Considering the hundreds of properties an asset manager may be actively marketing, it isn’t possible to know all of the details about a particular REO property. For this reason, asset management companies typically do not provide a seller’s disclosure and the property is sold “as-is/where-is.” However, known environmental hazards and any material defects found in an earlier inspection (that caused the buyer to cancel the deal) must be disclosed to the next buyer. In addition to federal regulations regarding lead-based paint, state and city regulations may require certain point-of-sale inspections, such as for radon, mold, Chinese drywall, and termites.
Check the remarks in the MLS listing comments for any repairs that need to be done to bring the property up to code or restore it to habitable condition. Additional escrowed funds may be needed to cover the cost of required point-of-sale inspections and correct problems. When point-of-sale inspections uncover issues that need to be corrected, a contractor’s line item job estimate will likely be required (at the buyer’s expense) as an addendum to the sales contract.
Writing the Short-Sale or REO Offer
Let’s say a buyer you are representing has decided on a short-sale property and is ready to make an offer. Before writing the offer, you should:
- Prequalify the listing agent, the borrower/seller, and the short-sale property by asking the following:
- Has the borrower’s/seller’s hardship been verified? If yes, by whom?
- Has the borrower/seller submitted the necessary short-sale documentation to the servicer/investor; for example, if this is a Fannie Mae short sale, has the borrower/seller submitted the Borrower Response Package?
- Has the listing agent received a response from the servicer/investor?
- If the short sale is a Fannie Mae short sale, has the servicer/investor established the price?
- How many liens are on the property?
- If more than one lien, what are they? IRS tax liens, something else?
- Has a foreclosure sale date been scheduled?
- Are there any other offers on the property?
- Have any other offers been executed and submitted?
- Check in the MLS or with the listing agent for specific instructions on submitting an offer.
- Provide a CMA to the buyer client to ensure that the client can make an informed decision on the price to offer. When creating a CMA, buyer’s representatives should include comparable properties that are distressed—short sale, REO.
- Be certain that the buyer’s lender understands the buyer is intending to purchase a short sale. The buyer’s agent should only refer a buyer to lenders that are familiar with short sales. If the buyer has chosen his or her own lender, a phone call from buyer’s agent to the lender would be appropriate.
- Counsel the buyer to have the lender order an appraisal after the property inspection has proved satisfactory.
- Have written repair estimates, if needed, from licensed contractors.
Buyer’s agents also need to educate their buyer clients on the elements of a good offer. Writing an offer on a short-sale property is not like writing an offer on a property that is not distressed. The buyer’s representative needs to be aware of what makes a good short-sale offer that has a reasonable chance of being accepted by the seller and approved by the investor.
Making Offers on Multiple Properties at the Same Time
Often buyers believe the best strategy in “getting”a short sale is to put offers on several short-sale properties at the same time. If those offers are accepted by the sellers, the buyers have entered into contracts to purchase more than one property. Buyers should be cautioned that this is a risky practice (unless they intend to purchase both properties). If your buyer client insists on pursuing this strategy, seek adv
Buyers also may be tempted to make a lowball offer on a short-sale property. An exceptionally low offer runs at least two risks if the offer is accepted by the borrower/seller and the contract is sent to the servicer for investor approval:
- For some borrowers/sellers, the foreclosure clock will continue to tick away (which may put the borrower/seller in imminent danger of foreclosure) while parties wait for the servicer to review the contract and ultimately not approve it.
- Buyers may miss out on other properties that would have been suitable and available while waiting for the servicer’s response.
- Remember, it is the duty of both the buyer’s agent and seller’s agent to protect and promote the interests of their clients. Both agents have a duty to negotiate the best price and terms for their client prior to the contract being submitted to the servicer for approval.
Length of Time for Investor Approval and Closing
- The approved short-sale addendum to the sales contract that is used in your marketplace to make the contract subject to investor approval should stipulate how long the buyer will wait for short-sale approval.
- If the time allowed for investor approval is too short, it will weaken the buyer’s contract. Note that the time allowed for investor approval will depend upon the type of short sale. For example, you may be able to have 30–60 days’ waiting period for approval from Fannie Mae or Freddie Mac. However, for non-GSE short sales, you may need 90–120 days’ wait time for approval.
- As with any real estate contract, the earnest money on a short sale is due according to the terms of the written agreement.
- Earnest money should be deposited as required by state license law based on the date the contract was signed by the buyer and seller—not based on when the contract is approved by the servicer.
- If the buyer does not want the earnest money deposited before the servicer has approved the contract, the buyer’s representative should note that on the contract. Accordingly, the buyer should not tender the earnest money before the date for agreed to for deposit.
- It is important to know your state laws on earnest money or deposits. Some state laws stipulate that there cannot be a valid contract without earnest money. This would, obviously, affect how the offer was written.
- Listing brokers should be wary of accepting personal checks for earnest money too close to the closing date. Many servicers do not allow more than ten days to two weeks for closing after they have approved the short sale. If the check does not clear, there could be problems.
- Without sufficient earnest money, a buyer may not hesitate to walk away from the transaction. The greater the amount of the earnest money, the greater the chance of the buyer being committed to the contract.
