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More about Short Sales.......

Buyers pursue short sales to get a good deal. So when you see a price listed for a home that you think is too low for the neighborhood, before you jump on that price like hot fudge on a sundae, ask your agent to call the listing agent to find out if the home is a short sale.

Because you might want to think twice about making an offer on a pre-foreclosure, short sale home. It's not as simple as you may believe, and very few can close in 30 days or less.

What is a Short Sale?

A short sale means the seller's lender is accepting a discounted payoff to release an existing mortgage. Just because a property is listed with short sale terms does not mean the lender will accept your offer, even if the seller accepts it.

Be aware that the seller need not be in default -- to have stopped making mortgage payments -- before a lender will consider a short sale. A lender may consider a short sale if the seller is current but the value has fallen. The seller may have over-encumbered, owe more than the home is worth, so a discounted price might bring the price in line with market value, not below it.

6 Things to Know About Short Sales

When you spot a short sale house that interests you, take your hand off the mouse and step away from the computer. Before you get all excited over the prospect of buying that short sale house, pick up the phone and call your real estate agent. Your agent needs to research that short sale listing first.

In some real estate markets, fewer than one in 10 short sales close. Just because that home is listed as a short sale doesn't mean it's really for sale (because it's subject to lender approval), nor does it mean it will sell at the advertised price. Here are 6 things you need to know before trying to buy that short sale.

Comparable Sales For That Short Sale House

The short sales are all priced below comparable sales, yet they are priced in line with pending sales. Why? Because short sales take anywhere from 2 to 4 months, on average, to close, and pending sales will become the comparable sales at closing.

Some short sales are priced ridiculously low. So low that the sellers' bank will never accept them. These types of listings receive multiple offers. But all is not lost. To get your offer accepted, it will need to be priced near market value. If you're not prepared to pay above a superficial price on a lowball short-sale listing, then pass.

Mortgage Amounts, Number of Loans and Lenders

Ask your agent to research how much is owed against the home and find out the number of loans that are recorded. A second or third mortgage lender will receive peanuts as compared to the amount a senior lender in first position will get.

Moreover, some lenders, deserving or not, get a reputation for being difficult to work with. If your agent is an experienced short sale agent, he or she will know who these lenders are and can advise you of the difficulty you may encounter.

If your offer is 20% or 30% of the mortgaged amount, it is unlikely that your offer will see the light of day on the negotiator's desk.

Short Sale Listing Agent's Track Record

A listing agent who is advertising a short sale but has never closed a short sale is a risky proposition for you. That's because it's up to the listing agent to submit the short sale package to the lender and negotiate. Your buyer's agent can't talk to the bank.

Some listing agents hire outside companies to do their job, and the results of those negotiations are sketchy at best. Ask yourself, do you want to risk rejection of your short sale purchase because the listing agent has no experience?

Short Sale Seller Qualifications

Find out if the listing agent has received a completed short sale package from the seller, and ask about the contents of that package. A complete short sale package consists, at minimum, of the following:

Sellers' hardship letter
Tax returns
W-2s
Payroll stubs
Financial statement
Bank statements

Some sellers do not want to cooperate and are slow to return these documents. Others have never been told by their agent that these documents are mandatory. You don't want your short sale purchase delayed because the listing agent doesn't have the required documents.

Number of Short Sale Offers Received

Homes priced under market value will receive multiple offers. An agent is not required to disclose the terms of those offers, but you do want to know how many offers you are up against.

Here's how it generally works:

When a short sale home first comes on the market, the first offer will most likely be a tad below list price.
The second, at list price.
The third offer will be slightly higher, maybe by a $1,000 or $2,000.
The fourth offer will be significantly more.

You want to make an offer that will beat the competition yet still be below market, or don't waste your time.

The Listing Agent's Short Sale Procedures

Although REALTORS are required by the REALTOR Code of Ethics to treat everybody fairly, not every agent is a REALTOR. This means the short sale listing agent may decide to submit only the first offer to the bank and withhold all other offers.

Withholding other offers could be considered to be a violation of the fiduciary relationship formed between the listing agent and the seller. The seller is entitled to receive the highest and best price. Realize that even if your offer is submitted to the bank, as time marches by while waiting for short sale approval, another buyer could outbid you.

Waiting for Short Sale Approval

Question: How Long Should I Wait for Short Sale Approval?

A reader asks: "I submitted an offer on a short sale almost 120 days ago, and we haven't heard anything from the listing agent. My agent calls every week to find out if the bank has accepted our offer. Half the time the listing agent doesn't call her back. We don't know how many offers the bank is looking at or even if our offer is best. How long should a buyer wait for short sale approval?"

Answer: Short sale buyers across the country are singing the blues right along with you. Every short sale is different and as much depends on the lender as it does on the listing agent. Some listing agents outsource their short sale negotiations to a third party, which can often delay a response.

Qualify Your Short Sale Before Writing the Offer

Before you decide to buy a short sale home, ask your agent to do a little groundwork first. Some of the things your agent might do are:

Examine the Comparable Sales
Many banks will discount the price a little bit from market value, but to get an acceptance, offers should be reasonable and close to the comparable sales.
Check Out the Short Sale Listing Agent's Track Record
If the short sale listing agent has very few short sale listings and has little experience actually closing a short sale, your chances of offer acceptance may be slim.
Ask How Many Short Sale Offers Have Been Submitted
While the listing agent may refuse to disclose the offer prices, the agent should let your agent know how many offers have been received. If there are multiple short sale offers, you may need to offer more than list price.
Find Out if the Sellers' Short Sale Package is Complete
Bank negotiators will not process a file if the sellers' short sale package is incomplete. That file will go to the bottom of the pile if it's missing paperwork that the bank requires.
Get the Name and Number of Lenders
More than one lender might mean the file will take longer to close. Some junior lenders are demanding unsecured prom notes from the seller or more money than usual from the first lender. Also, some lenders will consider only the first offer. If you are not the first offer, your offer may fall by the wayside.

How Long Do Short Sales Take?

This is the million-dollar question. What once took two months can easily take four months.

The short sale process, from submission to short sale approval, is generally as follows:

Submission of offer and complete short sale package from the seller.
Bank acknowledges receipt -- 10 to 30 days.
Bank orders a BPO or appraisal -- 30 to 60 days.
File is reviewed -- 30 to 60 days.
Negotiator is assigned -- 30 to 60 days.
Level II negotiator may be assigned -- 30 to 90 days.
File is approved or rejected -- 60 to 120 days.

If you're running past 120 days, it's possible that the listing agent or a third-party negotiator is not on the ball and is lax about calling the bank. Calling the bank means waiting on hold anywhere from 10 minutes to an hour or longer.

Or, a lengthy short sale period can also mean the bank has internal problems, not enough staff or has lost the file a few times, prompting the listing agent to resend the package over and over.

It can also mean that the appraisal is substantially higher than your offer, and the listing agent is building a case for a new appraiser.

Unfortunately, you can't always avoid problems on a short sale. Patience is key. You'll eventually get short sale approval. Threatening to walk away means nothing to the bank. Your best bet is to stick it out and wait, providing you truly want the home.

11 Reasons NOT to Buy a Short Sale

Short sales happen when home values fall and sellers do not receive enough cash from a buyer to pay off their existing mortgages, providing lenders agree to take less than the amount owed to them.

On the surface, it may appear that a short-sale buyer is getting a good deal. Although a slim margin of short sales may be profitable for a buyer -- because there are always exceptions -- much of the time, a buyer would be better off buying a home that is not in default.

You are unlikely to hear real estate professionals tell you that it's not a good idea to buy a short sale. In part, that's because real estate professionals profit on a short sale. Everybody makes money except the sellers and buyers. Realize, too, that listing agents might push sellers to list as a short sale, because if the sellers went through foreclosure, the listing agents will not get the listing.

Here are 11 Reasons Why Buyers Might Not Want to Buy a Short Sale:

1) Sellers Paid Too Much.

If a home sold for $500,000 a few years ago and is now for sale at $400,000, that doesn't mean the buyer is picking up $100,000 of equity for free. It means the seller paid too much in a rising market and now the market has fallen. It means the seller has no equity.

2) Sellers Borrowed Too Much.

Banks that were eager to lend money in appreciating markets sometimes allowed borrowers to over-mortgage the home, meaning the borrower's loan balance exceeded the value of the property. Appraisals are subjective, and not all appraisers will place the same value on a home. Although against the law, some appraisers are pressured by banks to appraise at the amount the home owner wants to borrow.

3) Stringent Qualifications.

Inexperienced or unethical real estate agents might push a seller into considering a short sale when the seller does not qualify for a short sale. Sellers must prove a hardship and submit evidence of the hardship to the lender for approval. Some agents list homes as short sales without ever talking to the lenders or pre-qualifying the sellers.

