Is it normal that seller stays in the house after the short sale deal is closed?

Question

We were waiting to buy a short sale. The bank finally approved the price but requires 30 days to close the deal before going to foreclosure, which will be before the Christmas. However, the list agent states that the seller does not move out of the house until three months later by next March. Our agent indicated that we may be able to give the seller some credit like three months rental, $6k -$10k, to persuade him. My questions is:
Is it normal that the seller to stay in the house for a few months after the escort is finished? Our concern is we may be facing the problem to pay the mortgage for someone else to live in the house. I guess the bank and all realtors will walk away after the deal is closed. I am afraid it would become a problem between the seller and us. Then we have to go to court. I do not want to see that happens.

Any advice would be greatly appreciated. Thanks and Happy Thanksgiving to everyone!

Jon Holdman · Answer

Not only is it not normal, but its almost certainly a violation of the terms specified by the lender.  The lender will state the seller can receive no benefit, and staying in the house three months is certainly a benefit.  Look at the paperwork on the deal, and I think you'll find a statement to this effect.  If not, ask for copies of any additional paperwork from the bank you'll be required to sign at closing and it will be in there somewhere.  Better to find out now than to get to closing, be asked to sign this statement and to be unable to close.

My first advice would be to walk away if you can't have possession of the house on the day of closing.

If this is your dream house and you're determined to buy it and willing to put up with this BS, then the first step is to be absolutely certain the lender who's approving the short sale is fully aware the seller is staying.  Add a statement to this effect into the contract, and push it back through the approval process.  I believe this will actually kill your deal, but I suppose the bank could approve it.

If the bank does sign it, and you're willing to put up with this, make it a rental.  Come up with a solid lease.  Best to get one from someone in your area.  You agent may be able to help.  Set the rent and deposit high.  The seller is wanting the benefit of not moving.  You want to move in.  Make them pay.  At least make it somewhat higher than market rent.  I'd be sure its well over enough to cover the payment on the new place as well as any expenses.  I'd actually make it significantly higher than that.  Require the deposit and first months rent (or, the full three months) at closing.  Since I assume you're bringing some money to closing, it would reduce the amount you bring rather than giving you cash in hand.

Your lender is going to require that you qualify for both loans, if you're going to have to keep your existing place for a while.  Is that a problem?

I'd plan to have to do an eviction.  If they can't be out now, what's going to change in three months?  Having a formalized lease gives you the basis for doing an eviction in three months when they refuse to leave.  If you choose, you could let them go month-to-month and continue to collect rent, if they're willing to pay.  My guess is that they won't pay and won't leave, and you have to do an eviction.    That's a month long process that costs a few hundred in some places.  If you've in a tenant friendly area, it can be many months and cost much more.

Seriously consider just blowing off this deal and finding another house.

Scott Hubbard · Answer

As Jon has stated, you providing the seller any benefit could be a violation of the terms of the approval.  I have personally handled hundreds of short sale transactions and this is out of the norm.  In fact, should you be required to sign the approval letter, you could also be putting yourself at risk should you participate in benefiting th seller.  You need to be very cautious.

In fact, since the owner has been living rent fee by not paying his/her mortgage up to this point, why should you assist them any further?   Your potentially bailing them out and they have the nerve to ask you for money? That is ludacris!

Secondly, allowing them to stay in the home past the closing gives you no guarantee that you will receive the home in the same condition you bought the home in.  If they are vengeful and bitter who knows what they could do to your home if given the opportunity.

Third, if you still want to pay the seller cash to leave, then disclose it.  Meaning that you have the $10K contribution  recorded on the HUD 1 so it is then disclosed to the shorted lender.  This will cover your butt as well as the seller's.  If the listing agent does not agree with disclosing the payment, then what she/he is proposing could be construed as fraud.

I do not know the hardship that the sellers have gone through, but chances are the seller may not be as motivated as you might think.  Unmotivated and financially distressed sellers can make a terrible counterparty.  You need the seller to be happy and relieved that your buying their home.  Seems to me, that they are not happy (at least with the timing) and this makes it very risky for you.

Joel Owens · Answer

Simply sounds like to me the sellers know how to work the system.

