Put a contract on a short sale property then bank decided to foreclose

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Put a contract on a short sale property then bank decided to foreclose

Jen Montgomery
St. Louis, MO · Member since 2012 · 1 post · 0 votes

Thank you in advance for reading.
Had our eye on a Short sale property for about a month but asking price was over what we wanted to spend on something that we knew would require work. Price dropped dramatically overnight, so the next day we got in there with our agent and decided to put a contract on it. We bid almost twenty thousand over the new asking price. Seller agreed immediately and was sent to the bank. They gave a verbal agreement on a Friday, stating that they would send the contract over early the next week and even going as far to say when they thought they would want to close by. I realize verbal agreements mean nothing, but it did leave us feeling very positive that we would get the signed contract. We heard nothing during the course of the week so our agent left numerous messages. Finally got a call back stating that the bank had still not signed and that they were not responding. Two weeks later we find out that they will probably just let the house go into foreclosure. We are the only ones who even have a contract on the property. We are not competing with any other offers.
A few questions I have is, one, if we bid well over the new asking price, wouldn't it be in the banks best interest to agree to the contract?
Two, is this something that is standard in short sale? I understand that banks can decide if they want to short sale or foreclose, but once they advertise as a short sale, don't they have to abide by that? Or can they just change their minds regardless? If this is something that they can do on a whim, after they have already approved a short sale, I have no interest in looking at anymore of this type of property.
Thank you

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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
14y

First, the bank never advertised the house at all. The owners did. As far as I can tell, you have nothing from the bank agreeing to accept the short sale. The closest thing you have is the seller telling you the bank verbally agreed to accept the short. Until you have a signed contract with a signed short sale approval from the lender, you have nothing. If you had that contact, approved by the lender, then they would not be able to just go to foreclosure. But you don't have that and they choose to go to foreclosure.

Go to the sale and bid.

There are any number of reasons for taking it to foreclosure. They may be senior liens the bank doesn't want to pay. This happened to me. The bank didn't want to pay about $6000 in liens, so accepted a lower price at the auction than I had offered. They also filed a deficiency judgment, which sometimes gets negotiated away in a short sale.

If you're going to pursue this sort of deal, do not focus on one property. Find ten more and make offers on all of them. Then maybe you will buy one.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    14y

    First, the bank never advertised the house at all. The owners did. As far as I can tell, you have nothing from the bank agreeing to accept the short sale. The closest thing you have is the seller telling you the bank verbally agreed to accept the short. Until you have a signed contract with a signed short sale approval from the lender, you have nothing. If you had that contact, approved by the lender, then they would not be able to just go to foreclosure. But you don't have that and they choose to go to foreclosure.

    Go to the sale and bid.

    There are any number of reasons for taking it to foreclosure. They may be senior liens the bank doesn't want to pay. This happened to me. The bank didn't want to pay about $6000 in liens, so accepted a lower price at the auction than I had offered. They also filed a deficiency judgment, which sometimes gets negotiated away in a short sale.

    If you're going to pursue this sort of deal, do not focus on one property. Find ten more and make offers on all of them. Then maybe you will buy one.

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  • Ryan ODonnell
    Flipper/Rehabber · Westchester, IL · Member since 2009 · 126 posts · 55 votes
    14y

    To start, banks don't advertise short sales, they only approve them. The OWNER is the one trying to short sale. The bank has to approve it and move to close. You are correct that they can do what they want. Your offer unless signed and returned was no guarantee that they would agree to a short sale.

    This can happen and unfortunately that's the process. I had a guy who offered every single term and price the bank would agree to and they still took it to foreclosure saying that he didn't do it "in time" although they control the time and extensions.

    Sorry to hear, but don't give up because of that. You're going to come across all kinds of deals that fall apart, maybe even AT CLOSING. It's just business.

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  • David Beard
    Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
    14y

    Yes, probably uncooperative junior lien holders, or the bank saw that the seller had additional assets or a good job such that they could effectively go after them on a deficiency judgment, versus the SS where the seller was probably negotiating hard to be fully released from the debt. The seller may well have had an incompetent agent or short sale negotiator, who wasn't keeping track of the foreclosure time line properly, or didn't get the appropriate paperwork to the bank.

    Just because the agent drops the listing price, this doesn't mean the bank will accept that price. Typically, the agent is just trying to systematically lower the price until someone makes an offer, then they'll submit all the info to the bank for approval. This often works, because the trail of list price reductions is prime evidence that the current list price that attracted the bid is in fact "market".

    As Jon says, you could track it on your county website and bid on it at auction, though it will be several months likely.

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  • Monica Breckenridge
    Rental Property Investor · Colorado Springs, CO · Member since 2010 · 476 posts · 305 votes
    14y

    The bank is under no legal obligation to sell the house on a short sale. It's their asset and they can choose to do what they want with it. The listing agreement is with the owner of record not the bank. So the listing agent sets the list price. Just because a house is listed at a price doesn't mean the bank will accept it.

    Now most banks do find it in their best interest to do a short sale. Just remember behind every bank there is an investor and there are different loan types. There may have been circumstances that you did not know of. For example, if it was an FHA or VA loan, they may have already done an appraisal. A VA appraisal will stick for 6 months and if the bank didn't get the required net of 88.13% of the VA appraisal, then they will foreclose because VA guarantees the loan. If it's an FHA loan and the homeowner were approved into the pre-foreclosure sale program and it expired, the bank can foreclose.

    With Conventional loans the investor could be fannie, freddie, ginney, or a private even. Some investors have set guidelines for example that say if the homeowner is more than 12 month in default, you must proceed with foreclosure. There really isn't much you could do. Especially since you were not in control of the short sale and you just submitted the offer. Being in that position you don't know the whole story behind the negotiation.

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