our offer.  

@John Grissam - I don't know what a settled insurance claim has to do with your buyer's purchase of the property if it occurred before entering into a contract.  They are selling it as is.  If the roof was damaged prior to your offer it doesn't change anything 

Brie Schmidt, Real Estate Agent in Wisconsin (#57846-90) and Illinois (#471.018287)

@John Grissam

an insurance claim payout is made to the policy owner, and any mortgagee to compensate for the loss of value on an asset.  

The property owner / mortgagee is not obligated to apply those funds toward the property.  

If the sale price + the insurance check satisfy the loan, that’s all the bank cares about.

There is an active insurance claim paid out on the home to complete work on the home.  The bank in the Short Sale is holding onto the money and not conducting the repairs on the home prior to any offers being accepted on the home. Yes, as is means as is.  I believe I read somewhere that if money is paid out on the home then the lender has an obligation in good faith to apply the money to the repairs to be completed.  I am not counting on the money.  I just want to know the legalities of it (can the banks pocket the 20-30k) and if there is a way to leverage the bank to conduct the repairs.  If the appraisal comes back and the bank immediately accepts my clients offer, that means it is within the banks 3-12% loss range or comes back for less than I offered.  I should have some leverage at that point.  I just want to know if any agents have come across this and if the banks are acting ethically or are they legally bound to complete the work.  I am assuming that the seller is not 30k behind in payments in the short sale.

Thanks for your reply Jason, that was closer to what I was looking for.  I am just trying to utilize any resources I have access to, in order to help my client's flip remain profitable. 

You're buying the property as is.  The fact the lender or current owner received an insurance settlement is not really relevant to your purchase.  Had they made the repairs they would be looking for a higher price.  You already have a contract on the table at a price that (at least they think) is based on the property's current condition.   They are under no obligation to apply the insurance settlement to the property. 

You say:

There is an active insurance claim paid out on the home to complete work on the home.

That's not really correct.  The insurance claim was paid out to compensate the policy holder for their loss.  The policy holder can choose to use that money to restore the lost value.  Or, they can choose to pocket the money and sell the damaged goods at a lower price.  If there was a loan in place and the borrower wanted to keep that loan, the lender may well force them to fix the damage.  But in this case, there is no upside to them to do that.

I'm wrestling with this choice right now.  My Mustang (among other things) was damaged in that big hail storm last May.   The insurance company evaluated it and wrote me a check for the damages.  Getting it worked on was another matter.  I do have an appointment scheduled, but not for another two months.  Trouble is the value of the car.  If it was in good condition it would only be worth about what it would cost to fix.  So, what's the point of fixing it?  If my choice is to spend seven grand and then have a car worth seven grand, or keep the money in my pocket and have a car worth even $1000 why would I fix it?

The bank has no obligation to use the funds to fix the property.....and you have no leverage, no matter what, to force them to do so. And, there is no “3-12%” loss criteria for approving a short sale. Sometimes the bank may lose 10%, sometimes they lose 80%......short sale valuation is based Solely on their assessment of Current value.

I know there is no set loss for a bank for a short sale.  I am sure most banks have an acceptable loss they are willing to incur.  My experience/knowledge assumes a range of 3-12%.  Completely up to the bank and what an acceptable loss rate is to them.  I am trying to think outside the box for possible ways to retain some of the paid out money for the repairs.  I was pretty sure that my client had no rights to them but I will always try to figure that out for sure. You never know unless you try.  I will post how I succeeded if I do succeed.

Most of the short sales I have done....the bank’s loss was around 50%....policy has nothing to do with it....market value is market value, no matter what the loan balance is.

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