4) Homes Sell at Market Value.

Lenders aren't naive or unaware of the value of a home. Lenders will insist on a comparative market analysis, known as a CMA, or broker price opinion, known as a BPO. If a lender believes a better price can be obtained by taking the property back in foreclosure over a short-sale offer, the lender may hold out for a higher price. That price will be close to market value. Lenders accept short sales when the home is worth the short-sale price, which means market value.

5) Homes Sell "As Is".

If a mortgage company agrees to a short sale, it is most likely also paying the closing costs in the transaction. Lenders ask buyers to purchase the home in its present condition. Lenders typically will refuse to pay for:

Suggested repairs disclosed on a home inspection.
Pest inspections or work necessary to issue a clear pest report.
Roof certifications or roof repairs.
Home protection plans for the buyer.
Deferred maintenance.

6) Length of Time to Close.

Depending on when the Notice of Default was filed, the lender's back-log of foreclosures and how much paperwork the seller has already submitted, it could take anywhere from two weeks to two months to get a response on a purchase offer from a lender. In addition, if two lenders are involved because there are two loans secured to the property, it could take longer to satisfy the demands of the second lender.

7) Lenders Can Change Conditions.

Some lenders reserve the right to renegotiate the terms of the short sale at the last minute. If the market changes, new laws pass or new information crosses the lender's desk, the lender can attempt to change the terms of the contract. Lenders generally have lawyers at their disposal, and ordinary buyers do not.

8) Lenders Discount Commission.

Generally, only lenders who have sold loans to Fannie Mae or Freddie Mac are paying traditional real estate commissions to real estate agents. The rest may want a discount. Moreover, agents end up doing two to three times the work of a conventional transaction and don't appreciate getting paid less to do more work. If you have agreed to pay your agent a certain percentage under a buyer broker agreement, you could be liable for the difference between what the lender will pay and what your contract stipulates, if your agent refuses to waive the difference.

9) Higher Buyer Closing Costs.

Because lenders rarely will pay for any extras, like a seller would be willing to do, if you want any of those extras, you will pay for them yourself. Sometimes lenders will refuse to pay for standard seller closing costs such as transfer taxes, too. If you want specific inspections, you will probably pay for them out-of-pocket.

10) Lose Control of Transaction.

If you need to close escrow by a specific date, lots of luck with that. A short sale home closing process takes an indefinite amount of time. The seller's lender calls the shots, not the buyer nor the buyer's lender. If you are trying to close escrow concurrently with the sale of your home, it might not happen.

11) Little Seller Motivation.

When the seller discovers that the short sale effect on credit is close to that of a foreclosure, there is little incentive for a seller to cooperate with a short sale. Although sellers may qualify to buy another home in 2 years after a short sale versus 5 (with restrictions) on a foreclosure, some have no intention of ever buying another home again.

Check the Public Records

Do your research before making an offer to purchase. Your agent can find out who is in title, whether a foreclosure notice has been filed and how much is owed to the lender(s). This is important because it will help you to determine how much to offer.

If there are two loans, you could have a problem. The first mortgage lender's position is protected by the second lender, unless the second lender does not want to foreclose. If a seller owes $160,000 on the first and $40,000 on the second, offering $160,000 leaves nothing for the second. The first will need to give something to the second to gain its cooperation.

Determine Your Type of Marketplace

When most people decide to sell or buy a home, very few stop to take the temperature of the marketplace or wonder if the market is conducive to the goals at hand. That's because most folks tend to think of their home as a place to live and not as an investment.

Buyer's Real Estate Markets

If you are a buyer looking to a purchase home in a buyer's real estate market, this is the best financial market in which to buy. Why? Because there are more homes available for sale than buyers to purchase them. Buyers have more homes to choose among, which increases the odds a buyer will find that **perfect** home.

In a cold real estate market, serious sellers are often willing to negotiate. This means you can probably buy a home for less than list price, and the seller might be willing to pay some or all of your closing costs.

Signs of a Buyer's Market

Inventory is high as compared to previous months / years.
More than six months of inventory is on the market.
Comparable sale prices are higher than active listing prices.
Fewer buyers are purchasing, resulting in lower closed sale numbers.
Median sales prices are declining.
Real estate ads are getting bigger.
For Sale signs are staying up longer.

How to Compute Months of Inventory

Find the total number of active listings on the market last month.
Find the total number of sold or closed transactions for last month.
Divide the number of total listings by the number of total sales, which results in the number of months of inventory remaining.

For example, in a buyer's market, there was 8,722 listings available over a given 30-day period. During that time period, 1,021 sales closed. That leaves 8.5 months of inventory remaining on the market, making that marketplace a buyer's market.

Seller's Real Estate Markets

If you are a home owner who wants to sell a house in a seller's real estate market, this is the best financial market in which to sell. Why? Because there are more buyers than available houses to buy.

In a hot real estate market, serious buyers are often willing to pay more than list price. This means you can probably sell your home quickly and quite possibly for more than you ask for it. If your market is sizzling hot, you might be able to demand that buyers waive appraisals and inspections, although it's always a good idea to let a buyer have a home inspection. Moreover, without waiving the right in writing, federal law says you must give a buyer 10 days to inspect for lead paint.

Signs of a Seller's Market

Inventory is very low as compared to previous months / years.
Less than six months of inventory is on the market.
Comparable sale prices are lower than active listing prices.
More buyers are purchasing, resulting in higher closed sale numbers.
Median sales prices are increasing.
Real estate ads are getting smaller.
For Sale signs are up for a few days before a pending or sold sign is attached.

Neutral Real Estate Markets

These markets are balanced. Typically, interest rates are affordable and the number of buyers and sellers in the marketplace are equalized. The scales don't tip in either direction, meaning the market is normal without experiencing volatile swings.

Signs of a Neutral Market

Inventory is normal as compared to previous normal months / years.
Three to six months of inventory is on the market.
Comparable sale prices are close to active listing prices.
Sales numbers have stabilized.
Median sales prices are flattened.
Real estate advertising remains uniform.
For Sale signs are replaced with pending or sold signs within 30 to 45 days.

What is a Title Policy?

To understand title policy insurance in America, let's look at chain-of-title and how title companies search the public records. Title insurance companies aren't really concerned with where dinosaurs once roamed, whether our ancestors trekked across the Bering Straight or where American Indian tribes settled. Title searches begin with when the United States government stole the land, I mean claimed it -- from the U. S. patent -- and move forward from that point.

Because humans are involved in recording deed transfers and plotting land parcels, a lot can go wrong. You want title insurance because it will protect you against defects and human error.

Property Searches and Public Records

Property transfers were first recorded alphabetically in separate Grantor and Grantee books.
The books are heavy to lift and dusty.
County records are often maintained at local courthouses or the Clerk of Registrars.
Today, most records are stored on the computer.

Division of Land

Early deeds involved large chunks of land known as Townships.
Townships contain 36 sections and are six miles by six miles.
Sections measure one mile by one mile and contain 640 acres.
Half of a section is 320 acres.
1/4 of a section is 160 acres.
1/4 section of 1/4 section is 40 acres.
An acre is 43,560 square feet

Title Search Basics

Title searches start with the most recent deed, searching the grantee's name (the person now holding title) backwards in time, until the deed when the grantee acquired the property is located.
That grantor's name is then searched backwards in time in the grantee's book to find when the grantor acquired title as a grantee.
This process continues, and over time, the property description involves larger and larger parcels of land.
Eventually, the searcher finds the U. S. Patent.

Other Factors Affecting Title

Deeds establish chain-of-title, but sometimes those chains are broken. In addition, title searchers also look for reconveyances (proof that the encumbrances are paid off), and they look for easements, rights-of-way, CC&Rs, other elements affecting title to the property. Here are more records that are searched to piece title together:

Marriage records
Death certificates
Tax sales

Title Insurance Coverage

Depending on the title company, consumers can choose among a variety of options, but the top three choices are Owners, Lender's and Extended Coverage.

Basic Owner's Title Policy Coverage:

Clear title to the property
Incorrect signatures on documents
Forgery, fraud
Defective recordation
Restrictive covenants
Encumbrances or judgments

Basic Lender's Title Policy Coverage:

Mechanic's liens and unrecorded liens
Unrecorded easements and access rights
Defects and other unrecorded documents

Extended Owner's Coverage

Building permit violations from previous owners
Subdivision maps
Covenant violations from previous owners
Living trusts
Structure damage from mineral extractions
Variety of encroachments and forgeries after title insurance is issued

Who Pays For Title Policy Insurance?

This depends on your local custom.
It can differ from county to county, but it is also negotiable in the purchase offer.
Sometimes sellers and buyers split the fee for the owner's policy.
Typically, the buyer pays for the lender's coverage.

