I put an offer in on a short sale and now the bank put it to auction. Is that legal?

Asked by Danielle, Worcester, MA Wed Nov 17, 2010

So I put an offer in on a short sale property in August and now the bank decided to put it to auction. Is that even legal? I think the bank and the seller could not agree on some sort of settlement amount which prompted the bank to foreclose and auction it off.
Anyways at the auction the house sold 27K less than my offer. The way the auction ended my real estate agent thinks that it was the bank who bought the house back but we're 0 not sure. So now he thinks I should rescind my offer as he thinks the bank will have it relisted at a lower price.

What do you think I should do? Rescind my offer or keep it in there? Just looking for second opinions and any suggestions or advice on this situation.

Thanks everyone.

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22
Jeffrey Manc…, , Boston, MA
Wed Nov 17, 2010
I think that it bears mentioning the obvious - if a property is offered in short sale, say for $200K, and the buyer offers $190K which then takes weeks to get approved, and then it goes to foreclosure and is acquired by the bank for $175K, the buyer may feel shortchanged. Why wouldn't they take the offer only $10K under the short sale list price? However, it is quite likely ias it is in many cases that there is a second lien position making up the difference (i.e. first position at $175K, second position at $25K, total is $200K, so someone has to write off $10K plus costs). For while the short sale is not approved in a timely fashion, the fact is that the first can come in and foreclose for thier $175K thereby wiping out the second lien position. If the first then resells the asset for $180K, they are closer to breakeven (remember holding costs) because the second lien holder is out of luck, they are entitled to nothing once the first forecloses. Every day that passes the bank is losing money on a non performing asset. Time is money, as true as ever in the foreclosure business. The clock simply ran out. I hope this clarifiies how/why this is so commonplace. I encourage all buyers/realtors to keep the lines of communication open with the lender, and to work diligently to meet all timelines.
1 vote
Andrew Adams, , 01915
Wed Nov 17, 2010
Lee,

As a California Agent what experience do you have with foreclosures and Auctions in MA?

Who is making the assumptions?
1 vote
Don Tepper, Agent, Burke, VA
Wed Nov 17, 2010
Yes, it's legal. Absolutely.

So, what do you do now? First, listen to your Realtor.

However, though you may want to generate some paperwork, there really isn't much of a reason to rescind your offer. You offered to buy the property from the owner. Let's call him John Smith. But John Smith no longer owns the property. Whoever bought it at auction--either the bank (most likely) or someone else--is the new owner. John Smith is completely out of the picture.

First step: Determine who owns the property now. It's either the bank (most likely) or someone else.

Second step: If the bank owns it, then at some point (probably 2-4 months . . . could be longer or shorter) the bank will relist it. At that point, make an offer on it.

If someone else bought it, it could be for their personal use or to resell. Still, you can make an offer on it. And if it's an investor, in particular, what you'd be offering is a quick $27,000 (more or less) profit. That's pretty attractive.

So, again: Find out who owns the property now. Then proceed as suggested above.

Hope that helps.
1 vote
Scott A. Nel…, , 02155
Wed Nov 17, 2010
The Boston Globe wrote a great article about this type of situation over the weekend. Alot of the times the lenders are taking the properties back at the auctions due to low turn out or low offers. It's all a numbers game in the short sale/foreclosure market. You should ask if there are representatives of the lender at the auction as part of any bidding process. Your offer was not accepted by the lender prior to the auction & even in most short sale workout documents the lender still reserves the right up until the minute of the closing to auction the property off or sell to a higher offer if it comes in. Basically the traditional rules of home purchasing go out the window when it comes to the lenders/banks and the ways they process the properties. They write contracts that don't allow review/exception by the buyer, it's basically take it on their terms or nothing.

Your agent/broker can check with the auctioneer to see who actually took possession of the property, it might take some legwork but it can be done. They're public events and have to disclose certain facts. Was your offer all cash, closing in less than 30 days, no financing contingencies & show preparedness to address ALL issues that might come up? Additional leins, 2nd mortgages, etc.? Did the property have 1 or 2 mortgages on it? Is there mortgage insurance on the property? These are things you also need to know.

Hope this helps, but only an attorney can give you legal advice on legal issues.
Web Reference:  http://www.MedfordHouse.com
1 vote
Jeanne Feeni…, Agent, Basking Ridge, NJ
Wed Nov 17, 2010
Hi Danielle, how is that for frustrating - goodness, so sorry you've had this experience. When I took my short sale and foreclosure certification course there was a discussion about this very issue. In this case, the short sale offer had been accepted by the bank and they were chugging along towards a closing date only to learn at the 11th hour that the home had been sold at auction...unfortunately in this case it was not the bank that took it back.

