What Are the Most Important Clauses in a Short Sale Contract?

In recent months lenders have started focusing on doing more short sales than REOs. Their reasoning sounds logical enough; they want to get out of the toxic assets at a better price than going to the foreclosure sales.

We have a service that tracks the discount at which each short sale and foreclosure ultimately sells. The discounts are not always larger for REOs; sometimes the short sales are greater. The final figures fluctuate wildly and vary by bank and motivation of each lender.

The market has been stabilizing and depending on which statistics you believe, the real estate market is either falling, moving into a bubble or poised for the greatest run ever! Frankly, it doesn’t matter as long as you are wholesaling short sales. If you are holding long term, it doesn’t matter either. It matters the most when you are a rehabber and you have to sell when you complete rehabbing a property and you are unable to sell it.

Since we wholesale 99% of the time, the clauses in the short sale contracts are critical to our not losing money if we are unable to find a buyer before our inspection period is over. With REOs the lenders have their own addendums that stipulate the inspection period for each deal – 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 overrides it.

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

Let’s assume your seller/homeowner is agreeable to a short sale and signs your contract. While you have a signed contract on the property, you can’t plan on selling it wholesale because you cannot be sure the lender will approve your short sale price.

Some wholesalers advertise the property for sale immediately. Technically they have an equitable interest in the property because they have a signed contract. If you sign a contract with an end- buyer, you have the legal obligation to sell him the property. But, if you don’t get it because the lender refuses to give you the price you need, you have „breached“ your contract. The way to overcome this problem is to put a clause in your contract that simply says, „Contract is null and void if short sale is not approved at a price acceptable to investor.“

It is more advisable to wait until you get a written approval from the lender to start your marketing. However, if you wait then you need your inspection period to start after you get lender approval. The simplest way to handle this is to put the following clause in your purchase and sale contract with the homeowner/seller, „Inspection period to start after buyer receives written approval from seller’s lender.“ The actual inspection period (we use 15 days) is located in the actual contract. I consider this the most important clause in the short sale contract.

This means that you have 15 days from lender’s approval to market and contract with an end-buyer. If you are unable to find a buyer, then you can cancel the contract and not risk losing your earnest money deposit („EMD“). This is the way to wholesale properties without taking a market risk.

Real estate agents will try to make your inspection period start when you sign the contract (contract’s effective date) with the homeowner/seller. The way to explain this issue 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 immediately, you run the risk of losing your deposit if you can’t wholesale it before the closing.

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

In summary, real estate is a renewable resource and there will always be other opportunities. Do not allow yourself to be intimidated by agents or other investors who want you to do what protects them. The final decision is whether the deal is so good that you have to comply with unreasonable requirements – just make sure your EMD is safe and you are prepared to close or lose your EMD.

To your limitless success!

Immobilienmakler Heidelberg

Makler Heidelberg