Avoiding the Short Sale "Investor" Trap...
In our Southern California real estate market, Short Sales have now become a mainstream reality. If treated properly, they can become an extremely viable option for those who may have bought at the peak of the market a few years back, who are currently looking for a solution that can very quickly bring them back to real estate prominence once again.
Short Sales can be a fantastic option, but only if your real estate agent knows what they are doing and knows what to watch out for to avoid any problematic scenarios that could hinder, not help, the process.
Because Short Sales are designed to readjust the price of your property to current market value, there is a trend happening in our industry right now where "investors" are making multiple "blind" offers on short sale properties in the interest of obtaining multiple acceptances in order to narrow down their choices to the one or two investments they deem worthy of moving forward into escrow on.
That's fine and well for the investor, but what about the seller in distress, where time is of the essence before going into foreclosure, who relies on the supposed commitment of the buyer he/she selects in order to move the sale of their home forward, close that chapter in their life, and finally give themselves peace of mind?
A quick educational digression to elaborate on the above points for those unfamiliar with this process. In the State of California, buyers are allowed to submit as many offers on as many different properties simultaneously as they'd like without any commitment. Only once an offer is accepted, escrow is opened, and a deposit is handed over is a buyer truly going to focus on that one particular home.
In the meantime, submitting on multiple homes simultaneously is standard practice, and a good strategy for worthwhile qualified buyers who are motivated, but who are also competing against other buyers and seeking that acceptance.
Our industry, however, is seeing this strategy being taken advantage of by the "investor" client. It is one thing to offer on 6 or 7 homes at a time. It is another to submit offers on 10-15 homes per day as these investors are starting to do.
In a Short Sale, buyers submit offers directly to the seller through their representation in their listing agent. The seller chooses the offer they feel is the strongest, and that offer is submitted to the bank for approval. The approval process can take anywhere from 30-90 days, which is a limbo period both buyer and seller have to wait on.
Even with a seller acceptance, an escrow technically does not open until there is a bank approval, so during this limbo period, there is no contractual mechanism in place that obligates a buyer to commit to the home. In short, at any time during this limbo period, a buyer has the freedom to walk away from the transaction, submit on other homes, and move forward on another home if a separate acceptance occurs.
As a seller in a short sale scenario, therefore, it is imperative for you to select a real estate agent who not only understands how to properly put together and package your portfolio in just the right way to move your file forward towards approval by the bank, but who also understands how to identify the truly motivated buyers who are passionate about your home versus the unreliable investor client who may choose your home, or may choose another home they received an acceptance on.
Its not good enough to simply choose the "best offer on the table" in terms of numbers only. That is one of the traps of the investor client, who will present you with the perfect offer - usually at asking price, with terms that are for the most part favorable towards the seller. An agent has to be able to see past the paper, think analytically, and truly be able to identify the best buyer in looking out for your best interest, and that isn't simply with numbers, but it is also about intent.
Don't get me wrong. Investors are out there with motivation to purchase a property, so I'm not saying avoid investor clients altogether. Rather, the point is to ensure that the offer you do select as the primary offer going to the bank is one where you feel the buyer truly is committed to seeing the transaction through to the end, and not a buyer who will drop you 30 days into your approval process, leaving you having to start from square one all over again, but with greater stress and headache.
Here are a couple of great tips that can help you sniff out the unreliable investor...
- If an offer is submitted by an agent, and the name of the buyer on the contract is the name of a corporation, not an individual.
- If an offer is submitted "blindly", that is, the buyer and the buyer's agent have made no attempt to schedule an appointment to view your home. They submit the offer without ever having looked at it.
And here is a great way to safeguard yourself against the uncommitted investor buyer:
- Have your agent call up the buyer's representation to have a one-on-one conversation, find out the true intent and motivation of the buyer, and get a true gauge on just how committed they are to your particular property.
- In a counter offer, or in asking them to re-write their existing offer to satisfy your short sale seller needs, have your listing agent make their deposit check "non-refundable" with seller acceptance, not bank acceptance.
To this last point, your agent is legally building into the contract your safeguard, where it is simply stated that the buyer is to submit their deposit check to escrow with seller acceptance, and if the buyer backs out of the transaction for any reason other than a contractual contingency, such as an inspection, appraisal, or loan issue, then the buyer's deposit becomes non-refundable. Basically, what we're saying here is that if the buyer backs out because they have submitted on 10 other properties and have chosen one of the other ones instead of yours, for time and effort wasted on your part, their penalty is the forfeiture of their deposit.
If an Investor isn't willing to entertain this point in the contract, then their motivations are questionable, and you would want to proceed with extreme caution if choosing to go with their offer. On the other hand, if a buyer is in agreement with this point, you can feel much more confident knowing that they are passionate about seeing the transaction through to the end. Of course, anything can happen and this is no absolute guarantee, but it is a good safeguard to have in place to give yourself better peace of mind.
Lastly, it is important that you select a listing agent to represent you who has this ability to think outside the box. Especially where short sales are concerned, where there is much more detail, much more minutia, and a lot of anxiety and emotions that can come into play, you want the confidence that your agent knows exactly how to anticipate these various scenarios to serve your best needs at heart.
It isn't enough for an agent to rest on their laurels and use their claim of "30 years of experience in the industry" to earn your business. Rather, find out how many short sales they have successfully closed in the last 2-3 years, and find out how truly capable they are in being able to think outside the box and think much more analytically to determine how capable they truly are in representing you.
- Jeremy Howard
Jeremy Howard is the Broker & President of Hpremiere Properties, (www.Hpremiere.com) a successful, progressive, modern real estate brokerage located in Westwood, in the heart of Southern California. With a separate background in the Film/Television industry, Jeremy has always had a passion for screenwriting, cinema, sports, and the arts, and finds a particular enjoyment and love in the escapism of theme parks.
In addition to representing both buyers and sellers on a wide variety of properties, from single family residences to condominiums, residential income properties, and commercial and industrial ventures, Hpremiere Properties has successfully closed a multitude of short sales from both buyer and seller perspectives, with its associates who are properly trained to understand today's real estate market, and who are leaders in our industry.
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