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Short-Sale Purchase Price Not Set In Stone

Ginny:  I’m buying a short sale. We have a signed purchase agreement from both parties. Everything was fine, but now (a month later) my mortgage (broker) said the bank did an appraisal on the property and now wants to increase the price by $5,000 and make other changes to the contract. She says they have that right — is this true?

The purchase agreement has been signed and I have talked to the bank. My lawyer said to sue them, because it should be pending unless we back out of the deal or something else happened that was our fault. — Tamar T., Miami, FLA

Tamar:  Before around 2007, most Americans had never heard of a short sale, and certainly didn’t know anyone who’d either bought or sold via this transaction format if they had heard of it. But the short sale came back into vogue when subprime mortgages began to reset and home values began to drop, leaving about a quarter of American homeowners “upside down,” or owing more on their homes than the homes are worth.

This makes sense, given the basic definition of a short sale, which is the sale of a home for a net price less than the mortgage lenders and lien holders are actually owed.

As many times as I feel like I’ve parroted the basic logistical and transactional contours of a short sale in the name of basic real estate education, clearly the message has not spread as widely as it needs to. This is evident not just in your question, but also in the fact that the question, “What is a short sale?” is one of the most frequently searched real estate questions on the Web these days, per Experian Hitwise, a search data analytics company.

The “short” answer (sorry about the pun — couldn’t help myself) to your question is a resounding yes — the seller’s bank absolutely does have the right to change the terms of your transaction, even though you have a contract signed by both buyer and seller, and even though you’re a month into the transaction.

The longer answer will be another short-sale primer. As I said before, a short sale is by definition a transaction in which the sellers owe more on the home than the net proceeds of the sale will be. Because they are not recouping enough from the sale to pay off the mortgage lenders and lien holders (lien holders include other entities that may have an interest in the house, like the government, if the seller owed back property taxes, for example), all lenders and lien holders with an interest in the house must give their permission for the transaction to close.

As a result, the purchase agreement negotiated between the buyer and the seller in a short-sale transaction is just the beginning of the transaction. Almost always, these days, the purchase agreement expressly incorporates a short-sale supplement or other express terms that state that the transaction terms are subject to the bank’s approval. Look through your documents and see if you see any terms to this effect.

Once the buyer and seller are in contract, that agreement then goes to the seller’s mortgage lenders and other lien holders for their approval, along with a detailed package containing the seller’s financial information and an explanation of the hardship underlying their need to do the short sale.

This is the phase about short sales that makes them take so long — the banks have to process them, negotiate and ensure that they are recouping as much money as possible before you can buy the place. This phase can take anywhere from a few weeks to the better part of a year, depending on which bank(s) are involved.

Most often, under the terms of the short-sale addendum, everything else about your transaction, including your inspections, your contingency period and even your loan underwriting process, is on hold unless and until the bank issues an approval letter stating the terms on which it approves of the short sale of the home.

If these terms are different from the contract terms, you, the buyer, must then decide whether you’d like to take the home on the terms approved by the seller’s bank, or whether you’d rather walk away from the deal.

And, quite often, the bank’s terms are different from the transaction terms that had been negotiated between the buyer and seller. This is well within the bank’s right — they must agree and participate in the transaction, recovering less cash than they are owed, for the transaction to close.

That means they have every right — which they often exercise — to simply refuse to allow the short sale, in which case both buyer and seller are out of luck. Many a disapproved short sale has ended up in foreclosure, in fact. I know a large number of wannabe short-sale buyers who would love to be in your place.

Your contract renders the home pending and the sellers unable to change the terms on you, or to sell the place to another buyer so long as you are in contract (although, note that increasingly banks are exercising their power to accept a higher offer from a buyer other than the one with whom the seller signed the contract. But that’s not your problem right now, so let’s not go there.)

In terms of what you can do from here — your lawyer may be unfamiliar with the short-sale process. Suing the bank should be the furthest thing from your mind. Instead, simply decide whether you’d still want the house at the cost of $5,000 more, or not. You’re welcome to take the bank’s revised terms, reject them outright and back out of the deal, or even to counteroffer them via the seller.

I haven’t personally seen many banks accept counters, but you could certainly try. Just be aware that a counter could easily add another month or more to your transaction.

One thing keeps bugging me about your scenario: Why is your mortgage broker giving you all this information? Why did you not know, going into this deal, what you should expect from a short sale? Your confusion and misinformation are the hallmarks of a buyer who is not represented by a broker or agent.

A buyer’s broker is quite skilled at managing buyers’ understanding and expectations of short sales; if you do have one, you should definitely consult with him or her before making a decision about how to proceed. If not, please consider consulting a local real estate attorney who is familiar with short-sale transactions before you make your next decision.