What Are the Most Important Clauses in a Short Sale Contract?

In recent months lenders have started focusing on doing more short sales than REOs. Their reasoning sounds logical enough; they want to get out of the toxic assets at a better price than going to the foreclosure sales.

We have a service that tracks the discount at which each short sale and foreclosure ultimately sells. The discounts are not always larger for REOs; sometimes the short sales are greater. The final figures fluctuate wildly and vary by bank and motivation of each lender.

The market has been stabilizing and depending on which statistics you believe, the real estate market is either falling, moving into a bubble or poised for the greatest run ever! Frankly, it doesn’t matter as long as you are wholesaling short sales. If you are holding long term, it doesn’t matter either. It matters the most when you are a rehabber and you have to sell when you complete rehabbing a property and you are unable to sell it.

Since we wholesale 99% of the time, the clauses in the short sale contracts are critical to our not losing money if we are unable to find a buyer before our inspection period is over. With REOs the lenders have their own addendums that stipulate the inspection period for each deal – usually 5, 7 or 10 days. So if you include any inspection period in your REO contract, it doesn’t matter because the lender’s addendum overrides it.

However, your short sale contract is not between you and the lender. It is between you and the homeowner. The lender is not on title until he forecloses, purchases the tax deed for the property or the homeowner gives the lender a deed in lieu of foreclosure. Until the lender is on title, he can only refuse to allow a principal reduction of the outstanding loan and stop the short sale.

Let’s assume your seller/homeowner is agreeable to a short sale and signs your contract. While you have a signed contract on the property, you can’t plan on selling it wholesale because you cannot be sure the lender will approve your short sale price.

Some wholesalers advertise the property for sale immediately. Technically they have an equitable interest in the property because they have a signed contract. If you sign a contract with an end- buyer, you have the legal obligation to sell him the property. But, if you don’t get it because the lender refuses to give you the price you need, you have “breached” your contract. The way to overcome this problem is to put a clause in your contract that simply says, “Contract is null and void if short sale is not approved at a price acceptable to investor.”

It is more advisable to wait until you get a written approval from the lender to start your marketing. However, if you wait then you need your inspection period to start after you get lender approval. The simplest way to handle this is to put the following clause in your purchase and sale contract with the homeowner/seller, “Inspection period to start after buyer receives written approval from seller’s lender.” The actual inspection period (we use 15 days) is located in the actual contract. I consider this the most important clause in the short sale contract.

This means that you have 15 days from lender’s approval to market and contract with an end-buyer. If you are unable to find a buyer, then you can cancel the contract and not risk losing your earnest money deposit (“EMD”). This is the way to wholesale properties without taking a market risk.

Real estate agents will try to make your inspection period start when you sign the contract (contract’s effective date) with the homeowner/seller. The way to explain this issue is that the short sale will take weeks or months and the condition of the property when the approval comes could be totally different than when you signed. If you sign the contract with your inspection starting immediately, you run the risk of losing your deposit if you can’t wholesale it before the closing.

The way to offset this potential loss of an EMD is to make the deposit as small as possible. We typically give a $250 to $1,000 EMD and are seldom asked for more. There will always be the rogue agent who wants a ridiculous amount – even as much as 10% of the purchase price. If you find one of these agents asking for a large EMD, explain that you do too many offers to have 10% on each one. If he is not motivated to help you, move on to the next deal.

In summary, real estate is a renewable resource and there will always be other opportunities. Do not allow yourself to be intimidated by agents or other investors who want you to do what protects them. The final decision is whether the deal is so good that you have to comply with unreasonable requirements – just make sure your EMD is safe and you are prepared to close or lose your EMD.

To your limitless success!

How Soon Can You Be Evicted After The Foreclosure Sheriff Sale?

Homeowners in foreclosure are rightfully worried about not being able to save their homes and how quickly they will be evicted after the sheriff sale. Although the lender and various “experts” will threaten them with the sheriff showing up the next day to violently kick them out of the house, this is just not the case in foreclosure situation. The county sheriff and the eviction crew will not show up the next day after the sheriff sale, and homeowners should ignore the fear-mongering that threatens this possibility.

Owners should be aware of the implications of the foreclosure auction, though. The sheriff sale will transfer ownership of the property, and the foreclosure victims will not own the house after this point. But this does not mean that the eviction process will happen automatically right after the house is auctioned, as there are more steps that will need to be taken by the new owner.

The high bidder at the auction will most likely have to have the sheriff sale confirmed (this is not a specifically detailed step in every state). This can take from a few days to a couple of weeks after the auction, depending on how quickly the courts and new owner act. But this is generally just a simple step in the foreclosure process after the sale that involves the sheriff and judge confirming the auction was for a legal amount and that the deed has now been awarded to the new owner.

The new owner will most likely be the original foreclosing bank that the homeowners had been dealing with in the first place to stop foreclosure. About 95% of foreclosures end up being purchased by the lender, rather than a third party.

