Real Estate

What are the most important clauses in a short sale contract?

In recent months, lenders have begun to focus on shorting more than REOs. His reasoning sounds logical enough; they want to get out of toxic assets at a better price than going to auctions.

We have a service that tracks the discount at which each short sale and foreclosure is ultimately sold. Discounts are not always higher for REOs; sometimes short sales are higher. Final figures fluctuate wildly and vary by bank and lender’s motivation.

The market has been stabilizing, and depending on the statistics you believe, the real estate market is falling, entering a bubble, or poised for the biggest losing streak in history! Frankly, it doesn’t matter, as long as you’re wholesale short selling. If you’re holding long-term, it doesn’t matter either. It is more important when you are a rehabber and you have to sell when you complete the rehab of a property and you are unable to sell it.

Since we sell wholesale 99% of the time, the provisions of the short sale contracts are essential so that we do not lose money if we cannot find a buyer before the end of our inspection period. With REO, lenders have their own riders that stipulate the inspection period for each agreement, 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 voids it.

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

Suppose your seller/landlord agrees to a short sale and signs your contract. Even though you have a signed contract on the property, you can’t plan to sell it wholesale because you can’t be sure the lender will approve your short sale price.

Some wholesalers advertise the property for sale immediately. They technically have an equitable interest in the property because they have a signed lease. If you sign a contract with an ultimate buyer, you have a legal obligation to sell the property to them. But, if he doesn’t get it because the lender refuses to give him the price he needs, he has “breached” his contract. The way to overcome this problem is to include a clause in your contract that simply says, “The contract is null and void if the short sale is not approved at a price acceptable to the investor.”

It is best to wait until you get written approval from the lender to start marketing. However, if you wait, you need your inspection period to start after you get the lender’s approval. The easiest way to handle this is to include the following clause in your purchase and sale contract with the owner/seller: “The inspection period will begin after the buyer receives written approval from the seller’s lender.” The actual inspection period (we use 15 days) is in the actual contract. I consider this to be the most important clause in the short sale contract.

This means you have 15 days from the lender’s approval to market and contract with an ultimate buyer. If you can’t find a buyer, you can cancel the contract and not risk losing your security deposit (“EMD”). This is the way to sell wholesale property without taking market risk.

Realtors will try to get your inspection period to start when you sign the contract (effective date of contract) with the owner/seller. The way to explain this problem 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 right away, you risk losing your deposit if you can’t wholesale it before closing.

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

In short, real estate is a renewable resource and there will always be other opportunities. Don’t be intimidated by brokers or other investors who want you to do what protects them. The final decision is whether the deal is so good that it must meet unreasonable requirements; just make sure your EMD is secure and you’re prepared to close or lose your EMD.

For your unlimited success!

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