Q: My daughter made an offer on a house, which the seller accepted, but it is a short sale and now we are waiting for the bank to accept the offer. In the meantime, the seller wants us to get the home inspection done so she is not inconvenienced. I think it is more about wasting her money if the bank does not approve the offer.
I know it can take the bank a long time to approve, but we wouldn’t get an inspection done if a seller did not accept the offer on a non-short sale. We are prepared to wait. Is this unusual to have an inspection done on a short sale before bank approval?
A: It is unusual, though there are situations in which it might make sense, as when the property seems as though it might have some major damage that the buyer has built into a low offer, and both parties agree that the inspector’s documentation of that damage might help the bank understand the contract price.
I’ve never seen any hard data on the number of short sales that fall out of contract, but from experience I can tell you it’s high. And the reasons these transactions die so frequently are numerous:
- sometimes the bank simply refuses to green light the deal;
- sometimes the bank demands a higher price from the buyer or contribution from the seller than the parties are willing to pay; and
- sometimes the lender or servicer holding the first loan is fine with the terms, but the second and/or third lenders balk.
One of the most common reasons short-sale transactions die has to do with the fact that the waiting period for the bank’s approval can seem interminable; with so many homes on the market, some buyers simply see another property they like, make an offer, and walk away from the short sale in the months of uncertainty that can elapse while the seller’s bank is processing the short-sale application.
Long story short: It’s good that you’re prepared to wait!
And waiting is also a wise course to take when it comes to obtaining a property inspection or any of the other services that will create out-of-pocket expenses for you and your daughter, for several reasons.
1. Buyer can’t recoup inspection fees if the deal falls apart. First, and most obviously, the deal could fall apart. If it does, and you haven’t obtained inspections, you’re not out any cash. If it dies and you’ve obtained a property or pest or roof inspection (or all three) you could be out anywhere from $250 to $1,000, depending on the inspections, the area and the size and type of the property.
2. Seller might trash the place if she thinks inspections are over. To understand the second reason I would advise your daughter to hold off on inspections, at least until the bank approves the transaction, let’s posit a hypothetical in which the bank’s approval process takes six or eight months, which is not, by the by, out of the ordinary. Imagine all that can happen to a house in that period of time!
A relative of mine recently bought a short sale in a process that took about seven months. His own, personal walk-through of the property (he’s been in the construction industry for several decades) after his offer was accepted by the seller revealed a home in tip-top shape.
Seven months later, though, the sellers/owners had essentially trashed the place, to the extent that he had to replace carpet, refinish cabinets and floors and paint every room in the place just to get it back to the shape it was in when he first saw it.
This is not the rule, but some owners of homes being short-sold cease all home maintenance — and even worse — once they feel assured that the buyer is in the deal for the long haul. Holding off on your inspections might create an incentive for the seller to keep the place in good shape for longer than she might otherwise.
3. Buyer’s commitment to the property may escalate, even irrationally so, after paying for inspections. Assuming your daughter is financing the home, the appraisal will also require an on-site property inspection. However, appraisals expire, so this should absolutely not be done until the bank approval is complete.
Having the property inspection at or near the same time as the appraisal would essentially eliminate any additional inconvenience to the seller, so I suspect her protestations of "inconvenience" are a pretext for something else.
Frankly, I believe that what might actually be going on is that the seller might want to boost your daughter’s commitment level to the property, so that she is more inclined to hang in for the many weeks or months it may take to get the bank’s approval, and less inclined to find another property.
Some might say they just want to make sure your daughter finds out everything there is to know about the place sooner than later, but sellers who have that (valid) concern generally obtain their own property inspections before listing the property and make those reports available to all buyers who even view the property.
There’s a psychological phenomenon called "escalation of commitment," whereby we get more and more committed to a course of action or a decision and less likely to pull the plug on it, the more we invest in it.
The seller might believe that if your daughter spends a few hundred bucks (or more) in this not-certain-to-happen transaction, her commitment to the property will intensify, even in the face of irrational demands or delays.
And the seller might be right.
With the little knowledge I have of the situation, my advice to your daughter would be to wait to obtain property inspections, appraisals and any other fee-incurring expenses related to this particular property until the seller’s bank has signed off on the deal.
If the seller insists that this is an issue of convenience, offer to have the inspections completed so long as the seller agrees, in writing, to pay your daughter back for the inspections if your daughter backs out during her contingency period or the transaction falls out of escrow for any reason.