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I've learned a lot in this thread too. Thanks to everyone who takes their time educating us buyers who have never done this kind of thing before.
I was wondering something I haven't been able to find out yet about short sales. When you make an offer on a short sale, do you have to put down earnest money like a traditional sale? And, since the process can take so long, can you put an offer on a second short sale and then buy whichever one gets approved first? If so, do you lose your earnest money on the other one you made an offer on, even if that one hasn't made it through the approval process yet?
...I was wondering something I haven't been able to find out yet about short sales. When you make an offer on a short sale, do you have to put down earnest money like a traditional sale?
As with any home purchase offer, you generally include some amount of earnest money as part of the offer. However, the standard AZ short sale addendum used by Realtors does not require deposit of the earnest money into escrow until the seller's bank provides a written approval notice.
But like anything, it's negotiable. Some sellers modify the addendum to require that you deposit at least a portion of the earnest money immediately, and is non-refundable for 60-90 days. The intent is to insure that you stick around long enough for them to get bank approval.
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And, since the process can take so long, can you put an offer on a second short sale and then buy whichever one gets approved first? If so, do you lose your earnest money on the other one you made an offer on, even if that one hasn't made it through the approval process yet?
This is a controversial issue. The short answer is yes, you can. However, the standard contract requires that you disclose to the seller any information that may materially affect your ability to complete the purchase. Making multiple offers obviously may affect your ability to purchase so should be disclosed to the sellers if you can't buy all the homes you make offers on. Obviously, some sellers may not agree to this if they can't count on you to follow through. You need to be careful to keep track of contingency dates that allow you to cancel out of the contracts you no longer want, or you could wind up obligated to buy more than one home.
As to the second question, you would lose earnest money if it's non-refundable up to the point you want to back out of the contract. You also may be required to make multiple earnest money deposits if you get multiple acceptances.
Regarding Mentoring, I don't think rjrcm was talking about the investment gurus as mentors, although there are some very good ones, as well as bad ones. The OP appears to be interested in buying a home for herself, and not becoming an investor, so I think he was talking about a mentor for a new agent.
When a person gets a real estate license, whether they realize it or not, they have learned just enough to pass the state exam; that is all the course is designed for, and they tell students that several times (after they're taking the class).
After getting the license, the new agent needs to take a lot of classes in order to learn about the business. Most of the designation classes such as ABR, CRS, GRI, etc are much more educational than the CE classes, and the first designation a new agent should get is the GRI. It's an intensive 90 hours. The classes are usually 1 or 2 days each, and are held in different cities, so it takes several months to take all the classes. The ABR and the CRS have experience requirements before being able to get those designations.
In addition it is almost imperative to begin working with a good mentor who will provide a combination of class instruction, personal instruction, monitoring and review of any contract the new agent writes, and shadowing (going on appointments to watch the mentor make presentations).
All of that helps to get the experience that's really necessary to get a jump start on learning the "business" of real estate. On top of that is the school of hard knocks. There will be mistakes made and one has to continue learning from the experiences. Networking with other agents helps to gain more experience.
In buying a short sale property, a buyer should make sure they're working with a sharp experienced agent who has made a study of short sales, has experience at listing them and buying them; has a thorough knowledge of the different types of short sale programs; knows how to structure offers so they will have a better chance of being accepted; and can deal with all of the different clauses that some listing agents will try to "require" the buyers to sign.
I recently ran into one that dealt with a $1,500 non-refundable 90 day deposit. My buyer was ok with that because he really wanted the house. We had been missing out on other properties to higher bids, and sometimes being late to the show. Here we were early and were in a hurry to get the offer in. That almost caused me to make a potentially costly error.
Their addendum said that the earnest money is non-refundable for 90 days, so one may have a tendency to zero in on that section and not read the rest as carefully.
When I read the addendum more carefully, it said that "after 90 days, the earnest money would be forfeited if the buyer canceled the contract.
That could lead one to think that if they want to cancel the contract because of something they found in the inspection that they could get their earnest money refunded, regardless of that clause.
That is not correct. That's because what is written in this addendum modifies what is in the contract. Therefore, with this addendum, if the buyer cancels for "any reason" they would lose their earnest money.
Wouldn't it be more clear if the addendum stated "earnest money is non-refundable for any reason"? Of course it would be more clear, but perhaps the author of the addendum didn't want it to be clear?
There two other clauses in the addendum that also flew a red flag. An inexperienced agent could have gotten caught in this trap because the language was written so it would not be noticed without a careful study of the clause, and a thorough understanding of the AZ contract.
We are out of town buyers looking for a mid/upper-end property in Scottsdale to rent for now/live in later. Our agent told us the following regarding short sales (and I'd be happy to hear from from anyone as to whether you think this is a good or bad approach!):
1. If we find a property we like online, submit a bid - no earnest money down. Agent advised submitting a cash offer, which we can do, but prefer to get a mortgage.
2. The owner either accepts or rejects. (could take days/weeks)
3. If he/she accepts, the bid is submitted to the bank for acceptance, a counter, or rejection. (could take weeks/months)
4. If the bank accepts, you have 24 hours to deposit earnest money (in our case probably at least $10k) and 10 days (or longer if negotiated) for the 'due diligence period' to arrange the inspection and receive the results -- and for us to get flight reservations and rush out there and see the property/neighborhood to see if it is 'the' house/neighborhood for us.
5. According to our agent, it is only at the end of the 'due diligence period' (10+ days post bank acceptance of our offer) where the $$$ commitment is made. Until then, we can walk away for any reason, or no reason at all. After that, earnest money (but not the full purchase price) is at risk.
Does this seem correct to the experts on this board?
Regarding Mentoring, I don't think rjrcm was talking about the investment gurus as mentors, although there are some very good ones, as well as bad ones. ....
