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Tom Morris, Home Buyer in Virginia Beach, VA

Looking to buy a short sale vacation rental house.

Asked by Tom Morris, Virginia Beach, VA Thu May 5, 2011

The house has weekly rentals reserved for the summer months and has approx $12,000 that has already been sent to the current owner. The actual rentals do not start until June. If we close late may on this short sale what happens to the money already sent to the owner.

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I have seen this before since we deal primarily with vacation rental homes and it is a market that is unlike other areas with huge expensive homes that are rented out a week at a time for thousands of dollars a week. From what you say you are in a sticky position. Owners are sent 1/2 of the weekly rental money by the rental management company they employ to rent their homes, by law. The 2nd half comes after the rental has actually occurred and it all goes to whomever is the owner at the time of the rental. Since the 1st half has already been sent to the owner, and the closing will be by June, you as the new owner will be due all money for the rentals from June to the end of the year. The problem is how to get the $12k back from the seller who has no proceeds from the closing to take it from or from the bank who does not have the money and is loosing money on the sale anyway and will not want to loose more. The rental company does not have it, so they can't send it. They will have the 2nd half when the renter pays that just before the actual rental occurs and you will get that part without trouble. Getting the $12k back will be the problem and you have to hope the seller gives it back or you will have to sue for it. It will be due to you so you will have a right to sue and you should easily win, but at what cost. I have done these where the seller is asked to put the returned money into an escrow account and held by the sellers attorney and this is the only way to be 100% sure it will be there at closing for you. This is a pitfall in buying vacation rental home short sales this time of year. Contact your attorney and have them talk to the sellers attorney to request this fro the seller.
0 votes Thank Flag Link Thu May 5, 2011

I also work primarily with vacation rental home sales on Hatteras Island and am familiar with this process. The others responses have addressed worst case scenarios but most of the time, prorated rentals are easy and unaffected by the short sale status. I instruct my sellers not to spend those rental deposits before the rental occurs (even the 50% they collect before the lease ends), especially when they are aggressively seeking a buyer or have a sale pending because they are going to have to pay those rents forward to the buyer. Rental deposits, payments and prorations are usually handled through the account with the property management company separately from the property settlement. I have not had an instance where the seller wasn't prepared to credit the buyer for the rentals during their ownership. Your closing attorney should be able to confirm that rental prorations are being handled correctly.

I'll keep my fingers crossed for you and expect the best.

Carla Reynolds
RE/MAX Ocean Realty
Hatteras Island Specialist
Web Reference: http://www.CarlasCoast.com
0 votes Thank Flag Link Fri May 6, 2011
Thanks Bill for your lack of understanding. The shedualed closing date is May 31 and it is all approved and on track. I have figured out the short sale process, I just am wondering how the return of funds affects the closing since the seller has no proceeds and the bank is loosing money. The seller already has the money and is suppose to return it, but it's a short sale so what guarantee is there, or how does that work?
0 votes Thank Flag Link Thu May 5, 2011
Bill Eckler is correct that you are not aware of the short sale process. With short sales taking anywhere from 3-4 months & some up to a year, by the time your transaction closes, you will probably be beyond the high rental season. So, don't depend on any rental income in 2011. Regarding your question about the $12,000 that the seller has from pre-paid rentals, my guess is that those dollars will go to the lender as part of the short sale process. In a normal transaction, the $12,000 should be handled differently & the disposition of those funds should be a part of the Purchase Agreement. In the future, you should have a Buyer’s Agent represent you (they represent your interests at no cost as the seller pays the commission) or retain an attorney who handles residential real estate matters to prepare the Purchase Agreement for you.
0 votes Thank Flag Link Thu May 5, 2011

Expecting to close on a short sale in less than 30 days demonstrates a lack of understanding of the short sale process. Unless your short sale transaction is a "bank approved" sale price, you can almost certainly expect the transaction to require 3-4 months.

In that case, you will likely not have to worry about this year's income from rentals.

Good luck,

0 votes Thank Flag Link Thu May 5, 2011
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