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What are the most important clauses in a short sale contract?

In recent months, lenders have started to focus on making more short sales than REOs. Your reasoning sounds pretty logical; They want to get out of toxic assets at a better price than going to foreclosure sales.

We have a service that tracks the discount each short sale and foreclosure ultimately sells for. Discounts are not always higher for REOs; sometimes short sales are higher. Final figures fluctuate wildly and vary by bank and the motivation of each lender.

The market has stabilized and depending on the statistics you create, the housing market is either crashing, entering a bubble, or ready for the best streak ever. Frankly, it doesn’t matter as long as you’re selling wholesales short. If you keep it long term, it doesn’t matter either. The most important thing is when you are a rehabilitator and you have to sell when you finish rehabilitating a property and you cannot sell it.

Since we wholesale 99% of the time, the terms of the short sale contracts are critical so that we do not lose money if we cannot find a buyer before the end of our inspection period. With REOs, lenders have their own addenda 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 overrides 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 they foreclose, purchase the property tax deed, or the owner gives the lender a deed in lieu of foreclosure. Until the lender is in title, they can only refuse to allow a reduction of the outstanding loan principal and stop the short sale.

Let’s say your seller / owner agrees to a short sale and signs your contract. Although you have a signed contract on the property, you cannot plan to wholesale it because you cannot be sure that the lender will approve your short sale price.

Some wholesalers announce the sale of the property immediately. They technically have a fair interest in the property because they have a signed contract. If you sign a contract with an end buyer, you have a legal obligation to sell the property to them. But if you don’t get it because the lender refuses to give you the price you need, you’ve “breached” your contract. The way to overcome this problem is to put a clause in your contract that simply says: “The contract is null and void if the short sale is not approved at a price acceptable to the investor.”

It is best to wait for written approval from the lender to start marketing. However, if you wait, then 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 sales contract with the owner / seller, “The inspection period begins after the buyer receives written approval from the seller’s lender.” The actual inspection period (we use 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 an end 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 started 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 approval comes in could be totally different than when it was signed. If you sign the contract with your inspection starting right away, you risk losing your deposit if you can’t wholesale it before closing.

The way to compensate for this potential loss of 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 rogue agent who wants a ridiculous amount, even up to 10% of the purchase price. If you find that one of these agents is requesting a large EMD, explain that they are making too many offers to have 10% on each one. If you are not motivated to help, 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 safe and you’re prepared to close or lose your EMD.

For your unlimited success!

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