Short Sales and Buyer Deposits – It’s a Pickle

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I received a call earlier this week from a buyer’s agent whose buyer was purchasing a short sale. This agent was not a happy camper. His buyer had signed a short sale addendum and agreed to deposit the earnest money into escrow, yet somehow the agent had overlooked that little ditty. Now the buyer did not want to put the earnest money into escrow. “This is a short sale,” he stated,  “and it could take a few months to obtain short sale approval.” Additionally the buyer’s agent seemed to feel that placing that earnest money into escrow might be some sort of legal breach.

While I am not an attorney (and I don’t play one on tv), the California Association of Realtors®’ contracts actually have a specific line item where you can stipulate whether the earnest money is delivered to escrow immediately or upon receipt of the short sale approval letter. (So, that kind of leads me to believe that there is no legal breach.)

Many buyers want to continue shopping, and would prefer not to deposit their money into escrow until the lender(s) approve the short sale transaction. You never know when a better deal is gonna come your way, and you may not want to be tied down by putting that money into escrow. Also, you cannot be entirely certain that the short sale lender will approve your offer, so why waste time depositing those funds?

The thing is that it may be a good idea to deposit those funds into escrow. Doing so further cements the buyer’s position as first in line for purchase. Also, it sets a tone for a serious transaction. If the seller is close to foreclosure and wants to avoid that, the seller wants to know that the buyer is really going to close: thus assuring that foreclosure is avoided. Also, the short sale processor (the agent) is now going to dedicate hours and hours to the deal. And, why bother if the buyer is just going to walk away when short sale approval is received?

It’s a tough call as to whether to deposit those funds into escrow or not. But, if a buyer is serious and really wants the property, it seems that putting that money into escrow may not be a bad way to go.

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About Author

Melissa Zavala is the Broker/Owner of Broadpoint Properties and Head Honcho of Short Sale Expeditor®. Before landing real estate, she had careers in education and publishing. Many folks say that Melissa is genetically pre-disposed to success with short sales. In fact, last year she and her staff obtained over 500 short sale approval letters! When she isn’t speaking with lien holders, Melissa enjoys practicing yoga, walking the dog, and vacationing at beach resorts.

4 Comments

  1. I totally agree with this position, as with any seller, especially one with another option (albeit usually a less attractive option, in this case foreclosure), you want to make sure the buyer is committed. If the buyer made the offer 3, 6 or 9 months ago and has no skin in the game, then it’s worth right about the same amount that the paper it’s written on, or the email the attachment is sent in.

  2. I have a different take.I wouldn’t put any earnest money down until the approval letter and that the lender is issuing a 1099 and waiving any deficiency for the seller.

    The seller will just junk up the process if an approval comes but the seller will not agree to the banks requirements.The other issue is if the short sale takes awhile the approval might not be worth anything.You wait 4 months and you offered 150,000.You get back an approval at 150,000 4 months later but values have dropped and now the prices are at 130,000 for the same property.

    I can’t remember where I read it but somewhere was a stat that only 31% of short sales nationwide go to closing and the rest fall out.I wouldn’t lock up earnest money tied into deals I might no longer have interest in.If you are a home buyer and not an investor than you might view it differently when you LOVE the house.For the investor it is simply about the numbers.

  3. Sellers of short sales can move away without notice, never to be heard from again. It just happened to me on my very first short sale contract. They have nothing to lose since their not getting any money from the sale anyway, and they may not care about the difference between having a foreclosure or short sale on their credit report. The sellers agent hasn’t been able to get a hold of the seller for the past two months and now her listing agreement is expiring so her broker has told her to let it go. In IL, earnest money can only be released if both sellers and buyers release it, which is impossible if the sellers are MIA. Otherwise, you have to go to court, and after legal fees it may not be worth it. Glad we made our contract such that we’d only put earnest money down and do the inspection once there was bank approval!!

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