Hi All,

Just recently I received a question on one of my previous posts about what buyers of Short Sales need to know. As I started to respond to the comment I realized that perhaps folks would be better served if I answered via a full post instead so…

KJN thanks for stopping by and here is your answer as I see it…. You asked “I’m currently contemplating putting an offer on short sale in Jersey City, NJ. My agent says that to make an offer I’ll need to place a good faith deposit of $1K (no problem with me). Additionally, should my offer be accepted by the seller, my agent claims I will need to pay for initial legal fees and inspection costs, all BEFORE the bank approval. Doesn’t sound right to me, is this the norm?”

First and foremost please remember that I am licensed and trained in Sunny Southern California real estate practices so that being said, I am therefore only able to respond based upon what I have seen here in my neck of the woods.

Asking a buyer to put forth a good faith deposit is not only very common it is also good practice. Folks can get very excited about buying a home (or a car, or a boat or a buffalo) but sometimes get reticent when the time comes to put their money where their interest is and having cold hard cash on the table tends to strengthen resolve.

As for legal fees and inspection costs… well, here’s the rub… In California, especially in Southern California where I practice real estate having lawyer’s involved in a purchase is not the norm (unless the property is being sold via probate then that is another story entirely ;-) . As a result, I can’t speak from personal experience here but my “Spidey Sense” would say that paying legal fees before you have any kind of guarantee that the transaction is going to move forward would not be a great idea.

However, being prepared to pay fees as soon as you get an official “green light” via a Payoff Demand Letter (which is the instrument that the bank prepares telling the seller of the property what their conditions for accepting the short payoff of the loan will be and also spells out exactly how much money, down to the penny, they will require, after all the other expenses of the sale are fulfilled, to come their way) is a good idea. And, being prepared to show proof that you have the funds available to do so is also a good idea.

As for the inspections, this is a two-edged sword. On the one side you could wind up paying for an inspection for a home you won’t be allowed to purchase because the bank in control of the transaction won’t accept your offer (more on this later…) which would be a bad thing, on the other side, you could spend money to do the inspections and uncover a glaring problem which would be a potential deal breaker or at least a deal modifier, which would be a good thing.

In a Short Sale, the one thing that you will have in abundance is time before the fact and choosing to use that time to your advantage to investigate the neighborhood and it’s amenities, continue to keep your eyes peeled for an even better property that fits your needs and budget and most importantly, to have time to thoroughly inspect and review the results of the inspections of the property somewhat at your leisure, is the only major advantage that you will have. Remember that in a Short Sale the property is being discounted from the amount owed upon it, but not necessarily from the current market value of the home. So, you might be paying less than you would have two years ago for the same home but that is because the market value of the home is lower, not because the bank wants to give you a “deal”

Another very good reason for wanting to do your inspections BEFORE the bank gives approval to the Short Sale payoff amount is that you may need to adjust your offer if you uncover something that needs repair or replacement. It is a whole lot easier to ask for an adjustment before the bank starts counting their money than it is to do after. And, if you have a home inspection (or a pest inspection) that documents issues that will NEED to be taken care of (not things like carpet or paint but biggees like a red tagged furnace or broken windows) in order to sell the home, especially if they are issues that the bank would have to pay to take care of if they were to foreclose – in addition to the cost of the foreclosure itself, you might be able to adjust your offer to reflect the costs or even possibly get the bank to give allowances to allow for the repairs. But if you don’t know about these things before hand you don’t know to ask for them.

Now, one thing to keep in mind if you do wind up having inspections done before receiving written approval and formally starting the clock is that if you decide not to go forward with the transaction, although your deposit probably won’t be in jeopardy (Because you signed a Short Sale Addendum with your offer and had your agent stipulate that the deposit would go to escrow within 3 days AFTER you receive written bank approval and that all the timelines of the contract start after approval as well, right?) you will eat the cost of the inspection and you will have to provide a copy of the inspection report to the seller regardless. (Be sure to have your agent ask the listing agent for copies of any other inspections or reports that they may have had done on the property. The seller is supposed to disclose these to a buyer but sometimes things slip through the cracks so asking is never a bad idea)

Of course you might be able to deduct the cost of the inspections from your taxes (check with your tax professional on this one since that is not my area of expertise) but you will still be out of pocket for the money. And, if you do it too many times these fees will add up quickly.

So, my bottom line on this is: If you think this is a home you really want to own, and you are sure that, on your end at least, you are prepared to move forward on the transaction as soon as the bank gives the official “go-ahead” then do your inspections, read the disclosures, get your loan docs ready, basically do everything you can do ahead of time so that as soon as the bank responds you can zip through the transaction like greased lightening.

Oh, and about that “Later” that I mentioned earlier… Sometimes, the bank doesn’t want to come to reality where value is concerned so while you may have made a very market appropriate and comparably supportable offer, they want more. In those times, your agent needs to be ready with supporting data including recent market sales, current market supply and other factors that can affect value. Providing this to the bank via the listing agent may not cause a meet of minds but at least you will know that you have done everything in your power to make the deal work. If they still won’t see reason, then, as my mom used to say when I was little “Perhaps it is time to pick up your toys and go home”.

So, Should you Pay BEFORE You Play where Short Sales are concerned? It depends… but you can’t pick up if you don’t put down and the smart business person will take advantage of every opportunity that will better their position. And having more information sooner is definitely bettering your position.

I would also tell you that in my opinion, I would counsel my client’s to not pay legal fees upfront (because I don’t see the benefit to my client as a buyer) unless they got some sort of guarantee that should the deal fall through for any reason other than their failure to complete the transaction, they would be able to get their money back, but again, because that is not generally how things are done in my neck of the woods that could be incorrect information.

So, as usual a long answer to a short question. I hope it helps and if anyone has any additional queries, please don’t hesitate to ask!

Take care all, help lots of people and have a wonderful day!

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One Response to Short Sales… Should You Pay BEFORE You Play?

  1. Great article and a very good answer in my opinion about that buyer being asked to pay for legal fees up front before they even received notice the short sale was even approved.

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