Q:
I’m buying a short sale. We have a signed purchase agreement from both
parties. Everything was fine, but now (a month later) my mortgage
(broker) said the bank did an appraisal on the property and now wants
to increase the price by $5,000 and make other changes to the contract.
She says they have that right — is this true?
The
purchase agreement has been signed and I have talked to the bank. My
lawyer said to sue them, because it should be pending unless we back
out of the deal or something else happened that was our fault. –Patty
A:
Before around 2007, most Americans had never heard of a short sale,
and certainly didn’t know anyone who’d either bought or sold via this
transaction format if they had heard of it. But the short sale came back
into vogue when subprime mortgages began to reset and home values
began to drop, leaving about a quarter of American homeowners “upside
down,” or owing more on their homes than the homes are worth.
This
makes sense, given the basic definition of a short sale, which is the
sale of a home for a net price less than the mortgage lenders and lien
holders are actually owed.
As many times as I feel like I’ve
parroted the basic logistical and transactional contours of a short
sale in the name of basic real estate education, clearly the message
has not spread as widely as it needs to. This is evident not just in
your question, but also in the fact that the question, “What is a short
sale?” is one of the most frequently searched real estate questions on
the Web these days, per Experian Hitwise, a search data analytics
company.
The “short” answer (sorry about the pun — couldn’t
help myself) to your question is a resounding yes — the seller’s bank
absolutely does have the right to change the terms of your transaction,
even though you have a contract signed by both buyer and seller, and
even though you’re a month into the transaction.
The longer
answer will be another short-sale primer. As I said before, a short
sale is by definition a transaction in which the sellers owe more on
the home than the net proceeds of the sale will be. Because they are
not recouping enough from the sale to pay off the mortgage lenders and
lien holders (lien holders include other entities that may have an
interest in the house, like the government, if the seller owed back
property taxes, for example), all lenders and lien holders with an
interest in the house must give their permission for the transaction to
close.
As a result, the purchase agreement negotiated between
the buyer and the seller in a short-sale transaction is just the
beginning of the transaction. Almost always, these days, the purchase
agreement expressly incorporates a short-sale supplement or other
express terms that state that the transaction terms are subject to the
bank’s approval. Look through your documents and see if you see any
terms to this effect.
Once the buyer and seller are in contract,
that agreement then goes to the seller’s mortgage lenders and other
lien holders for their approval, along with a detailed package
containing the seller’s financial information and an explanation of the
hardship underlying their need to do the short sale.
This is
the phase about short sales that makes them take so long — the banks
have to process them, negotiate and ensure that they are recouping as
much money as possible before you can buy the place. This phase can
take anywhere from a few weeks to the better part of a year, depending
on which bank(s) are involved.
Most often, under the terms of
the short-sale addendum, everything else about your transaction,
including your inspections, your contingency period and even your loan
underwriting process, is on hold unless and until the bank issues an
approval letter stating the terms on which it approves of the short
sale of the home.
If these terms are different from the contract
terms, you, the buyer, must then decide whether you’d like to take the
home on the terms approved by the seller’s bank, or whether you’d rather
walk away from the deal.
And, quite often, the bank’s terms are
different from the transaction terms that had been negotiated between
the buyer and seller. This is well within the bank’s right — they must
agree and participate in the transaction, recovering less cash than
they are owed, for the transaction to close.
That means they have
every right — which they often exercise — to simply refuse to allow
the short sale, in which case both buyer and seller are out of luck.
Many a disapproved short sale has ended up in foreclosure, in fact. I
know a large number of wannabe short-sale buyers who would love to be in your place.
Your
contract renders the home pending and the sellers unable to change the
terms on you, or to sell the place to another buyer so long as you are
in contract (although, note that increasingly banks are exercising
their power to accept a higher offer from a buyer other than the one
with whom the seller signed the contract. But that’s not your problem
right now, so let’s not go there.)
In terms of what you can do
from here — your lawyer may be unfamiliar with the short-sale process.
Suing the bank should be the furthest thing from your mind. Instead,
simply decide whether you’d still want the house at the cost of $5,000
more, or not. You’re welcome to take the bank’s revised terms, reject
them outright and back out of the deal, or even to counteroffer them
via the seller.
I haven’t personally seen many banks accept
counters, but you could certainly try. Just be aware that a counter
could easily add another month or more to your transaction.
One
thing keeps bugging me about your scenario: Why is your mortgage broker
giving you all this information? Why did you not know, going into this
deal, what you should expect from a short sale? Your confusion and
misinformation are the hallmarks of a buyer who is not represented by a
broker or agent.
A buyer’s broker is quite skilled at managing
buyers’ understanding and expectations of short sales; if you do have
one, you should definitely consult with him or her before making a
decision about how to proceed. If not, please consider consulting a
local real estate attorney who is familiar with short-sale transactions
before you make your next decision.
Copyright 2010 Tara-Nicholle Nelson, reprinted via Inman News
