Q: I signed a contract to buy a short sale in January 2010. The owners filed for bankruptcy and I was told that the agent was a short sale specialist and they had a bankruptcy lawyer.
The sellers’ bankruptcy went to court and was made official a few months ago. Last month, the contract was approved (by the bank), but I was just now told of a second lien for over $100,000 with (another company)! Now, I’m told we’re waiting to see if the other company will approve the short sale.
A month has lapsed, with no word from anyone. I was told that the bank offered the (second lender) $3,000 to pay off the second mortgage, which seems to be the norm. I have basically no input on this deal and I am pretty much left in the dark. So here are my questions:
1. It has been one month since the bank approved the loan — how long will it wait until it forecloses on the home?
2. I have been told this deal has to happen because of the bankruptcy, but it just takes time. Is this true?
3. Is it possible to talk with the second lien holder and offer more money if the bank approves? If so, how can I communicate with that company?
4.The contract has expired with no addendum to prolong it. Should I extend it? I was told this was a good thing because I can look at other homes in the meantime, but can I lose this deal because the contract is invalid?
Am I being taken for a ride?
A: Lots of questions, but all very insightful ones — the mark of an informed and proactive consumer. Kudos on being so inquisitive and trying to make educated and smart decisions. Let’s dive right in.
1. Most often, short-sale approval letters from the major banks are good for 90 days from their issuance. However, many times, this can be extended if necessary to get the deal done, by requesting an extension from the short sale negotiator.
The foreclosure time frame is not related to the approval letter time frame at all; rather, foreclosure time frames run relative to when the seller stopped making the mortgage payments and when the lender issued the notices of default and foreclosure sale, as dictated in your state.
If the property was part of the bankruptcy, though, the lender may not be able to even initiate foreclosure proceedings without the permission of the bankruptcy court.
Be aware that the fact that you have a valid and/or approved contract with the primary lender in no way stops them from foreclosing on the home, legally speaking. The bank may simply refrain from doing so in an effort to let the short sale be completed, or it may have agreed or been ordered to refrain from doing so.
But nothing about your contract with the seller legally binds the bank from foreclosing on the home under the laws of your state.
2. It is possible that one or both lenders agreed to or were ordered to liquidate the property via a short sale during the sellers’ bankruptcy proceedings.
3. It is also quite possible for you, the buyer, to add a contribution to the $3,000 payoff that the first lender has allocated to the second lender. However, it can be tricky. What frequently happens is the second lender refuses to take such a paltry payoff.
If you simply counter by instructing your agent to add a few thousand dollars to your offer and asking the listing agent to up the payoff offered to the second lender by the amount you’re willing to contribute, you run the very high risk that when the first lender gets wind of it, that negotiator will want to grab that extra cash you tacked onto the offer price for the first lender!
This is why buyer contributions to second or other junior liens are very tricky. Ideally, they are included in the original offer before it is sent to the first lender for approval.
Yet and still, you may want to ask your agent to write up an addendum not offering to increase the purchase price — simply offering to pay a cash contribution in the amount of X dollars to the second lender as part of your closing costs.
The listing agent should get the green light on this plan from the bankruptcy trustee managing the matter and the first lender, in addition to the second lender.
4. Under most states’ short-sale addendum forms, your contingency periods do not begin to run and you may even expressly have reserved the right to look for other properties until all lien holders on the property have approved the short sale.
Signing an extension does not do anything to prohibit you from continuing to look at additional properties, which most short sale buyers do, in any event, until all of the sellers’ lenders/lien holders have green-lit the deal to proceed to closing.
In my opinion, it would be wise to get the contract extension. First off, the first or second lender will eventually require it before you can close the transaction. But more importantly, what do you think will happen if another buyer comes around and wants to pay more (believe me — it happens)?
Right this moment, there is nothing legally prohibiting the sellers from just taking their offer — the sellers are not in contract with you! Short-sale buyers have so few rights as it is, it makes zero sense to me to let the only legal connection you have to this property — your contract — lapse.
If I were your real estate broker, I would advise you to obtain an extension of the contract without further ado.
5. You didn’t ask for this, but it is very likely a legitimate reality for the short-sale approval from the second lien holder to take a month or longer — sometimes much longer. Realistic agents may not even request the second lien holder’s approval until receiving the approval of the first lender, and that bank’s allowance toward the second lender’s payoff.
Read up on short sales online and you’ll see that there’s essentially no mandatory or even standard time frame that bank approvals follow. One month is certainly not out of line.