Short Sales, “A Tale Of Three Houses…”

Short Sales, “A Tale Of Three Houses…”

I know this is a long blog, but it really puts to bed the issue of submitting multiple offers to the lender.  If you will read it, I promise to make my next blog shorter! 7-20-10 update

This is a story of three homes for sale in Anytown, USA.  The stories are about the same, but the players are different as well as the perspectives!

All three homes were purchased for $250,000 a few years ago.  Unfortunately, there was a factory shutdown and many out of work residents were forced to sell their homes and move to another state to find work.  Home values plummeted.  This is a story that is repeated all across the country.  There may be other factors involved, but the result are the same, lower home values.  Here are the stories.  What do you think the final chapters should be?  Do the same principles of law, fiduciary responsibility and fair play apply to each story?  I think they do!

Home 111 Pleasant Street, was purchased for $250,000 cash by Mr. Smith.  He and his partner, Mr. Wood, owned the local restaurant, but due to so many of the laid off factory workers leaving town or not being able to afford to go out to eat as often, they were forced to close their restaurant and move to find work.  When Mr. Smith listed his home with ABC Real Estate, he was dismayed to find that property values had fallen about 40%.  Having no choice, but to sell and move, he accepted an offer for $150,000 and the Sales contract was signed.  After closing costs, he expected to net about $135,000.  The new buyer put a deposit down, paid for a home inspection, appraisal, loan origination fees, etc.  About 3 weeks before the scheduled closing, another prospective buyer who had seen the home earlier, told ABC Real Estate that he would offer $160,000 for the home!  This would net Mr. Smith about $9,000 more!  Should (or can) ABC Real Estate submit the new offer to Mr. Smith and can Mr. Smith accept it?  What about the first buyer’s investment of time, effort and costs that he has made?  Is the existing purchase agreement binding?

Home 222 Homestead Avenue, was purchased by Mr. Wood, the partner in the restaurant.  He too, decided to sell his home and move to find work.  His home was also purchased for $250,000 cash and the value was about $150,000.  He listed with ABC Real Estate and the listing agent helped with all of the listing disclosures, contract, etc.  The agent held an open house and the home was marketed in the local paper as well as the ABC Real Estate website.  The sales commission was agreed to be 7%.  Mr. Wood was hoping to net as much as he could and minimize his losses on the home and business.  Soon after listing, he talks with Sell For Less Real Estate.  He was told that they list for 5% or less!  This would reduce his cost of sale by about $3,000.  Since he could really use the additional sales proceeds, Mr. Wood wants to cancel his listing and re list with the lower cost broker.  Should (or can) Mr. Wood do this?  What about the first broker’s investment of time, effort and costs that he has made?

Home 333 Sunny Lane was purchased by Mr. Jones for $250,000 with a 20% down payment.  His mortgage balance is $195,000 and since he lost his job when the factory shut down, he could not afford the payments.  ABC Real Estate advised him that due to lower home values and inability to qualify for a loan modification, he may want to consider a short sale on his home.  His lender would need to approve taking less than what was owed on his mortgage and he would not be able to receive any proceeds from the sale.  His brother, a financial advisor and CPA advised him that a short sale would be better than the alternative foreclosure that was soon to come if a short sale could not be accomplished.  He listed the home and an offer of $140,000 was accepted.  The real estate broker began the negotiations with the lender.  He submitted a short sale package, (two times since the first one was not received).  He called the lender every few days, met with a BPO agent that the lender had sent to check value and helped clean up when some kids broke in and had a party in the now vacant home.  This was over a period of 2 months.  Since the buyer was not sure if his offer was going to be approved by the lender, he kept looking at homes.  When he found Mr. Smith’s house that was ready to close, he cancelled his purchase of Mr. Jones’s house (as allowed by the agreement) and bought the home from Mr. Smith.  Soon after, Invest LLC makes an offer to purchase Mr. Jones’s house.  They will do all of the short sale negotiations.  They say that they will continue to keep their offer in place and negotiate until the lender provides a short sale approval letter.  Since their business is buying homes and immediately selling for (hopefully) a profit, they keep the home on the market in hopes of getting an offer from an “end buyer” that will purchase the home from them as soon as they close on it and have obtained clear and marketable title.  They execute a purchase agreement with Mr. Jones that discloses their intent to re sell the home for a profit, along with several other disclosures that explain the process and that Mr. Jones will not be able to receive any proceeds from the sale, no matter what the eventual short sale price may end up being.  Of course Mr. Jones always has the option to not complete the sale in the event that the terms of the approval letter are not to his advantage (such as requiring a large deficiency judgment).  Invest LLC collects a new short sale package from Mr. Jones.  Their negotiator submits the Purchase agreement that discloses that the buyer is intending to re sell the home, along with the new short sale package.  As time goes on, there are many more submissions of updated financial information, bank statements, tax returns, etc.  The lender, through their due diligence, has two BPO’s done on the home.  They decide that when they factor the cost of foreclosure, carrying costs, the time that they must hold the property and what they would  likely net in a REO sale, that they would approve an offer of $125,000 from Invest LLC and there would be no deficiency judgment.  Finally after months of work, the investor and negotiator are pleased to hear that the approval letter is in process and should be received soon.  At this time an offer is received for $150,000 and the buyer wants to close and move in as soon as possible, so his children can start in their new school at the beginning of the school year.  He understands that a quicker closing is possible due to the fact that the investor has put the time and effort into the short sale process for the past months.

Here are the questions to consider.  They will be subject to consideration of contracts, fiduciary responsibility, fair play and “who is the client that the broker represents?”

1. Should the short sale be between Mr. Jones and Invest LLC, with a second sale immediately following to the new “end buyer”? 
2. Should the “end buyer’s” offer be submitted to the lender although there is already a binding contract in place and Invest LLC has invested a lot of time and effort into the purchase?
3. Who does ABC Real Estate have a contract with (Hint…it’s not with the lender!).
4. Is the lender competent in the real estate lending business and have they done their due diligence of a fully disclosed offer and accepted because they feel is in their best interest?

The goal of all parties involved is to save the home owner from a foreclosure and since there is a considerable amount of time and effort involved in each party’s part of the process, they should make a profit on that work.  By using the investor, the sale is a win for everyone involved.  The seller avoids foreclosure and can move on with his life.  The lender no longer has a non performing asset and has netted more than if it had gone to foreclosure.  The buyer has the home he wants, at a good price and can close and move in to meet his goals.  The broker has been paid for the marketing and sale of the property.  He did not need to spend time in negotiations.  He was also paid for the second sale to the end buyer.  The investor wins on this one by making a profit.  Sometimes he doesn’t when a buyer cannot be found that will pay more than the lender will settle for.  In this case, many investors will step away from the sale and allow a direct “A to C” sale to proceed.  I think that the answers to the questions posed in all three sales should be pretty easy.  Look at the issues and determine in your own minds what is fair to all and what is in the best interest of the troubled home owner.  This has been an issue that many real estate agents have struggled with.  Some understand the process and that with full disclosure, when an investor buys and immediately sells a property, no laws have been broken, no one has acted in an un-ethical way and everybody wins.  Other agents want to add a “special duty to the lender” that does not exist by feeling that they are obligated to submit other offers to the lender!  They have no more responsibility to do that than to submit a higher offer to a conventional seller after he has accepted a contract.  The lender’s approval is simply another contingency that needs to be removed before the sale can proceed, just like approval of financing or a home inspection.  With these examples and questions, the reasonable resolution to the issue should be easy to arrive at!

Bill Patterson

Serendipity Group, LLC

Nationwide Short Sales