Short sale question - which offer goes to the bank?

Question

I make a lot of offers on short sales because there are so many in my market. In fact, the last house I bought was a short sale.

However, I've recently come across several situations with short sales (all listed on MLS) where the home owners only wanted to sell the house to a friend (presumably at a deeply discounted price). In one of the cases, I know the home owner even had a plan to rent the house back for six months and then buy the house (at the end of the six month rental period) back for over the selling price but well under the amount discharged in the short sale.

I know in most (maybe all?) cases the listing agent can only submit one offer to the bank. So, my question is, is there anything that dictates which offer has to be submitted? Is it only the one the seller accepts? Or is it supposed to be the highest/best offer?

I'm just wondering how these home owners are able to sell their houses to their friends at a discounted price when multiple other offers are coming in at WELL over the asking price?

Any Realtors, or other people with short sale experience, out there who can offer some insight?

Joel Owens · Answer

While the seller owns the property the bank has to go along with the discount for the offer to go through. It's not just the price but the TERMS of the offer a seller has to agree too. There might be a better offer in the banks eyes but the seller doesn't like the closing date, getting a promissory note, or other items tied to a deal that are not good for the seller. The seller still owns the property so they can accept whatever they want and tell the bank to go jump off a cliff. The bank doesn't have to cooperate and it's a dance between getting what the bank wants and the seller wants to happen. Now you can contact the bank and try to purchase the note at a discount through the note sale department. You could then move to foreclose as the owner of the note or do other options. It depends on if the angle is just to make some money off of the property or you want to hold it long term and own it.

Kyle J. · Answer

Simon, I haven't done it personally and it may not be legal or allowed, but trust me it is possible. I have seen it done more than once, and I'm sure it's happening more frequently than you might think. I think there are a lot of problems with short sales right now. People have found ways to exploit them and frequently do things that aren't technically allowed, especially now that there is so much less available inventory out there.

Simon Campbell · Answer

I do not think that this is even possible. Every short sale regardless of lender requires the "arms-length transaction" certification that has wording like below: "The Buyers and Sellers nor their Agents have any agreements written or implied that will allow the Seller to remain in the property as renters or regain ownership of said property at any time after the execution of this short sale transaction. None of the parties shall receive any proceeds from this transaction except the sales commission." There are certain programs which allow homeowners to stay in home and either rent or buy back. A new supplement to the HAFA guidelines "amends this restriction to allow servicers the discretion to approve sales to non-profit organizations with the stated purpose that the property will be rented or resold to the borrower, so long as all other HAFA program requirements are met."

Mark H. · Answer

It's rampant In my area as well- kinda frustrating to see "insider" short-sales closing at half retail, but the banks don't care, and no one else has any right to intervene.

Kyle J. · Answer

The other reason I was curious about how this process works is because I know that banks require short sales to be listed, but it almost seems pointless to do so if the seller can still pick whichever offer they want and aren't even required to tell the bank about the higher/better offers.

Kyle J. · Answer

Thank you J Scott. I do have solid proof of everything. I actually know the buyer on two of the three houses and the listing agent on the third. So there's no doubt about what's going on. However, I'm not looking to get anyone in trouble. I just wanted to get a better understanding of how the short sale process worked behind the scene. And you explained it very well. Thanks.

J Scott · Answer

The seller can choose any offer he wants. This is unfortunate for you, but there is nothing you can do about it if the seller is set on that offer. Generally, a bank only wants to see one offer, so they won't see the offers not accepted. This may not be in the best interest of the bank, but there is no obligation for the seller or agent to do what's in the bank's best interest. Though, the bank will do a watered down appraisal and they'll expect the offer to be within 10-20% of the appraised value. Now, if the seller is trying to sell to a friend, rent back and/or buy back later, that may violate the "arms length transaction" requirement that the bank sets that basically says the buyer and seller aren't related, don't have any agreements outside of the contract and the seller must vacate the property upon sale. If they violate this, I imagine it can be considered fraud, as they sign a document to this effect at closing. The agents also sign this document, so if they are aware of any lease back or sell back agreements, they are in violation as well...I imagine they could lose their licenses. Do you have proof of the allegations you've made? If so, you could probably get everyone involved in a lot of trouble. But it probably won't help you get the house unless you were willing to blackmail the agent and/or seller by threatening to turn them in.

Kyle J. · Answer

Thanks for the response Joel Owens. Let's say the terms are all roughly the same. For instance, in one of the cases I came across, the property is listed for $110k. In less than 2 days, the property received over 50 offers. Most of the offers were all cash, over the asking price, all the way up to $170k. The listing agent said they can only submit one offer to the bank. So the bank will only see one offer, and doesn't get to choose between all of the offers submitted. In this particular case, the seller ONLY wants to sell to his friend. I don't know at what amount, but let's assume no more than the listed asking price of $110k. If that friend's offer is the only one that gets forwarded to the bank, the bank would have zero knowledge that there were many other offers for well over the asking price. Is that permitted? It just seems like a scam on the part of the current home owner. But maybe that's allowed. That's what I'm trying to figure out since I've been seeing more and more of this going on.