So,
As the short sales go rumbling along in our various real estate markets, a question has arisen, and the answers are varied and contradictory. The question is: how do I, as the listing agent, handle a multiple offer situation on a short sale?
Make no mistake, however you decide to handle it, people are going to be upset. It’s just like any multiple offer situation. There are winners, and losers. There are essentially two views of how to handle this scenario with short sales. We’ll assume for the sake of clarity, that these multiple offers come in, not all at once, but successively, over a period of a few weeks. If they all come in at once, it’s a no-brainer. Your seller chooses the highest and best offer, with the most likelihood of passing lender scrutiny. However, even if a bunch of offers come in, and you pick the best one, another one is probably going to come in after this initial flurry, and what are you going to do with that one? Suppose it’s higher than the highest and best you have in hand?
One group of agents will simply take the next offer that comes in, and submit it to the lender also. If any offers come in, each offer is simply passed along for the lender for consideration. Some agents will not even take the highest and best of the bunch of initial offers; they’ll just submit them all. As justification, they say that they are “serving the interests of their client”.
I personally believe that not only is this operating unethically, I also believe it is damaging to the interests of your selling client. Let me explain:
First, when your seller and a buyer sign a contract for purchase, it is LEGALLY BINDING. Just because there is a caviat that indicates the contract is subject to the ultimate purview of the lender does not make it any less valid as a contract. Remember in real estate school when your professors talked about “VOID vs VOIDABLE?” This contract, because it is subject to lender approval is voidable. And, it is not VOID unless the lender, in their ultimate wisdom, deems it such. You cannot simply take each successive contract and send it to the lender. Why not? Because the first buyer could sue you, your brokerage, and your client, and rightfully so.
So, how do you handle it? You have two options. You can:
a.) have each buyer who submits a contract sign a waiver relinquishing their right to positional heirarchy. This means that each buyer who submits a contract understands that all offers will be submitted to the lender, and that the lender will choose the best one. This, in my opinion, is the coward’s way to handle contracts. You are going to run into all kinds of disclosure issues. What is each buyer’s question?
“How much are the other offers? I want mine to be the best.”
Unless you have a signed agreement with your seller to disclose the details of offers, you simply can not do this. It is a violation of contract law. You can ONLY disclose the existence of offers, not their respective details. Do YOU want to get into making full disclosure of every offer to every buyer’s agent, and have them simply fight it out? Don’t do it. It’s a recipe for disaster. You can also:
b.) handle multiple offers with honesty and integrity. If an offer comes in that you think has a chance of getting through the lender’s scrutiny, send it to them. When other agents call to inquire as to availability, simply say what you would in any such circumstance:
“I have an offer on the property at this time. You are more than welcome to submit your offer for consideration in a back-up position.”
Now, that wasn’t so hard, was it? Simple, efficient, to the point. And it’s LEGAL!
What are the benefits of doing it this way? You protect your client from a lawsuit by an outraged buyer, and you increase your chances that the lender will approve the sale.
I can hear you scratching your head. How does this help my client’s chances of having the sale approved by the lender?
Simple: if you send multiple offers to the lender, you’ll simply confuse them. They’re confused enough already. Don’t help them.
Second, by sending multiple offers, you might unwittingly be creating the impression that you’ve got a hot little property on your hands that might be worth more money. This is going to make the lender cocky. Their demands for money are going to go up, and worse yet, they may get the impression that it’s a better idea to take the property away from your client and sell it themselves for more money!
Frankly, unless your seller client is going to be liable for taxes and/or definciencies, they could care less how much the property sells for. They’re off the hook if the property sells, period. By “accepting” multiple offers, you are violating contract law, and doing your clients a disservice.
Caution and Disclaimer: I am NOT an authority on contract law, although I like to pretend that I am. All questions about such issues should be addressed to and by your individual broker or firm’s legal counsel. This is their job, along with taking a hefty cut of your money.
Curtis Reddehase says:
As I have observed some of the short sale contracts in my office I can see kaos in a multiple offer on a short sale. I am often surprised to see them close in the first place, with all of difficulties in the process the banks offer.
June 14, 2008 — 3:14 pm
Erion Shehaj says:
In our firm we deal extensively with foreclosures and short sales primarily on the buying end. I always thought it was a better idea for the listing agents to set offer deadlines and subsequently present all offers received by the deadline all at once to the lender. The deadlines can be disclosed on the MLS listing and could last (say) a week and if no offers are received then the listing agent can simply renew for the following week. In this manner, you don’t simply reward an offer for being the first but you evaluate a group of offers in order to find the best.
June 14, 2008 — 3:24 pm
Craig Tone says:
See now you can continue to send in multiple offers to the lender. The offers continue to go lower, and lower, and lower…
June 14, 2008 — 6:06 pm
Sue says:
I am fortunate in that I live in an area where I have not dealt with short sales. Close to NY and a train line.
