Short Sale Negotiations
Short sales are often a moving target. How to proceed depends on the circumstances of each one when determining the likelihood of success with respect to negotiating short sales. A common issue is how to handle or request concessions for repairs following the inspection.
I. Requests after Inspection
I would suggest considering some of the following factors before making a decision:
- Who is the bank?
Is the lienholder or bank a local lender or is the bank a national entity? If local, the chances are much greater of getting a timely and/or positive answer to a request for a reduction of the purchase price based on the inspection results (as well as other questions and information). If the bank is a large, national lender, the more likely the response will be delayed (sometimes considerably) or rejected. However, even if the bank is a large one, the listing agent may be able to tell you whether they have worked with the bank before, how often, and if so, they may tell you what their experience has been with the bank when buyers have asked for a price reduction following the inspection. An experienced listing agent may have quick access to a bank negotiator and can find out information faster than others.
The seller, the listing agent and the bank all want the sale to be successful as well. A common theme from agents is to place all or most of the blame on the bank in terms of the lack of success with the short sale. I am not defending banks, but from the banks' perspective, it is important to be aware of the other side of the coin. Banks often claim the listing agent and/or the seller determines the success or failure of the short sale. Failure to provide the bank with all of the necessary documentation, not providing accurate information, or not following all of the bank's requests are some examples that cause considerable delay and/or an unsuccessful outcome. If there is one thing a bank wants to avoid more than a short sale, it is a foreclosure. Short sales are much more inexpensive to a bank than taking a property back via foreclosure.
- Communication between agents is critical, especially with a short sale.
There is little or no downside to asking questions of the sellers' agent, especially an experienced one. You may say "Why would my agent ask the seller's agent if the bank will reduce the price after my inspection?" Of course they won't say "yes", right? That may be right. However, in my experience, the answer has been "yes" more often than I thought it would have been. There is nothing wrong with asking the question. If I hadn't asked, the decision to make the request might not have been made. Asking questions can provide potentially great information. Whatever the answer is, take it as part of the information needed to make a more informed decision. Asking questions, even ones that appear unproductive, does not mean they will be unproductive, nor does it mean suspending good judgment regardless of whether you like or don't like the answer.
Maybe it's part of my background as an attorney in addition to being a real estate broker, but having negotiated cases with insurance companies involving big cases, negotiating is in my blood. Communications with the other side, bad or good, honest or dishonest, is essential. Simply listening to what is being said without interrupting can provide valuable information. Listening can allow you to hear gems of information. Sometimes, the best information one can learn is from what was not said. Negotiating is an art, not a science, but practice hones the art. Information is the key to negotiation.
Not all agents deal with each other repeatedly, but many do, especially with short sales. As with any communication, trust is paramount. If the agent tells you something you know is not true or you find out was not true, that dictates future communications.The opposite is also true. If the information you received was truthful and reliable, this goes a long way to establishing trust. Trust translates to better results for clients. Agents often work together more than once and agents speak to other agents so (in theory), the incentive is to cooperate. It isn't always easy to do. Personally, learning how to improve communication skills is an ongoing process.
- How significant are the repairs?
Unless the repairs are fairly substantial, expensive, and require the services of numerous professionals, it would probably be best not to request concessions for repairs. If the repairs involve a lot of cosmetic items, wear and tear, and minor electrical, plumbing, small structural items, etc..The chances of getting a price reduction are not great. However, unlike bank owned properties, short sales are not always sold in an "as is" condition. Concessions can and should be made when appropriate. If the repairs are such that you would not buy the home without a price reduction, then you must ask for the price reduction. If the repairs are so extensive that the bank knows they are going to have a hard time selling the house at the price they agreed to before the inspection, they will probably have to lower the price. Sometimes, submitting an extensive inspection report to the bank with significant findings can also burden the bank with the information and leverage your bargaining position.
- Are there competing offers to consider?
If a buyer finds a great house that many other buyers are scratching and clawing to get, requesting a price reduction following an inspection might jeopardize the sale. If there are several back up offers, including one or more without an inspection contingency, the bank could simply approve one of the other offers waiting in line.
- Following the inspection - A price reduction is the option in lieu of requesting repairs
Requesting a reduction in price is the only realistic or viable option with a short sale. Banks are not going to make the repairs on behalf of the seller, nor will the seller make the repairs. Some sellers make minor repairs if they can afford it, but the vast majority of the time, sellers who need to do a short sale do not have the financial resources available to make the repairs. Whether to ask for the price reduction as a result of the repairs needed is situational.
Unfortunately, some agents make generalized statements about requesting price reductions due to the repairs needed and default to the "don't ask for them" side. They simply tell their clients requesting price reductions after an inspection is not productive, so don't ask. Perhaps this has been their experience in some instances so they stop trying. My philosophy is more specific to the circumstances. If the inspection revealed significant issues, it is reasonable to request a reduction in the purchase price. If the question is not asked to the bank, the result is going to be the same every time.
If each situation is carefully analyzed, the opportunity may be ripe to make the request. It is my belief a duty is owed to the buyer/client to investigate the feasibility of the request. Making negative assumptions in general about the outcome of the request deprives the buyer/client of an important and valuable opportunity. This is a hard lesson to learn as I have made assumptions that turned out to be wrong.
II. Closing Costs
Although unrelated to the repair question, asking the bank to pay some of the closing costs out of the proceeds of the sale is, in my opinion, a worthwhile request if the circumstances permit. If the property is not a red hot property with cash offers, no contingencies, etc..(and there are properties in this market that fall in this category) asking for 2% toward closing costs is a reasonable request. The bank can say "no", they can reduce the amount of the request or even better, they can say "yes". Again, what you don't ask for you will not get. This is an unprecedented buyers' market. Closing costs are often cash out of pocket to a buyer so it means a lot. Even if the buyers' request for a price reduction based on the repairs needed is rejected by the bank, a buyer has this additional arrow in his/her quiver to help offset the cost of repairs needed by asking for closing costs. Often, with the refund I provide to clients combined with the bank agreeing to pay 1.5%, 2% or more of the closing costs, all of the buyers closing costs are covered. There are other ways to get the bank to agree to paying closing costs.
The market today is new and evolving. In this environment, new strategies often carry the day over conventional, traditional methods.
Adam Morrow | Real Estate Attorney | Broker | Sound Counsel Realty [email protected]