SHORT SALES

 Timelines

A buyer is negotiating a short sale on a property. The buyer does not want to have the inspection until the seller has lender approval of the short sale. Can that be negotiated? Also, the broker believes the offer is not accepted until there is lender approval. Is that correct?

Yes and no. Acceptance is defined at lines 23-24 of the WB-11 Residential Offer to Purchase (2011) as occurring when all buyers and sellers have signed the offer. The accepted offer may be subject to contingencies including the seller obtaining lender approval of a short sale. The parties may negotiate when timelines for inspections or any contingencies begin, whether from acceptance or from receipt of the lender’s short sale approval. The buyer may take the position that he does not want to incur expenses for inspections if the lender will not approve the sale, while the seller may want all inspections and contingencies to be met, thereby knowing the buyer will be bound if and when the lender approves the short sale. According to the home inspection contingency in the WB-11, the home inspection runs from acceptance. If a WRA short sale offer addendum SSO is used, the parties can choose to have the home inspection timeline begin upon lender approval using lines 25-27 of the WRA SSO.

Primary and Secondary Offers

The seller accepted an offer subject to lender approval of the short sale. After the offer was submitted to the seller’s lender, another offer from a second buyer was presented to the seller. It is the broker’s understanding that the seller can submit more than one offer to the seller’s lender because it is a short sale and nothing is primary until the lender accepts an offer. If the first offer did not have any language in the offer stating that it was exclusive, can the broker submit the second offer as primary?

Lender policies vary; some want only one offer submitted while others will accept multiple offers. Therefore the broker would be prudent to check with the particular lender before proceeding to provide more than one offer.

It is very risky and ill-advised for a seller to accept more than one offer to purchase as a primary offer.

Standard of Practice 1-7 provides in relevant part, “REALTORS^® shall recommend that sellers ... obtain the advice of legal counsel prior to acceptance of a subsequent offer except where the acceptance is contingent on the termination of the pre-existing purchase contract.” Clearly the safest practice from the seller’s standpoint is to make subsequent offers secondary offers – with each one also subject to the approval of the seller’s lender for a short sale. The seller may be able to submit all of the offers to the lender at the same time for the lender’s consideration, depending on the lender’s policy.

Although accepting all of the offers as primary is possible because they are all contingent upon approval from the same lender and the lender presumably is only going to approve one offer, it may cause the buyers and their agents to be misled - and could lead to multiple approved primary offers if communication errors are made by the lenders or agents and more than one buyer comes to believe the lender approved his or her offer. If a group of offers are all accepted as primary subject to lender approval, each individual buyer and agent may also believe that their offer is primary – at minimum all buyers must clearly understand that there is a “pool” of primary offers and the fact that any particular offer is accepted as primary means nothing – there is no advantage because they are all similarly positioned. It would be wise to alert all parties in writing that there are multiple accepted offers with the same bank approval contingency.

However improbable, a bank could approve more than one offer - in that instance, the seller would be obligated to sell the property to more than one buyer.

Accepting all of the offers as primary may also place the seller at risk of a breach of contract claim. Each of the offers is accepted with the parties agreeing to act in good faith and with due diligence to complete the terms of the contract. Any one of a group of multiple primary buyers could allege that the seller cannot in good faith attempt to negotiate a short sale to meet the terms of his or her contract, given there are multiple primary offers.

For further discussion of short sales and foreclosures, see the March 2010 Legal Update, “Uniform Short Sales,” at www.wra.org/LU1003, the March 2009 Legal Update, “Working with Distressed Sales,” at www.wra.org/LU0903, the July 2009 Legal Update, “Solving the Mysteries of Short Sales,” at www.wra.org/LU0907, and the January 2008 Legal Update, “Short Sales – A Risky Business,” at www.wra.org/LU0801.

FORECLOSURES

“As-Is” Sales and Inspections

How can the buyer ask for a home inspection when the seller is saying that the property is in foreclosure and it is an “as-is” sale?

An “as-is” clause alerts the buyer that he or she is responsible to determine the condition of the property being purchased, that is, have the property thoroughly inspected and tested. When the buyer is purchasing “as-is,” it is very important for the buyer to learn as much as possible about the condition of the property.

