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Close Of Escrow in the Short Sale World Is A Squeaky Beast

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When a normal real estate contract is written, the buyer requests a close of escrow date, which is typically dependent upon multiple conditions being met.  There are a lot of people involved, a lot of documents involved, and contractual time lines to follow.  Normally, that time frame is somewhere around 30 to 45 days.  In the case of FHA financing, it’s on the longer end.  In the case of a cash purchase, it can be as quickly as Title can complete their work, or simply a matter of days.

When a buyer writes an offer on a Short Sale, there is no close of escrow date.  Instead, the close of escrow date typically reads, “See Short Sale Addendum.”  In the Short Sale Addendum, you’ll see on line 38:

Close of Escrow: Close of Escrow shall occur thirty (30) days or _________ days after delivery of Agreement Notice.

The Agreement Notice is the letter that your lender(s) provide upon reaching an agreement to sell for less than you owe on the property.  According to lines 22-23 of the Short Sale Addendum:

Agreement Notice: If Seller and Seller’s creditors enter into a short sale agreement, the Seller shall immediately deliver notice to buyer (“Agreement Notice”).

Once the letter(s) reach the buyer, even though there has been initial contract acceptance by the seller at the start of this process, for the purposes of the contract time lines, we consider this the date of contract acceptance.  Technically, we have already had an executed contract during the entire negotiation period, with a Short Sale contingency.

In most of the short sales that I have listed, I make sure the buyer and seller understand that we are going to fast track this to closing within 21 days of the Agreement Letter receipt.  I do this on line 38 of the Short Sale Addendum because 9 times out of 10, the agreement letter affords us only 30 days to close, and the last thing we want is to run up against the expiration of this letter, coupled with a potential impending Trustee Sale date.  And, since we’ve had so much time for the buyer to sit around and basically do nothing, it’s assumed that the financing documents are already in order.  This is why it is critical, buyers, to have all of your documents ready to rock at your lender so when the agreement letter arrives, your lender will be able to push forward.

The Squeakiest wheels are typically caused by buyers’ lenders not having everything they need to proceed.  While most transactions outside of the short sale world are relatively smooth, even with all of the turbulence the transaction can experience, COE in a Short Sale is more of a balancing act and must be taken very seriously.  Lenders don’t like to bend once they’ve made their decision.

Short Sale Follow Through

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(May 11, 2009 - Photo by Clive Brunskill/Getty Images Europe)

As a listing agent specializing in short sales, I have run into many situations that raise red flags throughout the short sale process. One of those is finding out that the home owner isn’t prepared for the commitment involved in pursuing the short sale.

When you enter into a short sale listing agreement with your brokerage, represented by your REALTOR, you are hiring them to not only market your property, but also negotiate the short payoff to your lenders. While there is no official difference between a short sale listing, and a regular listing, the fundamental game-plan that we implement when we market your property is quite different than a traditional sale.

Your agreement to sell short is taken very seriously by your agent because of the amount of work that is involved after receiving an offer. It also must be taken very seriously by you, the owner. If at any point in time you doubt whether or not you really intend to walk through the process of a short sale, then you may not be a true candidate for a short sale. You see, even if your circumstances would support a short sale, you need to be completely committed to the process and you need to see it through to the end, whatever result that may be.

The Short Sale Pricing Plan

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Supply and Demand Basic Curve

Every short sale needs a pricing plan.  Every home on the market needs a pricing plan.  In any market, it’s in the best interest of the home owner to sell the home for the highest possible amount.  In a distressed market, with a distressed property, sometimes there isn’t enough time to “hope” for a higher price than the home will bring.  Knowing that, it becomes critical to the life of the listing to have a scheduled price reduction plan.

Every short sale that I have listed has received an offer, because I implement a pricing plan, depending on the amount of time left before foreclosure, which prices the home slightly above market value, then systematically reduces over time at regular intervals. When the price reaches market value or below, it will most likely draw an offer, and as a result of the planning, enough data has been captured to make a solid case to the lender that no higher offer is possible. This is all driven by supply and demand.

It’s very important to illustrate to the banks (because they have no idea about real estate) the gradual increase in showings over time as the price is slowly reduced on a schedule.  When we can show a lender that an over-priced home is receiving no showings, yet when we reduce the price, the number of showings increase, we make a good case for the offering when it comes.

What Do We Do? There’s a Notice On Our Door!

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Yikes.  That’s probably the first thing you’re thinking.  We just received this thing called a “Notice of Trustee’s Sale” and we have no idea what went wrong (“except that we stopped paying our mortgage a few months ago.”)

AHA!  That’s the problem.  What’s happened is the bank has taken action to recover the home to cover the note.  The fact that the note is greater than the value of your home, most likely, is irrelevant at this point.  The bank is going to take your house back.

The good news for you is that the bank doesn’t really want the house.  They want as much money out of the house as possible, but they don’t want the house because it costs tens of thousands of dollars for them to auction it, take it back, maintain it, re-market it, and sell it.

The real error in the entire situation was the fact that you didn’t recognize that you needed to have this house on the market a long time ago.  The banks will tell you that you need to miss payments in order to put your house on the market and have a short sale approved, but this is not true.  With a true hardship, whether or not you can pay your mortgage today or not isn’t important.  What’s important is whether or not you are headed for the dreaded foreclosure in the near future.