In order to evict former homeowners, the lender will have to request the court grant it possession of the property and order the county sheriff to evict any remaining people or personal items and change the locks. This is a legal process, though. Homeowners should not fear that a bunch of government thugs with badges and guns will show up at their house the day after the sheriff sale to kick them out. Of course, this is exactly what happens, but at a later date if the foreclosure victims do not move out in time.

But the entire eviction process can take up to a month after the sale; throwing people out of their homes is not a simple process before or after a county auction. The court will have no problem ordering the eviction (unless the former owners go and try to contest the sale, eviction order, etc.), but the sheriff’s department will have to give notice of the impending removal. This can be as little as posting a piece of paper on the property with three days notice to move. Thus, after the sheriff sale, former homeowners better be prepared to leave on their own or work out another solution.

People facing foreclosure should not be overly concerned about being kicked out of a house with little notice. The sheriff will not just show up the next day or a few hours after the sheriff sale, as there is still a legal process that must be followed for a bank to take back possession of a foreclosed property. Homeowners probably have at least two weeks to a month after the sheriff sale date to arrange for a new place to move into.

In any event, homeowners are always encouraged to call the sheriff’s department to ask them when then eviction will take place. Even more promising, they can also usually ask for a few extra days or a week in order to move everything out and give up the house peacefully. There is still a chance to negotiate with the local government for more time (courts and sheriff) so that the former owners are not taken by surprise by the eviction.

Thus, the banks and government officials will not evict foreclosure victims right away after the auction, but there is no time to spare, either. Having a couple of weeks to move out can give people a chance to find a place and move in at their own pace, but even a month-long eviction process will go by very quickly. If in doubt, homeowners should contact their local government officials and ask about the eviction — the courts or sheriff will be able to inform them of the date and try to work out the most reasonable solution. They want as little trouble after foreclosure as the former homeowners do.

Buy A Short Sale Home At Heavily Discounted Prices

You may have been reading or heard about all the money that you can save today with the purchase of a short sale home. Many people who do not even have any experience with buying homes or real estate investments are now buying these homes with great success. This is, however, a process that must be fully understood before being undertaken.

When you are buying this real estate, you are essentially purchasing a home at a heavily discounted price. The words “Short Sale” basically mean that the seller’s lender is willing to accept a payoff amount less than balance of the current mortgage. You can make offers on homes, which the seller and their lender will then consider. Both the seller and the lender must be in agreement for the short sale to be accepted.

Lenders will most often allow a home to be listed for short sale if the current buyer has fallen behind on mortgage payments or has completely stopped making payments. However, in some cases a lender might allow the current buyer to list the home as a short sale even if they are completely current on their mortgage payments. Situations like this may happen when the buyer has become “upside down”(owing more than the home is even worth) in the home due to the real estate market value dropping.

If you are considering buying a short sale house, it is vital that you do some investigation once you have found a potential home. Finding out whether a foreclosure notice has been issued and learning the amount that is still owed on the home, information that an agent can obtain for you, will help you in deciding if this is a good chance to make an offer. Lenders that offer a home that they are foreclosing on may be more motivated than those who have homes that the buyers are still making payments on. Knowing the amount owed is helpful since it will give you an idea of the finances behind the deal: How much the lender might be willing to sell for. Getting all of the pertinent information can save you a bundle when you are purchasing these properties.

Closing Short Sale Deals With the A-B-C Transaction

A little skepticism about Short Sales is a healthy thing. I understand that a lot of people out there are unfamiliar with how they work. That’s why it’s so important for real estate investors to get the right training and be able to answer questions like the ones I’ve been blogging about for the past week.

Just last week I received a letter from a lawyer who advised her client (the homeowner) against proceeding with a Short Sale with a real estate investor. I’ve been posting my point-by-point responses to the attorney.

Here’s another excerpt from the attorney’s letter, followed by my response:

The only way such a transaction could possibly be insurable is if the following requirements have been met:

1. There are no violations of any restrictions listed in the short sale payoff letter or closing instructions.

2. There have been no misrepresentations as to the value or ownership of the property to the existing lender, the new lender, or the purchaser.

3. All disbursements must be made exactly as stated on the HUD-1 settlement statement, and only to parties involved in this specific transaction.

4. Each half of the simultaneous closing must be kept separate and stand on its own. The sale from A to B must be fully funded and disburse with money coming from and going to all appropriate parties. The sale from B to C must also stand on its own. The money from C’s lender must not be used to fund any portion of the A to B transaction.

Yes, Ms. Attorney, you’re right on. Clearly you’ve read the advisory letter from your title underwriter (from where you appropriately copied these items). YES – this is how back-to-back Short Sale transactions should be structured and if the investor is appropriately trained (the way I teach it) then this is exactly how the investor will want to do it.

Like I said, a little skepticism is a healthy thing. We’re in absolutely unprecedented, historic times for the real estate market and especially for Short Sales. And yes, there are a lot of scams and bad-faith opportunists out there trying to rip people off out there.

However, when done the right way, Short Sales are win-win opportunities that only work if the deal works for all parties. If your seller is not on your side cheering for you, then I suggest you go find another house!

How do you set things up so your Seller is “cheering for you”? That’s one of the major real estate investor skills I teach!