I've done a few short sales, so know a little, but am no great expert - what I have been taught is that the bank will always have a representative at the auction so that if the price is not acceptable, essentially the bank buys it. At some point in the future the property will be listed for sale by the bank. In your case, you may well have another opportunity to go after the property and may just do better - so it may be a blessing in the end. And a bank owned transaction is often more straightforward than a short sale.

My sense of why this happens is that the short sale and the default processes seem to be handled by different departments, both moving along possibly without communicating. In the case I mention from my training, this was the take away from the instructor who had much experience and yet found himself in this same bind.

I would imagine that your first offer would be void if the property has been foreclosed upon and sold to the bank. I'd go after it anew and try to do better.

Keep us posted, will be interested to learn how this goes for you.

Best
Jeanne Feenick
Unwavering Commitment to Service
Web Reference:  http://www.feenick.com
1 vote
Lynn Stringer, Agent, Las Vegas, NV
Thu Nov 18, 2010
Let me start by saying I am not an attorney & these are merely my thoughts on this situation based on doing many short sales.When the bank sold the property at auction your contract with the seller was no longer valid. The original purchase agreement would of had a closing date that had more than likley expired, even if it had not the bank foreclosing removes the offer & acceptance from the seller. The fact that the seller had accepted the offer in no way obligiates the bank to accept the offer, they control what the property will sell for & what they will require from the seller to authorize the sale. The banks have these loan in numerous places with investors ranging from private equity groups, states, Freddy Mac & Fanny Mae, to name but a few & they never inform the borrorow or the listing agents of the reasons for their decisions other than to say the investor is declining the offer. At some point in time the bank will relist the property & if you still remain interested you can put in another offer on it. I'm sorry to say this story is a very common occurence in todays real estate market.
0 votes
Kathryn Acci…, Agent, Sturbridge, MA
Thu Nov 18, 2010
What happens quite frequently is that the short sale department at a bank and the foreclosure department at a bank have limited communication. Imagine two trains racing down separate tracks. Whichever track gets to the station first wins. Sounds like in this case that the foreclosure train won.

Best to ask your attorney (please tell me you do have an attorney helping you) if there is any recourse. Most likely not. You'll either have to move on, or hope to purchase the property when/if it becomes listed as a foreclosure. This is the frustrating part of purchasing a distressed property. Good luck, Danielle.
0 votes
Andrew Adams, , 01915
Wed Nov 17, 2010
In MA a home can be listed for sale however that does not prevent the lien holder from proceeding with the foreclosure process. In MA the Auction is the end of the line. That is when the property will be transferred back to the bank or the winning bidder at the auction.
0 votes
Jeffrey Manc…, , Boston, MA
Wed Nov 17, 2010
I think the assumption would be that here in MA when you go to auction following an open market exposure for short sale, that the property is a foreclosure sale, as advertised. Very unlikely that someone entertaining a short sale would then auction a property, as in the case of a probate sale. MA statute would dictate automatic termination of the offer if not accepted within the prescribed timelines either automatic or stated in the offer.
0 votes
Joe Abbascia, Agent, Worcester, MA
Wed Nov 17, 2010
Danielle-

You've received some great info in the last few hours which all leads to the same conclusion, get your earnest money back...Start looking for another house...Should this come back on th market within the next month or so, then make another offer on it...The shortsale process is long and very frustrating for both the seller and buyer...As Lee Stegall
posted below, the bank cannot sell what it does not have in its possession through due process of notice of defult and then forclosure...So, these are a few moving parts of this that don't make sense as to the house going from short sale to auction while missing the other two steps...

