I warned about this in my July 2, 2010 blog, “Brad comments today on short sale buyers withdrawing their offers and walking away”. Did you read it?
Lately, I have been hearing and witnessing a significant number of buyers who have no problem walking away from a short sale purchase contract.
In my opinion, there are two main reasons why this is becoming increasingly pervasive:
1. Buyers, with the assistance of their agents, are writing multiple offers on short sale properties, with the premeditated intention of eventually walking away from most of them.
2. Short sale lenders are just taking too long to issue approvals.
The first reason has to do with ethics. Although legal, the practice of writing offers on properties that a buyer has no reasonable intention of buying is unethical to me. Wasting agents’ time, sellers’ time, and submitting contracts to lenders only clogs the whole system more than it is already clogged. The same buyers who are complaining about the length of the short sale process are often the ones who submit these inconsiderate, unnecessary offers.
I think it should be an ethical violation through the Realtor associations for a licensee to write and submit offers, knowing in advance that the buyer will probably not follow through. There are hundreds of offers written every day in Las Vegas using this strategy. And something should be done about it.
Furthermore, it is extremely unfair to a seller, who is staring down the barrel of the foreclosure time clock. When the seller enters into a short sale contract, he is most likely facing foreclosure, and oftentimes, the short sale contract is the only thing standing between him and an auction date. So when an offer is effectuated and submitted to the lender for approval, the auction date may be temporarily postponed. But when the buyer backs out of the agreement, the clock restarts, and valuable time has been lost for the seller. I have seen numerous cases where a distressed seller may have a single opportunity (due to time) to attempt a short sale before losing his house to foreclosure. And if that opportunity is squandered with an unethical buyer, all can be lost, with devastating and potentially irreversible consequences to that seller.
The second reason has to do with the banks. Any real estate professional who has had short sale listings can probably back me up when I tell you how incredibly frustrating this process can be. Short sale houses are listed, offers are negotiated, financial documents are compiled, packages are submitted, and then . . . nothing. We wait, and wait, and wait some more. Some of the larger banks (I am so tempted to mention names!) do not even have the courtesy to respond that the packages have been received, much less update the parties as to the progress. Some banks will transfer files from department to department, with seemingly no concern about delays. Buyers’ agents can pressure listing agents all they want, but the vast majority of the time, the delay is coming from the bank, not the agent. Sometimes, agents remain on hold for exorbitant amounts of time, trying to sniff out the slightest progress on their short sale files. Simple emails or questions can take weeks to get a response. And all this time, the buyers are getting antsy, eager for any status update they can get.
I think that many short sales could be saved if the lenders would just communicate! But if they leave everyone in limbo for weeks and months at a time, that’s when buyers get the most nervous, and start to feel that an approval will never come. And then, they just disappear.
Real estate professionals who list short sales would be making a huge mistake if they allowed their listings to be tied up by buyers who haven’t even opened escrow. The days of “Earnest money to be presented upon short sale lender’s approval” should be behind us. Everyone knows, or should know, that short sales take some time, and we should not allow buyers to enter into a short sale contract with no earnest money whatsoever, making it so easy for him to simply walk away if the process takes too long. Then, everyone gets hurt.
I don’t have all the answers, unfortunately. I have suggested in an earlier blog that short sale purchase agreements state that the earnest money should be non-refundable during the short sale approval process. That might cut down on the cancellations somewhat. I also suggested that agents stop writing offers on several properties at the same time, with the strategy that whichever property gets short sale approval first is the one their buyer will buy, and they will simply walk away from the others.
But of more consequence, and for the benefit of everyone (including the overall real estate market), the lenders really need to get their crap together, and process short sales quickly. There is no reason they should take so long. We have been steeped in short sales for 2-3 years already, and the lenders know what to expect. So they need to have adequate personnel, the right software, the correct internal systems, whatever it takes, to get these done quickly. When buyers walk away from their short sale contracts, it often means that foreclosure is next. Wake up, lenders, and stop this from happening. If the market has any chance of recovering any time soon, this is one issue that simply must be dealt with.