Correct . I was specifically referring to either the agent's broker or other experienced agents that can provide guidance for handling various types of transactions, working with clients, etc that you don't learn in your basic RE licensing classes.
We are out of town buyers looking for a mid/upper-end property in Scottsdale to rent for now/live in later. Our agent told us the following regarding short sales (and I'd be happy to hear from from anyone as to whether you think this is a good or bad approach!):
I don't understand "rent for now/live in later".
If you're thinking of a lease/purchase arrangement, you won't be able to get a lease/purchase agreement on a short sale home.
If you're going to rent a home for awhile, and while renting, look for one to buy, then you wouldn't need to start a short sale purchase until you're here renting.
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1. If we find a property we like online, submit a bid - no earnest money down. Agent advised submitting a cash offer, which we can do, but prefer to get a mortgage.
Because some buyers like to make multiple offers on short sales and walk away from all but one of them, there are sellers who will require a non-refundable earnest money deposit for a period of 60-90 days.
In a multiple offer situation, a cash offer is a stronger offer than a mortgage.
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2. The owner either accepts or rejects. (could take days/weeks)
In the purchase contract you state the deadline for the seller's response. That time can vary. It could be anywhere from 4 hours to 24 hours, but should be no longer. The longer you give them to respond, the more time they have to get a better offer. Some agents will delay responding to beyond the deadline hoping for a higher offer. A deadline is a deadline, and you should be prepared to walk away if they don't respond by the deadline. If they won't respond on time, then if they do accept a day later, what will the rest of the transaction be like with that agent and seller?
I had an agent give me a verbal acceptance and said the signed documents will be sent the following day. 24 hours later, after I called, he said the seller accepted a higher offer. After that unethical incident I prepare my buyers to be prepared to walk. I state in a cover letter that our deadline is firm and at that deadline, the offer is off the table. My buyers have to be prepared to hold to that.
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3. If he/she accepts, the bid is submitted to the bank for acceptance, a counter, or rejection. (could take weeks/months)
Correct.
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4. If the bank accepts, you have 24 hours to deposit earnest money (in our case probably at least $10k) and 10 days (or longer if negotiated) for the 'due diligence period' to arrange the inspection and receive the results -- and for us to get flight reservations and rush out there and see the property/neighborhood to see if it is 'the' house/neighborhood for us.
That's pretty much correct. However, I would suggest that you come out and tour the area and narrow down the city and several communities where you would like to live. Your agent needs to have a very good idea of what you're looking for. When you find a house to offer on, and after the seller accepts, then you come and check out the home. Don't wait until the bank accepts.
If, at that late date, you elect to cancel, then it could be so close to the foreclosure date that the bank will just close the file and the sellers will be forced into foreclosure. While we need to look out for ourselves, we also need to understand the precarious position of the seller. If they're fortunate, another buyer will come along right away and buy the home.
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5. According to our agent, it is only at the end of the 'due diligence period' (10+ days post bank acceptance of our offer) where the $$$ commitment is made. Until then, we can walk away for any reason, or no reason at all. After that, earnest money (but not the full purchase price) is at risk.
Does this seem correct to the experts on this board?
You can walk away at any time prior to the bank issuing the Approval Letter and you accepting the terms. However, if the seller had required a non-refundable earnest money deposit for 90 days and you walk away before 90 days (and before the bank issuing an approval letter) then you will lose your earnest money.
If you accept the terms of the approval letter and proceed with the due diligence, and had not made a non-refundable EMD, you would make that deposit now, and then you can cancel within the 10 day period and get your EM returned.
Remember, in a short sale, the seller has the right to cancel at any time up to just before close of escrow.
If one day before closing, they have a windfall and can keep the house, they can cancel the sale and you're out all the money spent on inspections, etc. However you do get your EM returned.
It's the same with a bank owned property. You're committed but they aren't. They retain the right to cancel at any time before close of escrow.
Short sales and bank owned can be bargains. But in many cases a traditional sale from an regular owner is a hidden jewel.
First of all, thanks Captain Bill, for the incredibly helpful response. You ought to teach a class, as you make complex info very understandable for the non-expert.
To your questions/comments:
1. We have been out with an agent three times and have a pretty good sense of the general areas we want to be (N Sctdl - central or east out as far as Ancala, or north as far as Thompson Pk Pkwy area, or PV) and the agent knows our style/dimensions/must-haves/nice-to-haves. So we're not going into this blindly.
2. What I meant by "rent for now/live in later" (sorry I wan't very clear): We will not be able to live out there full-time or 8 mos/yr for several years, but plan to after retirement. So the choice is - use it occasionally for now (weekends now and then, vacation weeks) or rent it out for 2-3 years and cover/defray the carrying costs.
I sure some would ask why on earth would you buy now if you're not going to use it fully for several years? In this price segment, we've seen two kinds of sellers: those who need to bail now/quickly for whatever reason, and those who want to sell but aren't in a huge hurry. Since we started looking late last year, the number and quality of homes in the first category is declining, and the number in the second category is increasing. In November you might have found a nice house that had been priced to high, say $1.9M, that had sat on the market for 2 years, they lower the price mult times, and they eventually bail at $950K. Today, you might see an owner price a similar house at $1.25M - but they won't move off that price, or will only take $1.175M. Not sure this is price appreciation, but instead a combination of fewer distressed sellers and closer to realistic pricing/less willingness to negotiate down. C. Bill, is that consistent with what you're seeing?
Bottom line is, given today's interest rates, if we can find a home we really like, at a price we'll likely not see 2-3 years from now, we'll buy now.
Depends on when you want to buy. Do you have time constraints, if so short-sale might not a good option. Bank can take months to response. Just my 2 cents.
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Here's what we were told by our agent