Most buyers want a home inspection in an “as-is” sale. When a property is sold “as-is,” it generally means that the seller will not make property condition disclosures and will not cure defects. Sometimes sellers will make disclosures and might, if there are funds available, make repairs. In terms of buyer risk, if the buyer does not determine the condition of the property before the closing and closes the “as-is” transaction only to find defects later, the buyer will have limited ability to go back to the seller for any compensation.

The inspection contingency provides a way for the buyer to get out of the transaction if the condition of the property is such that the buyer no longer wants the property. After the property is inspected, the buyer can decide whether to go forward or give a notice of defects, knowing that the seller may refuse to cure any listed defects, thus making the offer null and void.

Sheriff’s Sale

The broker took a listing with the seller about a year ago. At that time, the broker had the title company perform a search and hold to see what liens and encumbrances were on the property. Now the broker has presented an offer and just found out there is a sheriff’s sale scheduled. What could have been done to prevent this?

When listing the property, it is prudent to sit down with the seller to determine their financial situation. It may be necessary to ask difficult questions about the seller’s obligations and status. If the seller thinks they will need to have a short sale, the sooner the broker and seller work together to get the seller’s financial information in order, the better. Given the length of many listings in the current market, it may be practical to review the seller’s position at least quarterly to avoid any unexpected changes in the seller’s status. It is possible for the seller to sell the house, subject to the short sale approval, until the court’s confirmation of the sheriff’s sale. The broker may work with the seller and the seller’s attorney to best position the seller to have a successful transaction.

Bankruptcy

An agent has a listing where there is a pending foreclosure and now the sellers are going to file for bankruptcy. The property will be going to sheriff’s sale in seven weeks. What is the status of the listing?

Bankruptcy may offer relief to the distressed homeowner. Basic bankruptcy information is available online at www.uscourts.gov/bankruptcycourts/bankruptcybasics.html and at www.wiwb.uscourts.gov/Bankruptcy_Info.htm. The filing of a bankruptcy may stall or delay the foreclosure. Whether bankruptcy is a viable alternative to foreclosure is a question for the homeowner’s attorney. A homeowner that has filed bankruptcy may still be eligible to sell the home and for a short sale, provided the bankruptcy trustee consents to the sale of the property. The agent may wish to confer with both the sellers and the trustee in bankruptcy to determine the status of the seller with respect to the home, the mortgage, and any possible sale in advance of the sheriff’s sale.

Commissions

The property is listed at 6 percent and the seller’s bank is saying they will only pay a 4 percent commission for a short sale. Is this legal?

It may depend upon who the lender and loan servicer are. Fannie Mae and Freddie Mac loan servicers are not to reduce commissions on short sales unless the commission exceeds 6 percent. See the information in the March 2010 edition of the Wisconsin Real Estate Magazine online at www.wra.org/WREM/Mar10/DistressedSales. Similarly with short sales under the Home Affordable Foreclosures Alternatives (HAFA) Program, the servicer cannot require, as a condition of approving the short sale, a reduction in the real estate commission agreed upon in the listing agreement (up to 6 percent). See the March 2010 Legal Update, “Uniform Short Sales,” online at www.wra.org/LU1003. The HUD short sale guidelines for FHA-insured loans also indicate that “HUD allows all reasonable cost of the sale including up to 6 percent sales commission, local/state transfer tax stamp and other customary closing cost.” See www.hud.gov/offices/hsg/sfh/nsc/rep/pfsfact.pdf.

Dealing with short sales is precarious because there are many pitfalls that may result in no closing or a closing that does not include the payment of the real estate commission. The agent cannot allow the fact that their commissions are not being paid in full to stop a transfer or closing. Unfortunately, there is little the agent can do to stop a lender from conditioning their approval of the short sale on the reduction of the commission if the lender or loan servicer is not subject to one of the programs mentioned above. The agent may wish to amend their listing contact with the seller to provide that “X” amount of the commission will be paid at closing and the remaining commission will be paid after closing.

The agent may require the seller to provide a promissory note for the remaining commission due. However, this arrangement would need to be disclosed to the lender to comply with Wis. Admin. Code § RL 24.07(4), which requires written disclosure of side deals to lenders.

Tracy Rucka is Director of Professional Standards and Practices for the WRA.