If you had to move today for a short sale you received no benefit for and then clean the place and then move somewhere else and pay deposits and first months rent it's doubtful the seller has this money.

So they have most likely told their agent if we get money to move we will do the short sale but NO if not.Other times the sellers have no intention of selling but list the property to appease the lender to give them more months of free rent not paying the mortgage and then accept and offer to get the lender to give them even more time on top of that to close it.The seller then creates roadblocks to stall the sale.

From their perspective they can milk it through foreclosure and wait even  a few more months  for eviction and get cash for keys.

So if they get 3 months more free rent at 1,500 a pop and 5k cash for keys that is almost a 10k benefit for them by NOT doing  a short sale.

I haven't worked in the residential short sale side for over 3 years.How investors use to handle this and I don't know if they still do it today but they would buy some of the sellers junk for inflated prices with a personal property bill of sale.

This got the sellers some cash out of the deal to move.

This wasn't illegal years ago but processes and rules have been added since then so don't know if it can be used today.

Jay Feldman · Answer

I agree with Jon. Also something smells very funny on this deal. My guess is there is information missing somewhere or being held back. If at all possible take you money and run! If that is not an option see a good real estate attorney before you spend another penny or day on this deal. Good Luck

Jim Murphy · Answer

Yes Jon is right I have done a short sale and this seems downright whacky .

Jon Holdman · Answer

If you are coming up on the deadline for this contract, CANCEL IT.  Demand your money back and unwind this second mortgage.

On short sales DO NOT provide any earnest money until the lender who's taking the short has approved the deal.  Without that approval, you don't have a deal, and your EM is tied up.   I've been in that position, too, and its sucks.  Put "Earnest money to be provided by certified funds within 48 hours of short sale approval".

I've never heard of a lender putting money into a deal before the deal was ready to close. Is your second a private lender or something?  Why are you making payments on a loan that's just setting in the escrow company.  That's CRAZY.  Maybe this is a private lender who didn't really know the process.  Otherwise, I think this lender is trying to shaft you by wiring the money too soon and then charging you interest while you wait.  You could be waiting a long, long time.

Jeff Tumbarello · Answer

The defaulted borrower in benefiting from this transaction. Run Forrest Run

:idea: Everyone will tell you that the lenders do not care about short sales once they are paid
http://www.businessweek.com/news/2010-06-10/banks-face-short-sale-fraud-as-home-flopping-rises-update2-.html

Sergio Natera and Anna McElaney now know better. Bear in mind these are licensed agent who should have at least know to disclose and should be hammered. As the banks free up legal teams when the debacle fades away (trust it will). They will then start working on getting Judgements. That "due dilly" from the attorneys may unearth a lot of this garbage. Failing to disclose "benefits" of the short sale will cause a few people to get judgements that probably would have not.
In the end do all the clean business you can. Run to the hills from what is not.

HUA YANG · Answer

Thanks for the great help from this forum. I have gone through all the stages to try to get this short sale house - sign the escrow doc and loan doc. However, I was still a few hours behind the deadline so the bank would not be able to release the loan. The list agent kept telling my agent that he had filed extension application. But we have not heard anything for over 10 days. I lost my patient and wrote an email to request answer. The listing agent wrote back with surprising answer - he did not file extension but will file a new approval letter to the seller's bank. We all know he is lying for at least one part. Maybe he has found a stronger buyer who is willing to offer more money so he delay whole process to force us to drop out, then he will be a dual agent. We do not know the exact reason why he did that and we do not know if he will file approval letter to the seller's bank. I am in stressful situation as I my downpay is in escrow company and I have started to pay my 2nd loan mortgage as it was wired before the main loan. My question is whether the list agent can change the buyer as he wants at this stage. Can I check with the seller's bank to see if the list agent has done what he said to do? Any legal help can I ask to protect my interest? If he delays the process for ever, I will have to pay 2nd loan mortgage continually, from which my loss will increase with time goes by.

Many thanks!

Nick Reuter · Answer

Bad idea... try to get them out. As others have said, there is no right, at that point they are essentially squatters. Move on!

Jack Coquerel · Answer

It happened to us just recently and we had to file eviction.

Is it normal that seller stays in the house after the short sale deal is closed?

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