June 14, 2008 — 7:50 pm
John Kalinowski says:
Allen- This is a great article, considering all the current buzz surrounding short sales. I’m not an expert on the subject, which may explain my confusion, but there are several points that need clarification.
> You cannot simply take each successive contract and send it to the lender. Why not? Because the first buyer could sue you, your brokerage, and your client, and rightfully so.
Are you talking about successive “contracts” or “offers”? The terms seem to be a bit mixed-up in the article. Buyers submit “offers”, not “contracts”. It’s not a contract until all sides agree and sign. How can the first buyer sue you for submitting other buyer’s “offers” to the lender? You have to do what your seller instructs you to do, and if they tell you to send it to the lender, that’s your obligation. If you’re advising your seller to sign and accept more than one offer, creating multiple contracts, then you’re definitely creating a real mess, but I don’t think that’s what you meant to say.
> a.) have each buyer who submits a contract sign a waiver relinquishing their right to positional heirarchy
Again, the buyer is submitting an offer, not a contract, and I don’t understand the comment about “positional heirarchy”. Maybe your state is different, but in Ohio I don’t know of any law that gives a buyer an advantage because their offer came in first. If I receive one offer at 9:00 AM, a second at noon, and a third at 5:00 PM, the seller has no legal obligation to give the first one preference because it was submitted “first”.
> Unless you have a signed agreement with your seller to disclose the details of offers, you simply can not do this. It is a violation of contract law. You can ONLY disclose the existence of offers, not their respective details.
Not sure about this one either. Unless your seller tells you it’s OK to do so, you can not disclose the existence of offers either (at least not in Ohio). If the home is under contract, that’s different, but I can’t tell other agents I have an “offer” on the table unless my sellers tell me it’s OK to release that information. We are only required to disclose if the home is under “contract” if asked by other agents.
> “I have an offer on the property at this time. You are more than welcome to submit your offer for consideration in a back-up position.”
Again, do you have a “contract” in place, or just an “offer”. If another agent calls you, you can not tell them you have an offer on the property unless your seller tells you to release that information. Doing so might cause that second buyer to decide not to write an offer, since they may be afraid of getting into a multiple situation, and this is not in your seller’s best interest.
> By “accepting” multiple offers, you are violating contract law, and doing your clients a disservice.
I’m really confused by this one. How can you “accept” multiple offers? The only way your seller can “accept” multiple offers would be to sign more than one, which would be ridiclous. By sending multiple “offers” to the lender, you are not accepting anything.
The important point is that you can not do anything unless your seller tells you to do so. Many good points in the article, but also a lot of confusion between whether you’re talking about offers or contracts.
June 15, 2008 — 5:08 am
Thomas Johnson says:
Step #1: Get the lender to pick up the phone. I had a S/S where the lender changed the workout person’s extension to a fax line. Kind of hard to talk to a fax machine…
June 15, 2008 — 9:32 am
Rick Belben says:
I am going by the assumption you are sending signed contracts to the bank and not just an offer. There would be nothing wrong with having a back up contract as long as it is noted in the contract that it is a back up and would only move forward if the first one does not.
If multiple offers were received at the same time I would think you would select the one that has the best chance of of being accepted.
The contract is a valid contract once the seller signs it. Yes the bank has to approve it but they are not a party to the contract.
June 15, 2008 — 1:41 pm
Richard Johnston, RE/MAX says:
Hi Alan,
I wrote a piece on my blog covering your post and also including my opinion on dealing with multiple offer situation on a short sale. Thanks for your post, glad to see great minds think alike.
Here is the link:
http://estatesla.blogspot.com/2008/06/short-sale-trouble-how-to-avoid-it.html
June 16, 2008 — 12:57 am
Allen Butler says:
Great Responses, Folks.
To Mr. Kalinowski:
It seems as though all of your questions revolve around my interchanging the terms “offers” and “contracts”. You would be correct in all instances wherein the two are actually quite different. Sorry for the confusion.
June 17, 2008 — 3:41 pm
Staten Island Real Estate says:
I’m buying a short-sale property right now – actually closing on it next week. It took the bank three(!) months (from the date of executed contract) to make up their mind. Plus the listing agent wanted to keep almost all the commission to himself, claiming he did so much work in this deal. It turns out a company in Salk Lake City did the legwork. This business is just getting weirder and more chaotic day by day.
June 17, 2008 — 5:27 pm
Glenn says:
Allen – your post is excellent.
First, if an offer comes in on property that already has an accepted offer – I inform the buyer’s agent we have an accepted offer and it has been sent to the lender, and we would appreciate it, if the buyer is truly interested, they make the offer a back-up offer.
“if you send multiple offers to the lender, you’ll simply confuse them. They’re confused enough already. Don’t help them.” Your statement has a deeper effect on the lenders – burying them deeper in paperwork they already have.
“…they could care less how much the property sells for.” This is a very true statement and part of the issues facing the lenders today – they are the ones taking the loss.
Maybe taking more of a business approach to short sales, timeframes for acceptance would be a lot less and more people could benefit.
June 21, 2008 — 5:59 am