How Long Are Title Policies Good For?

Forever, theoretically. If you are planning to resell the property within a couple years, ask your title company about "binder" coverage. Most companies will sell you a binder policy for 10% more. A binder is good for two years, often can be extended beyond that time, and the fee charged for the new buyer's policy will be the difference between what you bought the property for and the price at which it sold. In other words, you will get a credit for the amount of coverage you purchased under your own Owner's Title policy.

How Often Are Title Policy Insurance Premiums Paid?

Once. The fee is due when you buy. You will never pay it again. Title policy insurance is the best insurance policy you can ever buy.

How to Find Short Sales

Question: How Can I Find Short Sales?

A reader asks: "How can I find short sales online from MLS listings? Some of the listings say it's a short sale but some do not. I know my agent can figure out which ones are short sales. Is this information not available to the public?"

Answer: Every MLS system is different, so short sale listings aren't always evident. There seems to be a movement toward identifying short sale listings because of commission disputes. When agents fight over money, systems are often immediately put in place to keep disputes from happening.

What is a Short Sale?

Short sales occur when property values drop or inflated appraisals were obtained, making the property worth less than the amount of its mortgage. This means when a seller enters into a purchase contract to sell for an amount that is less than the home's present mortgage balance, if the seller isn't bringing in money to close, the lender must approve the short sale. That's because the lender is taking a loss.

Generally, short sales are not bargains for a buyer. It doesn't mean the buyer is purchasing the property under market, and it can take a long time to close, if it closes at all, among a host of other reasons. Not all lenders will approve a short sale, and many short sale prices that are advertised are not real prices. They are guesses at what it takes to sell the home.

Short Sale Commission Disputes

The problem arises when an agent takes a listing on a home that is not yet in default, meaning the seller is still making payments to the lender. During the listing agreement term, if a Notice of Default is filed, this could change the terms of the listing. It now becomes a short sale listing, subject to commission negotiation by the lender.

In the Sacramento MLS, our rules state that agent comments -- those that the public cannot see -- must contain verbiage that specifically spells out the sale is subject to lender approval and the commission will be divided 50/50 between the agents.

Most lenders discount the commission, paying less than a seller would pay. One listing agent did not include this verbiage. While in escrow, the buyer's agent insisted that his brokerage was entitled to the fee originally listed in MLS. The listing agent ended up giving a big chunk of his commission to the buyer's agent.

Finding Short Sale Listings

Most short sales are listed by real estate agents. You will find these listings on local web sites and in MLS feeds. Some lenders have complained about advertising that identifies the home as a short sale, because the lenders feel it puts them at a disadvantage when it comes to home pricing. They are right. A buyer generally offers less when it's advertised as a short sale.

If you have access to search terms, first look where the term short sale appears. It might be under "status modifier" or it might be contained in the marketing comments. Choose that field as your search term.

Read the listing carefully. Agents slip in words that identify the listing as a short sale. Look for the following terms:

Subject to bank approval.
Preforeclosure
Notice of Default
Give the bank time to respond.
Preapproved by bank.
Headed for auction

Above all, hire an agent who is well versed in handling short sales and can advise you of the procedures. If you have legal questions, please ask a lawyer for advice and guidance.

Hire an Agent with Short Sale Experience

It's one strike against you if the listing agent has never handled a short sale, but it's even worse if your own agent has no experience in that arena. You need an experienced short sale agent.

An agent with experience in short sales will help to expedite your transaction and protect your interests. You don't want to miss any important detail due to inexperience or find out your transaction is not going to close on time because no one has followed up in a timely manner.

Find a Short Sale Agent

REOs (bank-owned) and short sale listings offer buyers an opportunity to buy a home under market value. Bear in mind, however, that not every REO listing nor short sale listing is a great deal. In some ways, they aren't any different from any other type of listing. Buyers will find a Goldilocks' variety: some REOs and short sales are priced too high, some too low and some are just right.

If you're a first-time home buyer, you will greatly benefit from hiring a buyer's agent who has experience selling REO and short sale listings. Hiring a buyer's agent without REO or short sale experience is almost as dangerous as hiring the listing agent. You deserve an agent who will make your interests a priority.

Searching for an REO / Short Sale Buyer's Agent

In soft or falling real estate markets, many buyer's agents find the bulk of sales comprise bank-owned homes and short sales. If you can find a busy buyer's agent (not an agent who closes 3 or 4 deals a year), most likely this agent will represent a lot of REO and short sale buyers. Here are ways to find an REO / short sale buyer's agent:

Referral From Friends, Coworkers or Family to REO - Short Sale Agents
Chances are someone you know has recently purchased a home. Ask for a referral to that agent, then call to inquire about REO - short sale experience. Referrals are the preferred and most popular method of finding an agent.
Call an Agent Friend and Ask for an REO - Short Sale Referral
Agents who don't negotiate a lot of bank-owned or short sale transactions generally know which agents do. Agents judge each other by harsher standards, than buyers judge agents, so you're likely to be directed to a top-producing buyer's agent. Plus, agents regularly pay each other referral fees, which means the referring agent has an added incentive to make sure you end up in the right hands -- because if it doesn't close, they don't get a referral fee for you.
Talk to Agents at Open Houses
Whether the host of the open house is the actual listing agent or another agent from the same office doesn't really matter as long as you aren't there to buy that particular home. Open houses give buyers a relaxed, non-threatening atmosphere to talk with other agents. You can ask the agents to describe for you a recent REO or short sale experience and find out how many of these types of transactions the agents typically close every year.
Search for REO /Short Sale Agents Online
Many agents write blogs about their experiences. It's almost like reading a diary because you're given an inside peek at what goes on behind the scenes. Be careful you aren't suckered into a site where the agent relies solely on keywords for Internet traffic and doesn't really handle very many REO or short sale transactions. Ask direct questions, don't be afraid or timid.

You can search by "REO" or "short sale" from your favorite search engine site.
Sort MLS records by REO and Short Sale Agents
If you have a friend in the real estate business with access to MLS, run a search by limiting the returns to REOs and short sales, and pull up the closed sales for the past six months in your preferred ZIP code or neighborhood. Look up the buyer's agent name on each of the sales, and then go to that agent's web site for more information.

Rules for Working With Agents

1. Understand Agents Work on Commission

Very few real estate agents work on salary.
Most real estate agents are paid commission. If an agent does not close a transaction, she does not get paid.
Agents are not public servants and do not work for free. Do not ask an agent to work for you if you intend to cut the agent out of your deal.

2. Keep Appointments & Be On Time

Be respectful, use common courtesy and don't expect an agent to drop what she is doing to run out to show you a home.
Do not make an appointment with an agent and then forget to show up.
If you are going to be late, call and let your agent know when you expect to arrive.

3. Choose A Real Estate Agent

Decide whether you want to work without representation: dealing directly with listing agents, or if you want to hire your own agent.
If you decide to hire your own agent, interview agents to find an agent with whom you are comfortable.
If you are interviewing agents, let each agent know you are in the interview stage.
Never, never, never interview two different agents from the same company.

4. Do Not Call The Listing Agent if You Are Working With a Buying Agent

Listing agents work for the seller, not the buyer. If you hire the listing agent to represent you, that agent will now be working under dual agency.
If listing agents show you the property, the listing agent will expect to represent you.
Listing agents do not want to do the buying agent's job. Let your buyer's agent do her job.

5. Practice Open House Protocol

Ask your agent if it's considered proper for you to attend open houses alone. In some areas, it is frowned upon to go to open houses unescorted.
Hand your agent's business card to the agent hosting the open house. Sometimes this agent will be the listing agent, but often it is an agent also looking for unrepresented buyers. Announcing you are represented protects you.
Do not ask the open house host questions about the seller or the seller's motivation. Let your agent ask those questions for you.

6. Sign a Buyer's Broker Agreement with a Buying Agent

Expect to sign a buyer's broker agreement. It creates a relationship between you and the agent, and explains the agent's duties to you and vice versa.
Ask about the difference between an Exclusive and Non-Exclusive Buyer's Broker Agreement.
If you're not ready to sign a buyer's broker, do not ask that agent to show you homes. Otherwise, procuring cause may pop up.
Ask your agent if she will release you from the contract if you become dissatisfied. If she refuses, hire somebody else.

7. Always Ask For and Sign an Agency Agreement

By law, agents are required to give buyers an Agency Disclosure.
Signing an agency disclosure is your proof of receipt. It is solely a disclosure. It is not an agreement to agency. Read it.
The best and most practiced type of agency is the single agency. This mean you are represented by your own agent who owes you a fiduciary responsibility.