- If the contract calls for the home inspection to be done in five business days after the contract has been executed, the five days would start from the time of signing by the buyer and seller—not from the time of lender approval.
- The buyer will have little success negotiating any costs or repairs if the home inspection is completed after the servicer’s approval. The servicer’s approval is based on a minimum dollar amount to be realized at the closing, and servicers generally do not allow for further negotiations.
- Most often, a short sale is an as-is transaction. The seller doesn’t have the money to make the repairs and the servicer is unwilling to make repairs. That stated, the buyer still has the right to know what as-is means and withdraw the offer or reduce the offer based on the home inspection.
- Buyers may end up wasting valuable time on a property that they may not want to purchase as a result of a home inspection that reveals less-than-acceptable defects in the property.
- Although the short-sale approval process takes more time than a non-distressed sale, once approved, the closing date stipulated in the approval letter may not allow the buyer sufficient time to complete a property inspection.
Mortgage Application and the Appraisal
➢ The buyer must submit the mortgage application according to the contract as well. There is often a quick turnaround between lender approval of the short sale and the lender’s required closing date. The buyer must be ready, willing, and able to meet the specified closing date without asking for more time to get their financing in place.
➢ Often the buyer’s appraisal does not get ordered until the home inspection and possibly attorney modification periods have been satisfied or waived. For this reason, it is essential that enough time be allowed on the contract for the buyers’ loan commitment.
- Either party could back out without penalty if the offer is not signed.
- There is no contract until the contract and short-sale addendum are signed by the buyer and the borrower/seller.
- Typically, servicers will not accept digital signatures. Best practice is to have the buyers and borrowers/sellers sign in hard copy.
- The fact that the borrower/seller accepts the contract contingent on servicer approval does not guarantee servicer approval. The approval by the servicer is an additional contingency, like a home inspection, mortgage approval, etc., and should be treated as any other contingency.
- The borrower/seller may choose to continue to market the property looking for back-up contracts.
MLS rules and the NAR Code of Ethics require that the listing agent disclose the existence of an accepted contract, including those with unresolved contingencies, to any broker seeking cooperation. Once a short-sale contract has been executed, it should be reported to your MLS as the MLS rules require. Servicers do not require that the property remain on the market after an offer has been accepted. A borrower/seller would not be able to accept another contract unless it was made “subject to release of prior contract,” and servicers generally do not want back-up offers submitted.
The NAR Code of Ethics requires that all offers must be presented to the seller all the way to closing. Howe
Purchasing a home that needs substantial repairs presents a predicament because a bank won’t approve a mortgage on a home until repairs are complete, and the repairs can’t be accomplished until the purchase closes. The FHA 203(k) mortgage program offers a solution. The program allows a buyer to purchase or refinance a property plus include in the loan the cost of making the repairs and improvements, so there is just one loan and one closing. Two types of FHA 203k renovation loans are available, standard and streamline. The standard loan is typically for more extensive rehab projects, while the streamline loan covers a maximum of $35,000 of repairs. The FHA requires just a 3.5 percent down payment, based on the purchase price and total project cost. The buyer must plan to live in the property he or she is buying.
For detailed information on 203(k) mortgage programs, visit https://www.hud.gov/ and search for “rehab a home with HUD’s 203(k).”
The TILA-RESPA Disclosure Rule for Short Sales
- In 2015, the Consumer Financial Protection Bureau (CFPB) finalized the Truth in Lending Act (TILA) Real Estate Settlement and Procedures Act (RESPA) Integrated Disclosure rule, or TRID, also known as “Know Before You Owe” mortgage initiative. Because borrowers were struggling to understand the overlapping information and complicated terms in the existing federal mortgage disclosures, TRID consolidated them into two simplified documents:
- The Loan Estimate, which replaces the Good Faith Estimate document
- The Closing Disclosure, which replaces the HUD-1 Settlement Statement
- The Loan Estimate giver borrowers mortgage details in concise, easy-to-understand language. It must be provided to borrowers within three business days of receipt of their loan application. The Closing Disclosure details mortgage closing costs and other loan details. It must be provided to the borrower at least three business days prior to closing. TRID implemented this three-day waiting period to give consumers time to review their Closing Disclosure and ask questions before closing. Agents should keep this in mind to avoid any delays at closing time.
- To best prepare their clients for financing a home, the CFPB recommends that agents take following five steps:
1. Encourage clients to think through their mortgage choices first. 2. After they have found a property, encourage them to apply for Loan Estimates from multiple lenders. Loan Estimates no longer require written documentation. 3. Make sure your clients indicate their intent to proceed. 4. Provide clients with accurate and timely information about the property and transaction. 5. Find out who provides the Closing Disclosure.
- Although in the past a settlement agent, attorney, or closing company usually provided the HUD-1 Settlement Statements, lenders might deliver the Closing Disclosure directly to your client. The CFPB recommends checking with the lender and with state regulations, as practices can vary.For more information, consult the CFPB’s Real Estate Professional’s Guide at
IF your client has decided on a short-sale property and is ready to make an offer, you should take the time to “prequalify” the listing agent, the borrower/seller, and the short-sale property before writing the offer. This can be accomplished by asking questions such as “Has the borrower’s/seller’s financial hardship been verified?”, “Are there any other offers on the property?”, and “How many liens are on the property?”