Best of luck with your house hunting, should you need any help within worcester area.
http://www.TopDollarListing.com
Web Reference:  http://www.buyhousesmass.com
0 votes
Myra Gouger, Agent, Las Vegas, NV
Wed Nov 17, 2010
Yes the bank can do whatever it wants and usually does. Your offer is null and void as the seller no longer owns the proeprty. So you have no offer. Get your earnest money back. Sometimes these properties do not come back on the market for 6 months to a year aftewards. Find another property.
0 votes
Lee Stegall, , 92109
Wed Nov 17, 2010
Confusing question because you said the banks "decided to put it to auction" when it was in a short sale position. The bank cannot sell what they doin't own yet. Yes, they can sell their loan, but not the fee title to the home, as they have not foreclosed.
There was a lot of assumptions in the answers given. Rescind your offer?....it's not valid anymore if there is a different owner to be placed on the offer.
Web Reference:  http://www.sopactitle.com
0 votes
Jeffrey Manc…, , Boston, MA
Wed Nov 17, 2010
Your question is a common one, and it is unfortunate that it is so confusing. In the past REO (the management of bank owned assets) was an exception, not the rule, so consumers do find that the process can be a bit confusing and often frustrating. Yes, it is legal for the bank to auction their asset if they did not have a contract in place. There are often more than one interest involved (sometimes a second lien holder or mortgage insurer) who is also involved with the approval. Once the property sells at auction, it will be assigned to a local listing agent for preparation to resell. The property should be posted by the new agent in a visible location, and you can contact them and ask to be notified when the property comes up to market. Keep in mind that many banks will repair the home and do require open market exposure. A great tool for buyers is the Fannie Mae website: http://www.homepath.com. You can sign up for auto notifications of new listings in your area, which will post up the day the listing is issued. Good luck!
0 votes
Eugenia (Jea…, Agent, Mount Laurel, NJ
Wed Nov 17, 2010
First let's qualify who owns the home. While it is a short sale it is owned by the individual Seller. Once the foreclosure occurs it is owned by the Bank or Mortgage company. In my experience I have seen the Banks reject offers and then sell for less. Some of the reasons may be that the investor who holds the mortgage or mortgages as the case may be are not agreeing to the price. There may be PMI which then pays the Bank of Mortgage company upon default, or there are no longer multiple lien holders to satisfy upon foreclosure. In any case this has and will continue to occur. I'm not sure what you mean by auction, it could be the "sheriff's sale" to take back title. In which case the largest lienholder is the bidder, to protect their asset.
0 votes
Rozalyn Fran…, Agent, Columbia, SC
Wed Nov 17, 2010
Sorry that happen, the short sale paper work must not have made to the bank in time for them to stop the foreclosure and the property was auction at the same time a short sale was trying to take place. Great case of one hand not talking to the other. Once the bank puts it on the market as a foreclosure make an offer you will probably get a better deal and the process is a lot smoother. Good Luck
0 votes
Amy Mullen, Agent, Shrewsbury, MA
Wed Nov 17, 2010
Danielle,

That is frustrating!

Was the offer accepted?

Amy
0 votes
Andrew Adams, , 01915
Wed Nov 17, 2010
You made an offer to the former owner...They no longer own the property therefore they cannot sell it to you. Your offer is dead. The property will likely get listed with a realtor. Watch for it and make and offer when it comes on the market...not much else you can do.
0 votes
Lisa Johnson…, Agent, Newburyport, MA
Wed Nov 17, 2010
Hi Danielle, as the legal owner of the property once it is foreclosed on they can sell it how ever they choose. Any offer written on a short sale will always be contingent on banks approval. Often homes do sell for less at auction.
Web Reference:  http://www.route495.com
0 votes
Heath Coker, Agent, Falmouth, MA
Wed Nov 17, 2010
I am not an attorney so this is not legal advice: If there was no written agreement between you and the seller(s), there was noting binding the seller(s) to sell. Banks make decisions that appear weird these days, however, we often don't have the complete picture as to why theydo what they do. If the seller and the bank would not agree about the terms of selling this property, in my opinion, the bank has the right to excercise it's foreclosure option. I think most lawyers would agree with that.
As for what to do next: Contact the bank's REO department and tell them that you want to be contacted when the property is available for sale. Also - I would make sure to get an Owner's Title Insurance Policy when i buy a foreclosure in MA. That can help protect me if the foreclosure had mistakes.
In my opiniion, because your offer was to the previous owner, and because the dates have probably passed, your offer is probably not valid currently. You may find that choosing another house is a better avenue.
0 votes
John Kramar, Agent, Corona, CA
Wed Nov 17, 2010
I don't know about how foreclosures work in MA, but in California - YES. I work with an investor that purchases at Trustee Auction. I can tell you of numberous times where the home was sold at Auction while it was in escrow for a short sale. For the foreclosing lender this stirctly a financial decision - how much do they net at Auction vs. Short Sale. This includes the probability that many times in a short sale the initial buyer flakes out which delays the close of escrow unitl a new buyer can step in. I have seen lenders sell at Aucton during negotiations for loan modifications. However, if you have a good offer that is at current market value for the property, they will postpone the Auction to allow the escrow to close. Remember, its all in the numbers.
0 votes
Team Bowser, , Denver, CO
Wed Nov 17, 2010
Yes it is legal. An offer is just an offer. Now that the bank has foreclosed, they own the property and can dispose of it in any manner that they wish. As far as your offer goes did you have an expiration date? Most offers do so it probably expired some time ago.
0 votes
Mirna Morales, Agent, Los Angeles, CA
Wed Nov 17, 2010
This is happening more and more, when you submit an offer on a short sale there is no guarantee that the bank will accept the short sale request from the current home owner, your best bet is to wait for the property to go back on the market and submit a new offer to the new listing agent.
0 votes
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