8. Make Your Expectations Known

If you expect your agent to pick you up at your front door and drive you home after showing homes, tell her. Many will provide that service. If not, they will ask you to meet at the office.
Let your agent know how you want her to communicate with you and how often. Do you want phone calls, e-mails, text messages, IM's or all of the above?
Set realistic goals and a time frame to find your home. Ask your agent how you can help by supplying feedback.
If you are displeased, say so.

9. Do Not Sign Forms You Do Not Understand

Do not feel silly for asking your agent to explain a form to you. It is her job. Many forms are second nature to agents but not to you, so ask for explanations until you are satisfied you understand.
Do not sign forms titled Consent To Represent More Than One Buyer. This is never in your best interest. Find another agent if this happens.
Realize agents are not lawyers and cannot interpret law.

10. Be Ready To Buy

If you aren't ready to buy, you don't need a real estate agent. You can go to open houses by yourself; call listing agents for showings -- but be honest, say you are "only shopping"; look at homes online; but don't waste an agent's time if you aren't ready to act.
If possible, hire a babysitter to care for children who are too young to stay out all morning or afternoon touring homes.
Bring your checkbook. You'll need it to write an offer because an earnest money deposit may be required to accompany your purchase offer.

How Sellers Can Cancel Your Short Sale

Question: How a Short Sale Seller Can Cancel Your Short Sale Contract

A reader asks: "We signed a purchase contract to buy a home in Elk Grove. It was a short sale. Our agent told us to wait at least 3 months for the bank to approve the short sale. Then, after we waited 90 days, our agent called to say the seller had canceled our short sale contract because the bank approved some other buyer instead of us. Is that legal? How can a seller cancel our short sale contract?"

Answer: Short sales are complex and difficult. Throwing a wrench into the process like this by canceling your short sale at the last minute would be upsetting to any buyer, especially a home buyer who was patient and loyal.

Buyers Can Cancel the Short Sale Contract

Quite often, it's not the seller who cancels the short sale contract. It's the buyer. On the whole, most short sale listing agents don't care which buyer gets the home as long as the buyer is qualified and willing to wait through the short sale process.

Here are reasons why a buyer may cancel the short sale contract by withdrawing the offer:

Buyers might find a home they like better or a home that can close faster.
Buyers may get cold feet, known as buyer's remorse.
Buyers may have had no intention whatsoever of waiting for the short sale approval but instead made multiple offers on more than one home, taking the short sale that gets approved first.

Note: Some legal experts say it violates contract law for a buyer to submit more than one offer at a time if the buyer is unable to buy both homes.

Sellers Who Cancel Short Sale Contracts

Although it is more common for a buyer to cancel a short sale contract, sellers may have the right of cancellation as well. Sellers typically do not sign a purchase contract without specifying that the contract is subject to lender approval of the short sale.

Insome states, buyer's agents generally attach a "short sale addendum" to the purchase contract. The short sale addendum specifies that the entire transaction is contingent upon lender approval. Banks are under no obligation to approve a short sale.

Some legal sources say that if the bank decides to accept a second offer from Buyer #2, the short sale contingency with Buyer #1 fails, and the transaction with Buyer #1 is terminated.

Here are ways a seller can cancel a short sale contract:

A seller may decide to cancel the listing, and the listing agent will agree.
A foreclosure may take place, preventing the short sale.
The seller may be able to accept a higher offer and cancel the first offer.

How Buyers May Prevent Sellers From Canceling the Short Sale

Although it rarely happens, sometimes sellers get cold feet and change their minds about selling. In that event, a buyer who holds a signed purchase contract should seek the advice of a lawyer.

The best thing a buyer can do is read the short sale purchase contract and, if attached, the short sale addendum. A buyer may wish to talk with a lawyer as well. Basically, if the short sale addendum includes verbiage that lets the seller continue to market the property and allows for all offers to be submitted to the bank, the bank can elect to accept an offer at any time that is higher than the first buyer's offer.

Many buyers believe the short sale addendum protects their earnest money deposit and lets them start a home inspection after short sale approval, which it does, but they don't read the fine print.

The fine print often favors the seller. If a buyer finds such verbiage objectionable, a buyer may very well insist that the clause be removed in its entirety from the short sale addendum.

For more short sale legal advice, please talk to a real estate lawyer.

Qualifying the Property and Seller for a Short Sale

A lender is unlikely to agree to a short sale unless the seller has no equity and is unable to repay the difference between your sales price and the existing loans. Sellers need to provide a hardship letter to the lender. Sellers may also owe taxes on the amount of debt that is forgiven.

A seller once demanded that the buyer slip the seller $1,000 to be given the right to purchase the seller's property. This is fraud. The lender legally pursued that seller. Do not be lured by sellers who suggest this practice. In a short sale, the seller receives no money because the lender is losing money.

Short Sale Seller Requirements

Short sales is a hot buzz phrase. Some sellers who decide that their home won't sell at the price they had imagined often start to wonder if they should do a short sale. A short sale doesn't always solve problems, but it most assuredly can create problems. Short sales are not the "saving grace" some home sellers would like to believe.

What is a Short Sale?

A short sale happens when the lender is shorted on a mortgage, meaning the lender accepts less than the total amount that is due. If your mortgage is $100,000, but your home is worth, say, $90,000, you are $10,000 short, not including costs to close the sale such as real estate commissions, recording fees or title and escrow charges.

Sometimes, to avoid going through the costs of foreclosure, a lender will sanction a short sale by letting a buyer purchase the home for less than the mortgage balance while the home is in pre-foreclosure stage. A pre-foreclosure stage is one of the three stages of foreclosures.

Here are sample steps of a short sale:

Seller signs a listing agreement with a real estate agent subject to selling as a short sale with third-party approval.
The agent finds a buyer who makes an offer for less than the amount of the mortgage.
Seller accepts the buyer's purchase offer.
Seller's lender accepts the buyer's purchase offer.
Transaction closes when the buyer delivers the funds, the lender releases the lien and the seller delivers the deed.

In fairy-tale land, everybody lives happily ever after. Except the seller. There are consequences.

Qualifications for a Short Sale

Before you eagerly climb aboard the short sale bandwagon, consider the following to determine whether you may qualify for a short sale. If you cannot answer yes to all four requirements, you may not qualify for a short sale.

The Home's Market Value Has Dropped.
Hard comparable sales must substantiate that the home is worth less than the unpaid balance due the lender. This unpaid balance may include a prepayment penalty.
The Mortgage is in or Near Default Status.
It used to be that lenders would not consider a short sale if the payments were current, but that is no longer the case. Realizing that other factors contribute to a potential default, many lenders are eager to head off future problems at the pass.
The Seller Has Fallen on Hard Times.
The seller must submit a letter of hardship that explains why the seller can not pay the difference due upon sale, including why the seller has or will stop making the monthly payments.

A few examples that do NOT constitute a hardship are:

The Seller Has No Assets
The lender will probably want to see a copy of the seller's tax returns and / or a financial statement. If the lender discovers assets, the lender may not grant the short sale because the lender will feel that the seller has the ability to pay the shorted difference. Sellers with assets may still be granted a short sale but could be required to pay back the shortfall.

For example, if the seller has cash in a savings account, owns other real estate, stocks, bonds or even IRA accounts, the lender will most likely determine that the seller has assets. However, the lender might discount the amount the seller is required to pay back.

Many entities profit from short sales, but there is no seller short sale profit.

Short Sale Consequences

A short sale is dependent on a buyer making an offer to purchase. If you do not receive an offer, you will not qualify for a short sale. So even if you meet all the other criteria, it is possible that no one will buy the short sale. It is also dependent on the lender accepting the buyer's offer. If the lender rejects the offer, a short sale will not take place.

Tax Consequences
If the lender agrees to the short sale, the lender may possess the right to issue you a 1099 for the shorted difference, due to a provision in the IRS code about debt forgiveness. Many situations are exempt from debt forgiveness, according to the Mortgage Forgiveness Debt Relief Act of 2007.

You should speak to a real estate lawyer and a tax accountant to determine the amount of short sale tax consequences, and whether you can afford to pay those taxes, if any.
Blemished Credit Report
A short sale will show up on your credit report. It's a pre-foreclosure that has been redeemed. Short sales affect credit ratings. While the damage to your credit report may not seem as significantly bad as a foreclosure to you, creditors may not make the distinction. Experts say the drop in your FICO score is identical to a foreclosure reporting.

Always seek legal counsel before attempting to pursue a short sale. A real estate agent cannot give you legal advice.

Why Banks Reject Short Sales

Unless the bank has agreed upfront to accept a short sale, which is rare, no one knows for certain -- not the buyer's agent, not the listing agent nor the seller -- if a short sale offer will be accepted or rejected by the bank. Simply because a listing is advertised as a short sale does not mean it is a short sale. It means the listing agent and seller hope it will sell as a short sale and the bank will take the offer.

