In recent months, lenders have begun to focus on making more short sales than REOs. Your reasoning sounds quite logical; they want to get out of toxic assets at a better price than going to auctions.
We have a service that tracks the discount at which each short sale and foreclosure is ultimately sold. The discounts are not always greater for REOs; sometimes short sales are higher. Final figures fluctuate wildly and vary by bank and the motivation of each lender.
The market has been stabilizing, and depending on the statistics you believe, the real estate market is falling, entering a bubble, or poised for the biggest hotspot ever! Frankly, it doesn’t matter, as long as you’re wholesale short selling. If you’re holding long term, it doesn’t matter either. It is most important when you are a rehabber and have to sell when you complete the rehab of a property and cannot sell it.
Since we sell wholesale 99% of the time, the clauses in short sale contracts are critical so that we don’t lose money if we can’t find a buyer before our inspection period ends. With REO, lenders have their own riders that stipulate the inspection period for each deal, typically 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 nullifies it.
However, your short sale contract is not between you and the lender. It is between you and the owner. The lender does not have the title until the lender forecloses, purchases the deed to the property, or the owner gives the lender a deed-in-lieu of foreclosure. Until the lender has title, they can only refuse to allow a principal reduction on the outstanding loan and stop the short sale.
Let’s say your seller/landlord agrees to a short sale and signs your contract. Even though you have a signed contract on the property, you can’t plan to sell it wholesale because you can’t be sure the lender will approve your short sale price.
Some wholesalers advertise the property for sale immediately. They technically have an equitable interest in the property because they have a signed contract. If you sign a contract with a final buyer, you have a legal obligation to sell the property to them. But, if he doesn’t get it because the lender refuses to give him the price he needs, he has “breached” his contract. The way to get around this problem is to put a clause in your contract that simply says, “The contract is null and void unless the short sale is approved at a price acceptable to the investor.”
It is best to wait until you get written approval from the lender to start marketing. However, if you wait, you need your inspection period to start after you get approval from the lender. The easiest way to handle this is to include the following clause in your purchase and sale contract with the owner/seller: “The inspection period will begin after the buyer receives written approval from the seller’s lender.” The actual inspection period (we used 15 days) is in the actual contract. I consider this to be the most important clause in the short sale contract.
This means you have 15 days from lender approval to market and contract with a final buyer. If you cannot find a buyer, you can cancel the contract and not risk losing your security deposit (“EMD”). This is the way to wholesale properties without taking market risks.
Realtors will try to get your inspection period to begin when you sign the contract (contract effective date) with the owner/seller. The way to explain this problem is that the short sale will take weeks or months and the condition of the property when the approval comes in could be totally different than when you signed. If you sign on with your inspection starting immediately, you risk losing your deposit if you can’t wholesale it before closing.
The way to offset this potential loss from an EMD is to make the deposit as small as possible. We typically give an EMD of $250 to $1,000 and are rarely asked for more. There will always be a dishonest agent who wants a ridiculous amount, even up to 10% of the purchase price. If you find one of these agents asking for a large EMD, explain to them that they make too many offers to get 10% on each one. If he’s not motivated to help you, move on to the next deal.
In short, real estate is a renewable resource and there will always be other opportunities. Don’t 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 it must meet unreasonable requirements; just make sure your EMD is secure and you are prepared to close or lose your EMD.
For your unlimited success!
