When your short sale is a foreclosure in sheep’s clothing, what can you do to make sure you don’t lose any of your deposits? Here’s what I suggest.
Q: I read with interest your definition of a short sale in a recent column in the real estate section of our paper.
We have a contract on a beach condo that was advertised as a short sale and does need an estimated $15,000 in updates. We offered $4,000 above the list price for the property. An identical property in the same complex recently sold for $40,000 above our offer.
A relative of the owner is the real estate attorney on the deal and his wife is the real estate agent listing the property. After four months of negotiations, during an email conversation with the attorney, I noticed that the property is being referred to as a foreclosure.
Both the attorney and real estate agent say that short sale and foreclosure are the same thing and I really shouldn’t be upset or surprised. I’m still surprised at that comment. Foreclosure was never mentioned during the preparation of our contract for purchase. After 5 months, the seller’s agent is trying to determine from the status of the contract from the bank. The owner has told us directly that he wants to sell, however he said he is looking for a new attorney to represent him. His own real estate agent says the owner does not answer his phone and is very difficult to contact.
What do you think is going on here? We have $5,000 tied up in escrow. Should we abandon this attempted purchase?
A: Have you heard Stephen Colbert talk about “truthiness?” You’re getting some truth from everyone in the deal, but it may not add up to the result you’re hoping for.
Let’s start with the agent’s statement that a short sale and foreclosure are the same thing. If you look at the technical definition, a short sale is when a seller sells the property for less than the mortgage amount. The seller then goes to the bank and asks the bank to forgive the difference. A foreclosure is when the homeowner stops paying the mortgage, and the bank takes back the property (which was offered as collateral for the loan) and resells it in order to recoup its investment. There are clear differences.
However, during the Great Recession, most short sales were also foreclosures. The reason for this was that the owner stopped making payments on the loan, listed the home for sale as a short sale and the lender proceeded to foreclose on the home while the seller on the other side was trying to sell the home as a short sale. It was a rush to see what department at the big box lender’s departments would get to the finish line first.
If the short sale department was faster, the buyer ended up closing on the home in a short sale. On the other hand, if the short sale department lagged the foreclosure department, the home would be lost in foreclosure and the buyer would have to wait for the lender to list the home and try to buy it that way — if they could even figure out who the broker was and when the lender would list the home. The process in either case would take months (or years in some states).
We agree with you that you should have known more about the seller’s circumstances, but in states where buyers and sellers do not hire their own real estate attorneys, you are left to find out this information on your own. We don’t know if it would have made a difference if you had known the property was in foreclosure and also a short sale, but at least you wouldn’t have been surprised.
Having said that, you need to decide what your tolerance limit will be in waiting for the deal to come together. Sam has had clients that were willing to wait up to a year to buy a home in a short sale, but he also had some clients just give up after 2 or 3 months. He had one client selling a home in a short sale that took over 2 years to complete and had 3 different buyers back out before the last one closed.
If you’re willing to be patient and are sure you’re getting a good deal, you can wait and see what will happen. If you see other properties on the market, want to lock in a loan that you like, need to move for personal reasons or have any other timing constraints, this home may not be for you, even if the potential deal would be profitable.
In any event, make sure your contract contains the right language to allow you to terminate if the deal has not closed by a certain date. If the seller isn’t able to close by the prescribed date, you should have the right to give notice to the seller, cancel the deal and get your deposit money back. Good luck.
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