Short Sale List Prices

The list price of a short sale home generally has very little bearing on the actual price a bank may accept. The list price may be too high to attract an offer or too low for the bank to accept. Some agents advertise short sales at unbelievable prices, in hopes a buyer will be enticed to submit an offer. Moreover, just because the seller may accept the offer does not mean the bank will agree to take a short sale.

Short Sale Definition

Short sales happen when a bank agrees to accept less than the amount of the mortgage the seller owes to the bank. The property may be encumbered by two loans or one loan. If it has two loans, both lenders must agree to accept a short sale.

Why Banks Reject Short Sales

Banks demand a plethora of documentation before approving a short sale. Contrary to popular belief, sellers do not need to be in foreclosure or have fallen behind in making mortgage payments, for a short sale to occur. Here are reasons that banks turn down short sale requests:

Short Sale Offer Price is Too Low
Banks will request an appraisal, sometimes several appraisals, and may also order a BPO. When the listing agent submits the short sale offer, the agent should also include a comparative market analysis that justifies the price in the short sale offer. If the bank believes it can make more money by taking the property through foreclosure proceedings, the bank will reject the offer.

Tip: Be prepared to argue with a rejection and show comparable sales that support the short sale offer price.
The Short Sale Package is Incomplete
Ask any short sale specialist and you'll hear horror stories of how banks lose documentation. In some cases, it doesn't matter how many times the package is expressed overnight or faxed, the bank might misplace it. Worse, an important document might not be in the file, and without every single required document, the sale will not be granted.

Tip: Ask the bank for a list of documents, make copies, and send complete packages.
The Seller Does Not Qualify
If the seller is asking for debt forgiveness, the bank will want to see a hardship letter from the seller that explains why the seller cannot afford to pay back the shortfall difference. Sellers who have tapable assets are at a disadvantage if the sellers are unwilling to work out a repayment plan with the bank.

Tip: Prepare a hardship letter, profit and loss statement and monthly budget that show the seller has little or no assets and no disposable income.
The Buyer Does Not Qualify
A desire to buy a home and the financial means to afford a mortgage payment does not mean a buyer qualifies to buy a home. A buyer's lender will examine credit history, length of time on the job, debt ratios, and a host of other criteria to determine a borrower's qualifications. To gain credibility with the seller's bank, buyers need to submit a loan prequalification letter along with the offer, but a loan preapproval letter carries more weight.

Tip: Send a preapproval letter and a copy of a sizeable earnest money deposit that adequately reflects the buyer's ability to obtain a mortgage and intent to close the transaction.
The Bank Sold the Loan
Sometimes, the bank won't realize it no longer holds the mortgage on the property until many months have passed by during short sale negotiations. If the bank has sold the mortgage to another lender, the bank has no authority to approve a short sale because it has released the asset. Although the seller may continue to receive statements from the bank, the bank might be servicing the loan but not own it.

7 Short Sale Mistakes

Some short sale sellers are finding out the hard way that it's not easy to sell a home as a short sale. Short sales are a complicated process which, if not handled properly, can backfire and / or cause the sellers to lose their home through foreclosure proceedings.

Here are some of the common mistakes sellers make with short sales:

Short Sale Mistake #1: Priced Wrong

Short sale prices remind me of the story of Goldilocks and the Three Bears. Some are too high, some are too low and some are priced just right. Short sales that sell are priced appropriately. The price should be attractive to the following parties:

The Short Sale Bank
The Buyer
The Buyer's Agent
The Seller
The Buyer's Lender

Appealing to all five of these entities may seem impossible to do, but it is possible. There is an art to pricing a short sale. I can honestly report that all my short listings in Sacramento -- in our soft market -- receive multiple offers, and they close.

Short Sale Mistake #2: Inexperienced Listing Agent

Particularly in falling markets, agents who have little business are attracted to short sales like moths to a flame. Sellers should find out how many short sales a proposed short sale listing agent has actually closed apart from the number of short sales the agent has listed.

If many of the agent's listings have been on the market for more than 90 days without an offer, something is seriously wrong. Agents who succeed in this business have a minimum of two years of experience negotiating with short sale banks.

Short Sale Mistake #3: Bad Marketing

Some agents believe pricing alone will sell a short sale, and they persuade sellers to place a ridiculous price tag on the home. Then the agent purposely refuses to adequately market the home. Not only does the price need to be reasonable, but the home deserves the same type of treatment as any other listing.

Short sales should be exposed to the widest possible pool of buyers, which means plastering that listing on all the major web sites, and includes doing direct mail marketing and networking.

Short Sale Mistake #4: Showing Restrictions

Buyer's agents, bless their overworked and tired hearts, will sometimes take the path of least resistance. If the listing requires an appointment, a buyer's agent might pass over that home in favor of a listing without appointment restrictions.

When a buyer's agent calls to announce a showing, the response should be, "Come on over. We're ready!" Short sale listings that restrict activity such as no showings on Sunday, for example, may never get shown at all.

Short Sale Mistake #5: No Photographs

Submitting a listing to MLS without multiple photographs -- or worse, no photograph at all -- is like slamming the door in the face of buyers. Buyers aren't likely to return. A listing with missing photographs sends messages that say nobody cares if the home sells and there's probably something wrong with it.

On some web sites such as Realtor.com, listings with the most photographs are ranked higher, and those without drop to the bottom.

Short Sale Mistake #6: Poor Property Condition

Short sale homes benefit greatly from home staging. Sellers need to prepare the home for sale and keep it in pristine condition. If beds are unmade, toys are scattered about and the kitchen sink is filled with dishes, buyers can't see past the mess. Moreover, some buyers are worried that if the home is in disarray during a showing, the sellers may trash it upon vacating.

Short Sale Mistake #7: Uncooperative Sellers

Sellers need to submit required documentation to the bank in a timely manner. If the package is incomplete, the bank won't process the file, and that will delay approval.

If a seller refuses to submit personal financial information and a reasonable hardship letter, the seller will not qualify for a short sale.

Submit Documentation and Purchase Offer to Lender

Once the seller has accepted your offer, send it to the lender for approval. You do not have a deal until the lender accepts. Also, send the lender a copy of your earnest money deposit. Do not be astonished if the lender asks you to increase it.

In addition, the lender will want to see that you have your own loan available and you are preapproved. Send a preapproval letter to the lender. It will help if your agent sends a list of comparable sales that support the price you are offering to pay for the home.

How to Price a Short Sale

Short sale sellers who don't price their homes appropriately are unlikely to receive viable offers. That's because pricing needs to appeal to more than the buyer to ensure a short sale transaction will close.

Pricing a short sale correctly involves choreographing a delicate dance between bringing in an offer and getting the bank to buy into that offer. Moreover, if a Notice of Default has been filed, time is of the essence. In that instance, there are only so many days left on the calendar before a short sale seller may lose the home to foreclosure.

Price it wrong, and the home goes to the bank. That's one of many reasons why it's important to hire an experienced short sale listing agent. The short sale price needs to be attractive to the following five parties:

The Short Sale Bank.
Because short sales can take a minimum of 3 months to close from listing inception, the price should be based on pending sales, which will become the comparable sales at closing. Banks will generally accept an offer priced within reason of comparable sales.
The Buyer.
Short sale buyers want to buy under market; they want a good deal. Otherwise, buyers have little incentive to wait 90 days or more for a short sale to close. Sellers will catch a buyer's eye if the home is priced under the competition.
The Buyer's Agent.
Short sales aren't high on the list of a buyer's agent's favorite transactions. Buyer's agents generally earn a lower commission on short sales, the deals take longer to close and sometimes they don't close at all. The listing verbiage needs to assure the buyer's agent it's worth the time invested.
The Buyer's Lender
A buyer and seller can arrive at a mutually agreed price, but the buyer's lender will hire its own appraiser to determine market value. This means the home will need to appraise in line with the comparable sales. Pricing too low is rarely a problem. But if it's priced too high, it won't appraise, and either the buyer will need to foot the difference in cash or the pending sale will blow up.
The Seller.
Some types of short sales are subject to deficiency judgments and mortgage debt forgiveness tax, which means sellers need to get the highest possible price. Attractive pricing will encourage multiple offers, and multiple offers tend to bid up the price.

Short Sale Multiple Offers

Question: How Can I Get Multiple Offers on My Short Sale?

A reader asks: "I am thinking about putting my home on the market as a short sale, but I have reservations about paying taxes to the state on the deficit. It would make sense to get as high of a price for the house as I can. I hear some short sales are getting 2 or 3 offers. How can I get multiple offers on my short sale?"

