One of our three readers posed a good question:
I have a question on short sales or foreclosures. If we find one we like and make an offer, and we have to wait to hear back, can we back out if we find something better?
There are two issues here, really. One is the legality of backing out, and the other concerns, for lack of a better term, dealing in good faith. I’ll tackle the latter first.
A story was related to me recently about a woman who was shopping for dress for a big event. So obsessed was she that the dress be perfect, she ended up buying six different ones, fully expecting to return five. Now, Nordstrom will probably recover from the return pretty quickly; they have a large buyer pool, and moving the typical evening wear ensemble doesn’t require a two to three month marketing period, a stager and five hundred glossy brochures. Not so with homes.
We have been on the receiving end of the “placeholder” offer too often. And each time (what turns out to be) a casual, uncommitted shopper cancels because he found one he liked better, there is a seller who has been emotionally and, often, financially impacted. Lost market time and time spent by the seller and the agents involved in the transaction are just two of the costs. Add a declining market, which ours still is in many price ranges, and there is a very real cost associated with a misfire.
As with just about every other topic remotely related to real estate, we have talked about this before.
But can you cancel legally? The answer, of course, is yes. Per the typical contract, you can cancel at anytime prior to written removal of contingencies. And, until your offer has been accepted, you are free to roam about the county. With short sales, however, there may be some fine print.
Before we get to short sales, I’ll dispense with the foreclosure sale first. Foreclosures are in a different category. They feel more like a traditional sale in the sense that there is one seller with the authority to approve and reject the offer. The obvious difference is that the seller of the foreclosed property is the lender.
Foreclosures are fraught with exciting plot lines and surprise twists, but the waiting period from offer to response is not generally terrible. Banks don’t work weekends, so stupid old Saturdays and Sundays (and holidays) can delay a response. But, buyers offering on bank-owned properties usually need wait no longer than a week to be put out of their misery.
Short sales are a different story entirely (and often of the tragedy genre). The seller of the property will likely respond fairly quickly to an offer, but upon acceptance, the offer is shipped to the lender for review and, hopefully, approval. Think of it as believing you have safely crossed the border to find that you are suddenly thrown into secondary. Bank response times vary wildly, ranging from a typical best case of one month to a more typical period of three to six months. So, the question as to whether or not the would-be buyer can continue to shop while they are in a holding pattern is a good one.
And the answer is, it depends. Many times, the seller’s acceptance comes with an addendum that specifies that all time frames start upon the lender’s approval of the short sale. In these cases, no escrow is opened, and no deposit checks are cashed. The buyer, therefore, can cancel at any time – no harm, no foul (except to the seller, who now has to rinse and repeat). But there is a popular new trend emerging in short sale land.
More often these days we are seeing the sellers in short sale situations accept an offer with the provision that escrow be opened and the buyer’s earnest money check be deposited. Further, they are adding language to the contract that puts the deposit at risk in the event the buyer cancels prior to receiving a response from the lender. In other words, they expect the buyer to commit. In return, the buyer is given first position and protected.
This seems fair enough, but the cost to the buyer is that there is absolutely no guarantee that when they cross the finish line there will be a home at the end of the stick. Therefore, short sales are not for the “must move by Tuesday” crowd, nor are they for the meek. The popular notion is that short sales present an opportunity to purchase a home at a below-market value, and many times this is true (although one could argue it is true less often than you think). But opportunity comes at a cost. Often this cost is in terms of time, uncertainty, and the possibility of having to start over. More frequently these days, there is also the cost of having to commit.
ABOUT THE AUTHOR Kris Berg is Co-Owner and Designated Broker of San Diego Castles Realty. If not-so static web sites are your thing, go here at once where you will find loads of real estate information including homes for sale, market trends, floor plans and more. Kris's hobbies include fencing and spot welding. She likes kittens. 
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Kris
Good question – lots of different ways to look at this issue.
No easy answer but what’s good for the goose is good for the gander! When a buyer submits an offer and even if it is accepted by seller subject to lender approval, the lender typically still wants to see other offers. So in my mind since the lender will still look at other offers during the three, four, or six months it takes them to make up their mind; the buyer should be free to look for other property. I generally recommend that buyers should NOT pursue short sales as 1) there are plenty of REOs available that as you note one can get a quick response on 2) in reality, maybe 15% to 20% of all short sales acutally close escrow bit if they choose to pursue a short sale, I always tell them we need to keep looking for other property. Not saying my approach is perfect but it is the best approach I believe for my client the buyer!
keep up the good work!
“One of our three readers posed a good question:”
I could post questions, no problem. But they wouldn’t be good questions.
Just thought you should know.
Over the last 7 months or so, I have put in over a dozen offers on homes that were, mostly, bank-owned and a couple that were short-sales (out of my own mere desperation). It was rare to see any “traditional” listings…at least in my price range. My experience has been that the “list price” was generally set in such a way that it baited potential buyers such as myself into thinking I had a chance. At least that’s how it came across given the results.
I could and did offer anything from 20 to 50 thousand over the “asking price” without success. This, in turn, led me to wonder how the banks come up with this figure. But again, I was in a price range that was attractive to cash investors. Just the same, how is it that they can price something that, for all intents and purposes, might run into potential appraisal difficulties? I really feel like I wasted a great amount of time.
By the way…love the website. Count me in as a 4th reader!
Tim – I have written about the magic pricing method used by banks and short sale agents before. I generally agree with your baiting conclusion. It is not fair, one could argue it is not ethical in fact, but it is the practice. I saw one (extremely under-priced) listing last week log a price increase of $90,ooo after one day on the market. I saw it, because my clients who are in escrow on a home down the street called about the too-good-to-be-true opportunity. It was. Clearly, the offers where fast and furious — and well above full price, thus the price increase. Unfortunately, too many buyers are given false hope and do end up wasting time (along with their agents).
I’ve got a million stories, most of which I can’t tell, but I can say that dealing with shorts and REOs has become an extremely (technical term alert) “icky” process.
I just noticed that the comments are showing two photos of everyone. This is suddenly bugging me. Looks like I have a little internal plug-in war going on.
Thank you, Kris! I thought maybe I was missing something.
“Icky”…yes! That was the word I was searching for!
Okay, this is an ethics question.
A buyer writes an “Earnest Money Check” for $5,000 on short sale SR, then wants to make an offer on another SD short sale and write an offer including another $5,000 EM check. But they only have $7,500 in the account and can only afford to buy one house.
What do you readers advise??