If you are, then you don’t need to miss payments.  In fact, if you are able to keep up with the payments, you are more likely to be able to down-size by buying another home after this process.  The key is whether or not you are keeping up to date on all of your payments.

So, what do you do now?

You’re headed for foreclosure.

  • You can re-instate and get caught up, which will cost you more than the amount you’re behind
  • You can walk away from the house and experience turmoil, have a larger than required deficiency, and potentially face future law-suits and high tax liabilities;
  • or you can attempt to buffer the losses and have your lender release you from your note by selling the house!

But we owe more than the house is worth!  Right, that’s why it’s a short sale.  You’re going to bring a market value offer to the lender, and you’re going to get them to approve it and allow the sale.

It happens all day long in this market, and it’s going to keep happening for years to come.  Short Selling your home is the best preventative measure you can take now that you KNOW you’re being kicked out.

The Moral Obligation: Repay or Walk?

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Short Sales are a tricky beast.  There are two sides to the argument when it comes to paying off a loan that you’ve promised to pay.  The first argument is that you’ve signed a promise to pay and you have a moral obligation to do so.  The second argument says that the lenders took advantage of us, so why should be pay them back?  They are the cause, right?

It doesn’t exactly work that way.  When you signed the note on your home, there was no clause within it that stated that you promise to pay “when the market is good.”  You signed a promise to pay no matter what.  Let’s face it.  I think we all can take a step back and say that we’ve learned a huge lesson about borrowing money in this day and age, and the lenders have clearly taken a step back to re-evaluate how they lend money.  So, it’s arguable that both parties are at fault for the disastrous market conditions.

That doesn’t release you from the obligation that you agreed to.  So, what are you supposed to do now?  Repay, or walk away?

That all depends on your financial outlook.  If you are in a position of financial distress, and you’re headed towards an inevitable foreclosure, then you’re probably a candidate for a Short Sale, which is the best option for you because it’s not really walking away.  It’s asking the lender for permission to sell for less than you owe. Foreclosure is what happens when you simply don’t pay. Foreclosure is not an option, it is a symptom.  People who don’t pay their mortgage lose their homes.  People that walk away from their homes, lose their homes.

It’s critical that you determine whether or not you qualify for a Short Sale.  A short sale allows you to move on with your life with the permission of the lender.  The lender agrees to release you from the note, and release the mortgage, and in most cases, you can walk away with peace of mind and a bright outlook on your future.

Why would a lender allow this?

Banks don’t want real estate.  They want money.  They lend money to make money.  Without cash, a bank goes out of business.  We’ve seen this happen time and time again.  When you quit paying your mortgage, and the bank reposesses your house, they have to spend thousands upon thousands of dollars to maintain the house, prepare it for sale, and sell it.  It will cost them more to foreclose than it will to allow you to sell it for current market value.

You have a moral obligation to pay your debts.  You signed a promise.  When you walk away, you are invalidating your credibility and as a result, regaining trust in you as a borrower will take years.  Don’t walk away without attempting to sell the property, and make sure you hire someone who knows what they’re doing.

Give Your Specialist Room To Work

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The process of selling a home short of what you owe is simple in concept, but very difficult emotionally because it involves you and your home, and your prospect of foreclosure, and your finances.

As a short sale expert, it’s my job to first market your home, and second, negotiate with the lender so you don’t have to.  Banks listen to us because our job is to circumvent their B.S. and we’re not emotionally invested in the financial situation, even if he had finest lending solution for all and because we know the market and they don’t.  We are invested in you and your success through this process.  We know the facts and we get the job done where the job can be done.  Banks don’t really listen to their customers.  In fact, they’ll use tactics to frighten you into emptying your retirement accounts to stay afloat until all of your money is gone and you’re truly realizing the hardship that was inevitable anyway.  They know that most Americans feel held hostage by their “credit scores” and they’ll use that to keep you paying your mortgage even in the face of financial hardship.  As long as they get their money…

It’s best that you allow your Certified Distressed Property Expert the room to do the job you have hired them to do.

Through the process, you will be hounded by your lenders, you will be called, you will receive letters that may cause you to freak out.  You may even start searching for alternate solutions in desperation.  Don’t do this.  It’s critical that you give your short sale expert room to work.  There’s a process involved and deviation from that process is the first thing that will slow the process and in some cases prevent success.

Sometimes the job cannot be done.  You need to know this.  A short sale is how we attempt to prevent foreclosure.  Banks do it because it saves them money.  Foreclosure is expensive for them, and they don’t want to own houses, they want to play with money.  However, the clock is ticking, and there is no guarantee that we will be able to achieve an agreement with the lender.  We do it all day long, and have been very successful at it, but nobody can guarantee that it will work.

What I can guarantee is that if you aren’t 100% trusting of your realtor, and you find yourself seeking alternative solutions, of which there are none by the way outside of finding someone else to start all over again, then you’ll be saying to your agent, “I don’t think you’re able to do the job, so I’m going to have someone with more clout, more experience, or more legal knowledge tackle it.”  As a result, your agent may resign the listing to take on more loyal and trusting clientele.

A good agent will know when he in over his head, and a good agent will resign from the job if he recognizes that he can’t solve your short sale problem, whether it’s truly unsolvable, or it’s because you aren’t giving him or her the room needed to do the job.  If you feel like you need to seek outside help, such as an attorney, then feel free to do so, but I would encourage you to read my story about “Attorney Negotiated Short Sales are Still Just Short Sales” so you understand why they offer this service.