Have you ever found a property advertised as a short sale* but the real estate agent said the bank would have to approve your offer? You go to the trouble of putting your offer together, but the agent is clearly trying to get other potential buyers to make offers too. You are attracted to the potential profit in the short sale, but you are afraid someone else will outbid you. What can you do? This article will show you how to take control and sweeten the deal.
You will often hear this statement: “A short sale offer requires the approval of the lien holders**,” but this is not an accurate view of what is really happening. To clarify, let’s cover some basic real estate theory. First, an agreement for the sale of real estate is between the buyer and the seller. Period. If they choose to involve other parties (like the bank), they may because everything is up to them, including which contract they use.
Second, changing ownership of real estate does NOT require paying off liens. While new lenders usually require a clean title, as do most buyers and sellers, the clerk in the land records office never verifies that debts are paid before changing ownership by recording the deed! Examples of this include “subject to” deals and “wrap-around” mortgages.
Third, the influence of a lien holder on a property comes from two places: the power of the lien itself to encumber the property or allow a foreclosure, and any power given by the buyer and seller. Having a lien does not permit the lien holder to “approve” or “disapprove” a purchase agreement. It only means that the lien holder may specify the conditions under which the lien will be removed, according to the terms of the loan documents. Note, the removal of liens is usually required by a new lender when obtaining a new loan.
Understanding these basic concepts will help you in your investing, but here is a strategy to help you get control of almost any short sale deal you find.
Make these changes and additions in the contract you use to make your offer?:
1. Set the offer price as high as necessary to beat the competition. (Stay with me here.)
2. Set the closing deadline just like this: “on or before the date of the foreclosure auction.”
3. Add these three sentences to the “Other Terms” section of your contract:
“This offer is subject to the buyer’s approval of all short sale conditions at the buyer’s sole discretion. To that end the buyer may adjust the purchase price. Seller authorizes all lien holders to share any information with the buyer.”
These terms give the buyer complete control of the deal. Setting the initial price a little higher than the competition gets the offer past the agent, into the hands of the seller. The buyer has walk-away power because he may cancel the agreement if he doesn’t like anything about the short sale, including the price! This literally means that the buyer may change the price either up OR DOWN. Also, setting the closing deadline to match the foreclosure auction means the contract will never expire unless the bank forecloses, which it would rather not do. Time is on the buyer’s side.
Finally, the last sentence authorizes the buyer to negotiate with the lien holders for the short sale, instead of allowing the agent to do so. Lien holders may require a form, often called an Authorization to Release Loan Information, to be signed by the seller before they will talk to the buyer. Having this language in the contract facilitates getting that form signed.
There are many sources of information about negotiating a short sale with a bank or other lien holder. Ultimately they will have two choices: 1) come to an agreement with the buyer on the price and terms, or 2) allow the foreclosure. The bank will go ahead and foreclose if there is not enough value in the short sale; but the buyer has walk-away power with no negative consequences and therefore is in the strongest negotiating position. It shouldn’t be too difficult to get the bank down to their lowest price.
With these modifications to your purchase agreement, you should be able to profitably buy almost any short sale property on the market. Sweet!
Notes:
* The term “short sale” is used to describe a situation where a property cannot be sold for enough money to pay off all the liens (debts) on the property. If the liens are to be removed when the property is sold, the lien holders must agree to accept a payment that is less (or “short”) of the amounts actually owed.
** Lien holders are usually mortgage lenders, banks, mortgage insurers, bankruptcy trustees, plaintiffs, contractors, and federal, state and local taxing authorities (such as the IRS or State Tax Commission).
? The reader is encouraged to obtain legal counsel regarding possible consequences of contract language.
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