Answer: Excellent question. For one thing, you most likely see multiple offers happening on bank-owned homes, so it's not out of the question to market your short sale home in the same way in hopes of attracting multiple offers.

Multiple Offers on a Short Sale Happen for Two Reasons

Pricing a short sale is a mix of blending intuition, strategy and math. Price it wrong, and you won't get any offers. Here are the two reasons why buyers go into a bidding frenzy over a short sale home, or any home, for that matter:

The Short Sale Price is Below Comparable Sales
Nobody can resist a good deal. Buyers who are home shopping by focusing on a certain neighborhood get to know the prices in that neighborhood very quickly. They can spot an under market deal before some agents will.
The Short Sale Home is Irresistible
If your home is highly desirable due to location, construction, condition or, lucky you, all three, everybody will want to buy it. Unique homes are hard to come by. If you have a special home, you most likely know it.

Short Sale Listing Mistakes

Almost every one of my short sale listings in Sacramento get multiple offers, sometimes a dozen or more. Other agents lament that their short sales take too long to sell because few buyer's agents want to make offers on a short sale. My secret? I looked at what other agents did wrong, and then I don't do that. Here are some of their mistakes:

Priced too high or way too low.
No multiple photographs or, worse, a really lousy photograph.
No inducement for a buyer's agent to write an offer.
Bad property description / marketing comments.
Agent doesn't project confidence that the deal will close.
No evidence that the short sale package is complete.
Leaves the buyer's agent wondering if the listing agent is competent or has short sale experience.
Restricted hours on showings.
Makes the offer process sound too confusing.

How to Make Buyers Fight For Your Short Sale Home

First, you should stage the home. Clean out the clutter. Make it attractive to buyers, and have it ready to go the minute your home hits the market.

Ask your agent to submit all offers to the bank and put in the listing "no lowball offers."
After the first offer is received, let the second buyer who calls know that you have received an offer but there is still time to submit a second offer to the bank. Repeat with subsequent buyers.
Ask your agent to check in with all buyers during the short sale waiting period (while negotiating the short sale with the bank). Give those buyers weekly updates.
Don't disclose any of your offer prices. If you do, your agent will need to notify all the other buyers of those prices, and some will drop out.
Don't discard any offer because you have a higher offer. You have no way of knowing whether the buyer with the higher offer will still be in the game upon short sale approval.

Handling Short Sale Sellers in Default

Question: Should We Stop Making Mortgage Payments to Do a Short Sale?

A reader asks: "Should we stop making our mortgage payments while our home is on the market as a short sale? We've tried to do a loan modification with our lender, but our application was denied because we were current. The lender said if we were in default, it would help us. But we owe so much more than our home is worth, I've lost my job and really can't afford to keep making payments. Can you help us?"

Answer: Nobody, outside of a lawyer, can tell you whether to stop making your mortgage payments -- especially not real estate agents, because we are not licensed to give legal advice. This is a personal decision that sellers need to make for themselves. There are consequences if you stop making payments. Here are a few things to consider:

Are You Willing to Go Through Foreclosure?

Typically, lenders will not authorize a short sale until the seller finds a buyer, but that status is changing. Realize there is no guarantee that a lender will accept a short sale, and not every lender is required to let you sell on a short sale.

If you begin the short sale process and stop making your payments, should the short sale be denied and you cannot make up the back payments, you may find yourself involuntarily losing your home through foreclosure. Many short sellers enter the process with the thought that if the lender won't approve their short sale, they are prepared to let the property go.

Advantages to Making Your Mortgage Payments During a Short Sale

If you can manage to continue making payments while your home is on the market, it may be advantageous for you to do so for these reasons:

Qualify to Buy a New Home.
Fannie Mae guidelines, issued in August of 2008, say a borrower may immediately buy another home after a short sale if the borrower was never delinquent, complies with its "excessive prior mortgage delinquency policy," and is not obligated to repay the short sale lender, including a deficiency judgment.
Protect Credit
Keeping your mortgage current also helps your credit rating because your credit report will not reflect any late payments. Realize that a lender may, however, report your short sale as a Credit Score Factor Code #22, which will still somewhat drop your FICO.
Peace of Mind
Not falling behind on your payments makes it easier for some sellers to deal with a short sale because the stigma of being delinquent is absent, and they sleep better at night.
Cancel Without Penalty
If your home does not sell or a lender refuses to accept an offer from your short sale buyer, in California, for example, you are free to cancel the listing and keep your home without liability.

Reasons to Stop Making Your Mortgage Payments During a Short Sale

Some sellers are dealing with extreme financial hardship and don't have the option of deciding whether to continue making mortgage payments. Other sellers deliberately stop paying.

More Motivation for Banks to Accept Short Sales
Although it is not necessary to be in default before a bank will consider a short sale, the files that get priority are those in default.
Lenders Might Not Obligate Repayment
You can't squeeze blood out of a beet, although I know banks that have tried. Typically, if a borrower is facing a true hardship and has no assets nor means of making a mortgage payment, the lender is unlikely to try to force the borrower to pay back any of it. It does not mean a lender is not entitled to a deficiency judgment, if circumstances warrant.
Acquire Funds to Move
It stands to reason that if you're not paying the bank, money that would ordinarily be allocated toward that expense may instead be used to pay first, last and a security deposit on a rental.

Drawbacks to Going Into Default During a Short Sale

There is no free lunch. While some sellers are happy to walk away from a home in foreclosure, others would prefer to complete a short sale and dread the thought of a foreclosure.

Credit Report Will Suffer
Short sales and foreclosure affect credit. In addition to a Credit Score Factor Code #22, the lender may also report your delinquent mortgage payments to the credit bureaus.
Restricted From Buying a New Home
Although I expect restrictions may become relaxed a bit due to the increasing number of foreclosures and short sales, at the moment, borrowers with a 60-day-late-pay or greater are required by Fannie Mae to wait two years to buy another home. Golden 1 Credit Union in California offers a six-month waiting period for borrowers who fit certain criteria.
Lose Home to Foreclosure
If you can't make up the back payments prior to the trustee's or sheriff's sale, you may lose your home to the bank.

Give the Short Sale Lender Time to Respond

Make your offer contingent upon the lender's acceptance. Give the lender a time frame in which to respond, after which, you will be free to cancel. If the lender is under no pressure to make a decision, the paperwork will sit on an underling's desk.

Some lenders submit short sales to committee, but most can make a decision within two to three weeks, providing you have submitted the offer to the individual in decision-making capacity. Get a name and phone number for the appropriate contact at the lender. Don't send an offer blindly to a department.

Protecting Your Good Faith Deposit

Buyers always ask how much of an earnest money deposit is required. Typically, there is no set requirement. In California, contracts must contain consideration to be valid, but that amount can be as little as one dollar. Laws in your state may be different. Bear in mind, however, that the amount of your earnest money deposit depends primarily on your marketplace and local custom.

What is an Earnest Money Deposit?

It's a good faith deposit but not to be confused with a down payment. When buyers execute a purchase contract, the contract specifies how much money the buyer is initially putting up to secure the contract, to show "good faith," and how much money all together will be deposited as a down payment. The balance is generally financed as a mortgage or a combination of mortgages. An earnest money deposit says to the seller: "Yes, I am serious enough about buying your house that I'm willing to put my money where my mouth is."

So, How Much is Enough?

Because there is no set amount, it varies from market to market and across the country. In California, deposits are generally 1 to 3 percent of the sales price. Buyers there do not often put down more than 3% since most sign a liquidated damages clause that limits the seller to 3% of the purchase price as damages in the event of a default. But it's not unusual for a buyer purchasing a $300,000 home to put down $1,000, especially if the buyer is obtaining 100% financing. In those scenarios, the deposit is most often refunded to the buyer and subsequently used as a credit toward closing costs because the financing makes up the entire purchase price.

If it's a seller's market, with many buyers fighting over limited inventory, it makes logical sense for the buyer to put down a much larger earnest money deposit to entice the seller to accept the offer. In buyer's markets, a larger earnest money deposit might entice a seller to accept a much lower purchase price. So you see, it all depends.

Be Careful to Whom You Give Your Earnest Money Deposit

A reader from New Brunswick, Canada, Sylvie Schriver, claims she lost her $2,500 earnest money deposit by handing it over to an individual who professed to be a real estate broker. She says the broker stole a brokerage's logo and business supplies to make it appear that he was legitimate; however, he vanished when Sylvie called to ask questions about her mortgage. When she reported the crook to the police, she then discovered that others had filed complaints. Sadly, at that point, Sylvie's money was gone.

Never give an earnest money deposit to the seller.
Make the deposit payable to a reputable third party such as a well known real estate brokerage, legal firm, escrow company or title company.
Verify that the third party will deposit the funds into a separately maintained trust account.
Obtain a receipt.
It is unadvisable to authorize a release of your earnest money (or a pass-through) until your transaction closes.

