Short sale question: What protects a buyer from someone else scooping up the property out from under them while they have earnest money at stake?

Asked by Otto, Pleasanton, CA Thu May 23, 2013

The Short Sale Addendum says (Item #6),
"Unless otherwise agreed in writing, after Buyer's offer has been accepted by Seller, (i) Seller has the right to continue to market the Property for back up offers or additional offers; (ii) Seller has the right to accept back up offers (C.A.R. Form PAA, Paragraph 1), and present the Short Sale Lender(s) any accepted back up offers or additional offers that are received; and (iii) Seller shall notify Buyer when any accepted back up offers, or other subsequent offers are presented to Short Sale Lender(s)."

This sounds like a Seller who is in default can use the short sale process to delay foreclosure while they continue to fish for a better deal. Is this true?

Help the community by answering this question:

+ web reference
Web reference:

Answers

12
Neil Case, Agent, Martinez, CA
Thu May 23, 2013
Otto,

Here's the long and short. First, yes the seller and listing agent are allowed to continue to market the property. But ONLY FOR BACKUP OFFERS. They cannot enter into another contract for a first position buyer without risking a breach of contract and potential liability. It is highly unlikely any seller or agent would be that stupid or would want to do it. You essentially have the contract locked up during the period agreed upon in the contract. Be careful not to let that period come and go without getting an extension.

Here's where it gets tricky. You and your agent negotiate the deal with the seller and listing agent. The seller and listing agent in turn "negotiate" the deal with the sellers bank. The bank can accept, reject or counter offer. But they would NOT be counter offering you directly. The sellers bank would not negotiate or counter offer you directly. (But in effect they do indirectly.) The seller's bank would be countering the seller's offer to settle the debt. Now suppose that the listing side did indeed solicit more offers and one or more offers came in higher or better than yours in some way. Assuming they subsequently submitted those offers to the seller's bank, that bank would then see that there was a possibility to obtain a better net. That bank would then essentially counter the sellers offer (your offer) and effectively cause that seller to come back to you and see if you were willing to match the best offer or sweeten your offer at all. If you refused the sellers bank could reject the offer and ask the seller to submit the next best offer. Why would a seller and listing agent ever want to do this? 999 of 1000 of them probably never would because in almost all cases the seller has no vested interest in what the final net to the bank is. But one instance that I can think of when a seller does have an interest. That would occur if that seller was potentially on the hook for continuing liability on the debt or a potentially large tax consequence as the result of debt forgiveness. Both of these are possibilities if the house is a non owner occupied investment home.

That's the long of it. The short is simply this. It is highly unlikely any of these scenarios would ever occur. But the CA Association of Realtors develops their forms in an attempt to cover all possibilities and cover all bases. For the most part I would not lose any sleep over it. But it might be good to know if the house is owner occupied or not.

Good Luck
1 vote
Ron Thomas, Agent, Fresno, CA
Thu May 23, 2013
Because, if the Depoist check has been cashed, that means that there is a CONTRACT.
The Buyer's Agent is supposed to hold on to the check until there is a signed contract, then he has three days to give it to the Escrow Company.

If you don't have a signed contract, then they can still market the house, and you can't complain.
1 vote
Thanks for your answer Ron. Both the Buyer and the Seller have signed the purchase agreement and the Buyer's deposit check has been confirmed as received by the title company holding escrow. But given what the Short Sale Addendum says (i.e., "after Buyer's offer has been accepted by Seller"), it seems like the Buyer is tied down by the contract while the Seller can continue to take better offers. The Seller has no money in escrow, so what is to keep them from cancelling this contract in favor of a better deal?
Flag Thu May 23, 2013
Doug Buenz &…, Agent, Pleasanton, CA
Wed May 29, 2013
Possible but unlikely. I have not seen that occur locally, but it is theoretically possible. The main reason is there is momentum with the current offer, and to pull the plug on that offer to start over would not be attractive to the seller. Remember the seller is likely in default, and just wants it to be over. All offers must be presented to the seller and ultimately signed by the seller, who in turn submits it to the bank for approval. I can't imagine a likely scenario where the seller would be induced to start from scratch when they are not likely to going to get any proceeds out of the sale in any event. Most sellers in this situation just want it to be over.

Good luck in your search!

Doug Buenz
The 680 Group at Alain Pinel Realtors
(925) 463-2000
Web Reference:  http://www.680homes.com
0 votes
Steve Curtis, Agent, Walnut Creek, CA
Thu May 23, 2013
Otto ... It is possible but unlikely ... HOWEVER, MORE IMPORTANTLY, if the property is owner-occupied, AND a Notice of Default was filed BEFORE you wrote your offer, THEN YOUR OFFER MUST be written on a NOD Purchase Agreement. There may be very serious repercussions if this is not done. You and your agent should immediately verify whether or not this is the case and act accordingly.
0 votes
You may want to check on this as I understand that you use this contract if you are representing an investor who is looking to purchase a home that has a Notice of default.
Flag Fri May 24, 2013
Mack McCoy, Agent, Seattle, WA
Thu May 23, 2013
Yes, it's true. However:

1. The entire objective of a short sale is to avoid foreclosure.

2. There is no short sale without lender approval. This means that the Seller needs to present the best possible offer to the lender so they can avoid foreclosure. If a better offer comes in, the listing broker will almost certainly give you the opportunity to match it, but they can't take the risk of letting a lesser offer satisfy the lender.