Is Your Earnest Money Deposit Refundable Upon Cancellation?

First, read your contract. Laws vary from state to state. In California, standard C.A.R. purchase contracts allow for the return of the earnest money deposit to the buyer within a specified time period, by default 17 days, should the buyer elect to cancel the transaction. If, at that point, the seller refused to return the deposit without cause, the seller could end up paying a $1,000 civil penalty to the buyer.

Upon cancellation, the sellers and buyers are asked to sign mutual release instructions. If an agreement cannot be reached, the party holding the earnest money deposit will continue to hold it until an agreement is reached. If no agreement has been reached after a few years, escrow companies then send the parties a certified letter asking for mutual instructions. The letter says if nobody responds within a certain time period, then escrow will return the money to the buyer. If the seller contests the action then, after 3 years, escrow will send the money to the state of California, presumably to help balance our budget deficit.

Case in Point

A buyer's $1,000 was deposited into escrow two years ago. Unknown to the seller or real estate agent, a week before closing escrow, the buyer decided to buy another property and entered escrow at a different title company. A few days before she was scheduled to close on the first property, the buyer completed her final walk-through and declared there were water stains on the ceiling. There was no evidence of water stains on the ceiling. But that didn't stop the buyer from canceling the escrow. The sellers believe the buyer has forfeited her deposit. The buyer believes it should be returned. Two years later, the money is still sitting in escrow.

Purchase Offer Negotiation Tips

The best way to get an offer accepted is to appeal to a seller's emotions. Why? Because residential real estate transactions are put together -- and sometimes blow up -- over emotional hotbeds of insanity, lunacy and what often seems to be bipolar mood swings. So it helps if you can give the seller a reason to care about you.

Put a Human Face to the Offer

This is a people business. Sellers have an unexplained desire, sometimes buried deep inside, to know that the house they are selling will fall into the hands of a worthy buyer. You scoff? You cynic, you. It's more than four walls, floors and a ceiling! A seller's house is a place where joy is shared, sorrows are expressed, hopes and dreams are crafted; it's a place of treasured memories.

To make a seller receptive to your offer, make the seller feel a connection to you. Showcase your vulnerability and sincerity in a letter. Make the seller feel as though you are the perfect buyer.

Include the following details:

The names, ages and relationships of all occupants.
A little history about your previous homes and how that relates to this home.
Your occupation, education and struggles to get to where you are in life.
List the specific reasons why you fell in love with this home.
Explain why you deserve to live in this home and how you will care for it.

Write a Clean and Positive Offer

This is more difficult than it sounds. Sometimes in the excitement of writing an offer, buyers don't read the offer for clarity. Ask your agent to double-check the offer as well.

Don't leave out an essential element or give the seller any reason to write a counter offer. If the agent prepares a counter to correct mistakes, it might make the agent consider changing terms of the offer as well. Make it a no-brainer for the seller to sign the offer the way you wrote it. Cross all your t's and dot all your i's.

Verify the address is correct.
Add up the earnest money deposit, loan amounts and balance of down payment to make sure the numbers equal the sales price.
Check the closing date and possession terms.
Discuss motivations for changing contract default periods.
Review seller- and buyer-paid items and determine whether these items are "red flags" or likely to raise shackles.
Generally, the party responsible for title and escrow fees selects the services -- has the seller selected the services and expects to pay for them, yet you want to choose? Don't let a small item become a big issue.
How much time are you giving the seller to respond and who needs to receive the response, which will designate delivery acceptance?

Detail Selling Agent's Credentials

Just as the buyer tries to appeal to the seller, the selling agent should try to appeal to the listing agent as well. One of the biggest obstacles to a real estate transaction that listing agents face is incompetent selling agents. In the FAX or offer cover letter, a selling agent might want to:

Share her experience and background
State she is a full-time professional agent (to set her apart from some of the part-time rookies in the business)
Indicate her willingness to cooperate
Mention services she can provide that will help to expedite the transaction
Express excitement over working with the listing agent

Writing Buyer's Market Offers

Understand Short Sale Commissions

Regardless of the commission the seller has agreed to pay, the lender is actually the entity paying the commission. The reason is the seller is not receiving any money with which to pay a commission. Since the lender is losing money, the lender will likely negotiate the commission directly with the listing broker, who will then share the commission with your agent.

If you have signed a buyer's broker agreement with your agent, ask if the agent will waive the difference due or you might have to pay it out of your pocket. Some brokers feel it is unfair to penalize the agent, but the lender is calling the shots.

Who Pays the Real Estate Commission?

To understand who pays real estate commissions -- whether it's sellers or buyers or both -- first take a look at how real estate agents are paid and how they share cooperating commissions. Don't be embarrassed if you don't know how commissions work because I've had clients who didn't know, even though I had sold their home, represented them to buy a new home and then later listed that home for sale.

How Real Estate Commissions Work

Real estate agents work for a real estate broker.
All fees paid to a real estate agent pass through the broker.
Only a real estate broker can pay a real estate commission and sign a listing agreement with a seller.

How Are Real Estate Agents Compensated by the Broker?

Divisions vary. New agents can receive as little as 30% to 40% of the total commission received by the brokerage. From that amount, other fees may be deducted such as advertising, sign rentals or office expenses. Top producing agents might receive 100% and pay the broker a desk fee. Everybody else falls somewhere in between.

Listing Agents' Fees

The most common type of listing agreement between a seller and her agent gives that agent's broker the right to exclusively market the home. In return for bringing a buyer to the table, the seller agrees to pay a commission to the broker. Typically, this fee is represented as a percentage of the sales price and is shared between the listing broker and the broker who brings the buyer.

Co-Broker Splits

Divisions of fees among brokers is not always fair or equal, just like life. For example, a seller could sign a listing agreement for 7% that stipulates the listing broker will receive 4% and will co-broker 3% to the selling broker. It's not always a 50/50 split. In a buyer's market, sellers might want to consider asking the broker to give a larger percentage to the buyer's broker. In a seller's market, the buyer's broker might receive less. There is no set formula.

Buyer's Brokers

Seller Pays the Buyer's Commission

Buyer Pays the Commission Directly

The seller is then not obligated, under most listing agreements, to compensate the listing broker for more than the listing side or portion of the commission.
Often sales prices are reduced to reflect the amount the buyer is paying.
Sellers can also credit the buyer the commission and the buyer, in turn, credits the brokerage.

Who Really Pays the Commission?

It can be argued and, quite rightfully so, that the buyer always pays the commission. Why? Because it's typically part of the sales price. If the seller did not sign an agreement to pay a commission, the sales price might have been lowered. And therein lies the appeal of buying homes through unrepresented sellers because, given the same logic, those prices should reflect a net sales price without a commission. But those sellers haven't quite figured this out yet which causes potential buyers of those listings to be consistently disappointed.

To help alleviate much of this confusion, don't be astonished if over the next 20 years sellers and buyers each retain their own representation and pay separately for said representation.

How to Negotiate Real Estate Commissions

You know real estate commissions are negotiable, right? Regardless of local customs, all real estate fees are up for discussion. Some agents will agree to a fee reduction right off the bat. Others will discuss it. But nobody will feel upset that you asked. It's expected.

Understand First How Agents Are Paid.
Splits vary among brokers, depending on policy and production. A top-producing agent who closes 100 transactions a year is paid more, a higher split, than an agent who closes one deal every couple of months. Only licensed real estate brokers can receive a commission. Brokers have written agreements employing agents and, in turn, pay the agents, typically as independent contractors. Commissions paid by a seller are divided with about half going to the listing side and the rest to the selling side; it's not always a 50/50 division.

Typical Net Profit
Let's say Mary's buyer purchases a $150,000 home. The total commission paid is 7%, with 4% to the listing broker and 3% to the selling broker. Mary's broker is paid $4,500. Mary's entitled to 50% less an 8% franchise fee. Mary receives $2,070. From that, Mary pays her overhead expenses of 22% and puts away 30% into savings to hold for payment of social security, federal and state income taxes. Mary has made $993.60 net profit.

If Mary closes only one transaction a month and works a typical 40-hour week, that makes her net hourly wage about $5.78 for the month. If she closes two deals a month, then Mary makes about the same as an aisle clerks.

Selling & Buying With the Same Agent
It's permissible to ask Mary if she will discount part of her commission if she represents you to sell your home and also represents you to buy a home. The theory works on the premise that two birds in the bush are better than one in the hand. In other words, if Mary is your listing agent, she'll earn the listing side of the commission. Plus, by helping you to buy another home, she will earn the selling side of that transaction. One person. Two deals.