3. Starting over sux. If a better offer comes in three months later, starting over may mean that the seller is at severe risk of foreclosure. That's why they want you committed to the deal.

So remember: The seller wants the short sale to close, and they'd prefer it if it closed with you, so long as you are able to remain the most likely candidate to close the sale.

All the best,
0 votes
Otto, Home Buyer, Pleasanton, CA
Thu May 23, 2013
@Neil Case and everyone else who answered so far, thank you very much for your detailed replies.

My question applies to the owner-occupied scenario. If I understand these responses correctly it seems that the dominant answer is, yes it is possible, but unlikely.
0 votes
Walter 'Skip'…, Agent, Brea, CA
Thu May 23, 2013
Keep in mind the sellers do not have much, if anything, to gain by fishing for a better offer. As long as the current buyer is qualified and the price is at or near market value the shorted lender will be satisfied. In addition, the agents involved will not want to start the process over with a new buyer. So hang in there.
Good luck,
0 votes
The Hagley G…, Agent, Pleasanton, CA
Thu May 23, 2013
The "seller has the right," but that does not mean necessarily mean they are going to continue to market the home. The way to protect yourself is to make sure that 1) your buyer's agent knows how to properly write the short sale offer and 2) that you are willing to open escrow immediately by placing your good faith deposit into escrow. You can also specifically request in your offer tha the seller will NOT continue to market the property during the short sale negotiation.

Cindi Hagley
The Hagley Group
Prudential
0 votes
Pacita Dimac…, Agent, Oakland, CA
Thu May 23, 2013
After accepting an offer, the seller may look at or even accept another, but those will be in BACK UP position. The buyer whose offer was accepted by the seller, and whose deposit was cashed to open escrow while waiting for short sale approval is still in contract and as such in primary position.

If the sellers have back up offers, it's because they want to be assured that should the first buyer back OUT of the agreement, the seller's short sale application is not jeopardized because he can submit that back up offer as a replacement offer to the short sale lender.

Today, short sale agents and their sellers are more inclined to look at offers more favorably if the buyer agrees to open escrow upon acceptance by the seller, and prior to receiving short sale approval. This shows seriousness on the buyer's part to wait. But it still doesn't guarantee the buyer will wait...hence, the seller will entertain back UP, not replacement offers.

Also remember....once escrow is opened, it will require mutual and written consent from both buyer and seller to release the deposit back to the buyer.

We have had so many occasions when buyers get tired of waiting, or find something else and then back out of the agreement, leaving the seller and his agent in the lurch.
0 votes
Steve Curtis, Agent, Walnut Creek, CA
Thu May 23, 2013
With the SSA you have to specifically agree to having that deposit submitted to escrow under the original terms of the contract rather than after the short sale approval letter has been received. You may want to check your signed addendum to see if that is the case.

Unless otherwise specified the seller always has the right to show the property for back-up offers but they are just that... back up offers. There is often a challenge especially in this market with rapid appreciation that the short sale lender can insist that any offers the seller receives be submitted to them for review.

While your seller may in fact be in default, not all properties that are short sales are in default. Again check with your agent. This clause is not generally seen as a benefit to the seller simply because they aren't getting anything out of the sale anyway. The short sale lender is however charged with getting as much as they can from the sale and might bump yours if a substantially better offer came in.

We have had instances in the last year that the offer that was ultimately accepted by the seller was sufficiently over list price that the property was no longer a short sale. If that was to happen in your case then the lender would in fact bump your sale in favor of the one that.

As an aside, if the seller was in default before you went into contract with them and they still live in the property then you may not be able to use the standard CAR purchase agreement. You should clarify that because it may have significant consequences to you, the seller, and the agents.

good luck
0 votes
John Souerbry, Agent, Fairfield, CA
Thu May 23, 2013
The seller's signature does not mean you have an executed sales agreement if that signature is contingent upon the lender's approval. The dirty secret of short sales is that the bank wants the owner to continue marketing the property as long as possible if the market is improving. It's usually the lender causing the delays, not the owner.
0 votes
Thanks John. So does this mean that the short sale process makes it possible for a Seller to delay foreclosure by initiating a short sale with a buyer, and then just use that arrangement to wait until the market improves, with no intention of really completing a short sale?
Flag Thu May 23, 2013
Barbara Ries, Agent, Lancaster, PA
Thu May 23, 2013
You can find your answer by researching "Act 91 notification" and it's repercussions on a seller. Your best bet is to contact a broker.
0 votes
Search Advice
Search
Ask our community a question
Home Buying in San Ramon Zip Codes

Email me when…

Learn more