There are agents who will offer you a discount if you sell and buy a home through their agency. Real estate agents who refuse to discount fees likely believe the two transactions are separate from each other, which they are. They entail the same amount of work, whether the seller and buyer are the same person or two different and unrelated individuals. If Mary discounts her listing commission for you in order to do twice the work and earn less than twice the money, she might also be hit on the selling side of the commission since she has no control over the fees another agent negotiates. To persuade Mary to "give you a break," you might have to offer Mary another incentive such as referrals, sending her more business down the road.

When the Same Agent Represents You and the Buyer
This is called dual agency, and it's not even legal in some states. But where it is legal, Mary would earn both sides of the commission, the listing and the selling fees. It's called double-ending a transaction. Same property but two separate parties with separate interests and separate abilities to sue. Mary now has increased liability.

It's common to ask a listing agent if she will agree to lower her commission if she ends up representing both the seller and the buyer. You have the option of negotiating this when you sign the listing agreement or when you receive an offer, but it's better if you discuss this scenario upfront, at the listing's inception.

Bear in mind that this negotiation might backfire. It could reduce the listing agent's eagerness or motivation to sell your home to her own buyer. Apart from her legal fiduciary responsibility to market your home to all available buyers, what is her incentive to induce a buyer to purchase your home when her fee will be reduced? Especially if she stands to sell this buyer of hers someone else's listing and get paid more. But go ahead and ask. Many agents agree to "variable commission" when asked because they suspect the odds are they won't represent both sides, so they're not giving up anything.

Multiple Listings, Same Seller
Reducing commissions in exchange for a number of exclusive listings from the same seller depends on:

Dollar volume
Ease of sale
Market mobility

If all three of those variables are in the agent's favor, it's a no-brainer to negotiate and probably the easiest negotiation to win.

Agents Who Control Neighborhoods
Agents who do a ton of business every year in specific areas typically discount a point here and there. These are agents who might ask for a higher commission but quickly agree to lower fees if there is competition from another agent. If you like an agent who has quoted you a higher commission but interviewed a second who agreed to do the job for less, call back the first agent and offer the second agent's fee. She'll probably agree to it, and you'll both be happy.

Buyer's Broker Agreements

Home buyers typically sign buyer broker agreements with their real estate brokers / agents before writing a purchase agreement. The buyer broker agreements spell out precisely who represents the buyer. It's also known as buyer representation. There are a huge variety of buyer broker agreements used throughout the United States. For simplicity, I will review the three most common types of agreements used in California, with most weight given to Exclusive Right to Represent because it's the preferred form.

The following information is a general overview. It is not a legal interpretation of Buyer Broker Agreements. I cannot give legal advice. If you desire legal advice, please consult a real estate lawyer.

Buyer Broker Agreement (Non-Exclusive / Not for Compensation)

This agreement outlines the broker's / agent's duties and obligations to the buyer, agency relationships, broker scope of duty and buyer obligations; it does not provide for compensation.

Buyer may hire more than one broker / agent to locate property
Buyer is not obligated to compensate the broker / agent
Buyer has the right to demand single agency

Buyer Broker Agreement - Non-Exclusive, Right to Represent

The non-exclusive agreement outlines the broker's / agent's duties and obligations to the buyer, agency relationships, broker scope of duty and buyer obligations; however, it does provide for compensation. It also removes the buyer's responsibility to pay a commission if the broker / agent is paid by another party such as the seller.

Buyer may purchase a property through another broker / agent, as long as the property is not a home introduced by the first broker
Buyer has the right to demand single agency
The broker / agent can receive a higher commission than the negotiable fee stated in the agreement if the seller elects to pay more and it is disclosed

Buyer Broker Agreement - Exclusive Right to Represent

This is the form that I use with my buyers. It is similar in scope to the non-exclusive form except for one major distinction: the buyer has agreed to work exclusively with the broker / agent.

The buyer cannot hire more than one broker / agent to represent her
The commission is negotiable
Buyer has the right to demand single agency
The buyer is not responsible for the commission if another party (such as the seller) pays it
The broker / agent can receive a higher commission than the negotiable fee stated in the agreement if the seller elects to pay more and it is disclosed

While non-exclusive agreement terms may run for a month or two, exclusive agreement terms are typically anywhere from three months to one year. If the buyer elects to subsequently purchase any property introduced to her by the agent, she will owe the agency a commission. Exclusive representation gives the broker / agent the ability to negotiate with unrepresented sellers (such as for sale by owners) on the buyer's behalf. In these instances, the commission is often added to the sale price and then paid by the buyer to the broker as part of the financing. If the buyer is able to purchase the property at a substantial discount through the power of the broker's / agent's negotiating ability, the broker / agent will have more than earned her fee. Exclusive representation means the broker / agent is employed by the buyer and will work diligently on the buyer's behalf.

Termination

Ask the broker / agent if she will release you from the contract if you find that the relationship is not a good fit for you or vice versa. While agents are not bound to release you, if they won't agree to this upfront, don't sign the agreement with them. Professionals give personal guarantees that the customer will be satisfied. If an agent can't give you that guarantee, the agent does not deserve your business.

Reserve the Right to Conduct Inspections

Generally, the lender will not pay for customary items that a seller would pay. These include home protection plans for the buyer, buyer credits of any kind and pest / termite inspections. A buyer will be asked to purchase the property "as is," which means no repairs.

It is extremely important that a buyer obtain a home inspection and pay for other types of inspections such as pest, roof, sewers, septic tanks, chimney or fireplace inspections. Do not waive your right to obtain these inspections and make your offer contingent on approving them.

More about Short Sales.......

What is a Short Sale?

6 Things to Know About Short Sales

Number of Short Sale Offers Received

The Listing Agent's Short Sale Procedures

Waiting for Short Sale Approval

Qualify Your Short Sale Before Writing the Offer

How Long Do Short Sales Take?

1) Sellers Paid Too Much.

2) Sellers Borrowed Too Much.

3) Stringent Qualifications.

4) Homes Sell at Market Value.

5) Homes Sell "As Is".

6) Length of Time to Close.

7) Lenders Can Change Conditions.

8) Lenders Discount Commission.

9) Higher Buyer Closing Costs.

10) Lose Control of Transaction.

11) Little Seller Motivation.

Check the Public Records

Buyer's Real Estate Markets

Seller's Real Estate Markets

Neutral Real Estate Markets

How to Find Short Sales

What is a Short Sale?

Short Sale Commission Disputes

Finding Short Sale Listings

Hire an Agent with Short Sale Experience

Find a Short Sale Agent

Searching for an REO / Short Sale Buyer's Agent

Rules for Working With Agents

1. Understand Agents Work on Commission

2. Keep Appointments & Be On Time

3. Choose A Real Estate Agent

4. Do Not Call The Listing Agent if You Are Working With a Buying Agent

5. Practice Open House Protocol

6. Sign a Buyer's Broker Agreement with a Buying Agent

7. Always Ask For and Sign an Agency Agreement

8. Make Your Expectations Known

9. Do Not Sign Forms You Do Not Understand

10. Be Ready To Buy

How Sellers Can Cancel Your Short Sale

Buyers Can Cancel the Short Sale Contract

Sellers Who Cancel Short Sale Contracts

How Buyers May Prevent Sellers From Canceling the Short Sale

Qualifying the Property and Seller for a Short Sale

Short Sale Seller Requirements

Short Sale Consequences

Why Banks Reject Short Sales

Short Sale List Prices

Short Sale Definition

Why Banks Reject Short Sales

7 Short Sale Mistakes

Short Sale Mistake #1: Priced Wrong

Short Sale Mistake #2: Inexperienced Listing Agent

Short Sale Mistake #3: Bad Marketing

Short Sale Mistake #4: Showing Restrictions

Short Sale Mistake #5: No Photographs

Short Sale Mistake #6: Poor Property Condition

Short Sale Mistake #7: Uncooperative Sellers

Submit Documentation and Purchase Offer to Lender

How to Price a Short Sale

Short Sale Multiple Offers

Multiple Offers on a Short Sale Happen for Two Reasons

Short Sale Listing Mistakes

How to Make Buyers Fight For Your Short Sale Home

Handling Short Sale Sellers in Default

Are You Willing to Go Through Foreclosure?

Advantages to Making Your Mortgage Payments During a Short Sale

Reasons to Stop Making Your Mortgage Payments During a Short Sale

Drawbacks to Going Into Default During a Short Sale

Give the Short Sale Lender Time to Respond

Protecting Your Good Faith Deposit

Purchase Offer Negotiation Tips

Understand Short Sale Commissions

Who Pays the Real Estate Commission?

How to Negotiate Real Estate Commissions

Buyer's Broker Agreements

Reserve the Right to Conduct Inspections