Real Estate Blog - When is a Contract NOT a Contract?

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When is a Contract NOT a Contract?

Is a contract NOT a contract when it is signed by both buyer and seller? Again and again, buyers are walking from short sale offers with no penalty, sometimes encouraged by their selling agents. Here are two emails below from agents in the Destin- Navarre Florida area whose buyers simply backed out of short sale offers after three months of negotiations:

"Yes it is a long time and they do understand the contract but they are not obligated to the contract until the bank responds."

"It was contingent upon the banks acceptance of the offer and the bank did not accept the offer yet. We did not have a contract only an offer. I do not see the need of a letter or a release of contract since there was no contract."

My question to these, and other agents, is, if it is not a contract, what is it? Of course, it is a contract. Contracts have contingencies all the time that require action by third-parties. For example, the buyer's lender must make a decision on the borrower's ability and the value of the home. The buyer's home inspector will provide data on the home's condition. The title agent will determine if there is marketable title. These contingencies do not negate the fact that there is a contract. But any one of these factors can initiate a termination of the "contract".

What steps can listing agents take to ensure their seller is protected from "escape artist" buyers?

1. Require buyer contingencies to be fulfilled without waiting for lender approval, such as home inspection and mortgage application.

2. Require an earnest money deposit (called escrow in some states) upon acceptance by the seller, not upon lender approval.

3. In return for buyer's forthright investment in the contract, place the property "under deposit" in the MLS system.

Until selling agents educate their buyers about the gravity of being in a contract when buying a home, we will continue to see short sale contracts fall apart.

It's Wendy!

Wendy Rulnick, Broker, CRP, CRS, GRI, ABR Rulnick Realty, Inc.

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Wendy Rulnick specializes in real estate sales, short sales, traditional sales on Emerald Coast of Florida: Destin Florida real estate, Santa Rosa Beach, Fort Walton Beach, Niceville, Bluewater Bay, Navarre, Seagrove Beach, Watercolor, Sandestin, Seaside, Dune Allen, Blue Mountain Beach, Freeport, Rosemary Beach, Mary Esther, Shalimar, Eglin AFB, Hurlburt Field. Wendy Rulnick, Broker and Realtor, has been selling real estate for almost 20 years. She has won numerous awards, including the coveted ADDY for advertising design. An expert marketer of real estate listings, she negotiates successfully to her dients' advantage. She is supported by a team of top buyer specialists. She lists and sells homes, condos and townhomes.

This site, Wendy Rulnick or Rulnick Realty, Inc. is not providing legal or tax advice. The information provided is for educational and informational purposes only. It is recommended that sellers considering a short sale should consult an independent legal and tax advisor for more information

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Posted by Wendy Rulnick "Its Wendy!" Destin Short Sales on 12/13/2008 10:55 AM

Comments (47)

Short Sales in the Sales Strategies / Tactics Channel

buying short sales, listing short sales, destin short sales, niceville short sales, seagrove short sales, fort walton beach short sales

Originally posted at: Destin Short Sales- Emerald Coast Florida Real Estate: When is a Contract NOT a Contract?

Post is included in group: Short Sales Specialists
Post is included in group: Short Sales Pre Foreclosures Bankruptcy and More!
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47 Comments on When is a Contract NOT a Contract?

DEC

2008

Well we have an addendum here in Central Florida for short sales addressing that it has the buyers put in a timeframe that they are obligated under the contract after that time everyone is released, but until the banks get in gear and fix the problems buyers will keep walking away.

Those are great ideas Wendy. I had a buyer willing to place their deposit in escrow and the title company said it would only send it back since there is no approval from the bank. But then I had another title company keep it in escrow until lender approval.

Wendy, That's a real tough sale of having a buyer invest money into a home inspection and pay bank fee's to start a loan process for a loan that may never happen. I think the blame lies with the banks, not the buyers. Banks are notorious for wanting people to hang on FOREVER waiting TO SEE if the bank will accept it. ( which typically they don't accept) I don't think it is a contract until a bank rep signs off on the deal.

How about the flip side: Should buyers be able to hold sellers (owners) to a short sale, when the banks finally come back and refuse or counter the offer... because the owners signed the offer? Should the buyers be able to recover the costs associated with things like the inspection, CL-100, application fee's, credit report fee's, reantal expenses because they sold their home thinking they had a home to go to..etc? If the seller can decide it's a contract without the bank approval, then the buyer should be able to as well.

Until banks stop jacking people around for weeks and months on end, there is no solution. I really do blame the banks entirely.

Wendy,

First, the disclaimer: I am not an attorney. If an offer is accepted by the seller but is subject to or contingent upon third party approval, it seems it is non-binding until the third party approves. Would you suggest a reasonable time limit in which to obtain approval...60 or 90 days? In the absence of approval the agreement would automatically terminate. If the buyer deposits earnest money, and there is no agreement on how long they must wait for third party approval, might the seller refuse to release the earnest money in insist on waiting for an answer from the third party? It may be challenging, but I think we serve our clients interests best when everyone clearly understands the contingencies and potential consequences.

I forgot to add- THAT'S WHY I STAY AWAY FROM SHORT SALES. PERIOD.

Heather - Walking away with no penalty in many cases.

Mike - It is a combat zone out there.

Toni - Good points. Interesting. And short sales are definitely frustrating with no sense of proper procedure, every does his own thing. I've seen it all!

Ray - Is a contract non-binding because there is third party approval for buyers' financing? It is still binding, thus my argument that a contract is still a contract.

We have a short sale contingency addendum in our state that states that only for the computation of time mutual acceptance is not until lender approval is received but it is considered mutually accepted for all other purposes when the seller and buyer come to mutual agreement and is shown as such at that time in the multiple listings. It also is a negotiated agreement between the buyer and the seller on the same form as to whether or not the buyer can terminate before lender approval for any reason and receive earnest money back.

The problem we have run into is with escrow. If the check is deposited at time of buyer/seller mutual acceptance and then buyer bails -Escrow won't release just based on the contract and what it says - they want both buyer and seller signatures on rescission. SO try and get a rescission from an upset seller.....or a stubborn seller who feels he has been wronged etc or whatever and after xx amount of days in escrow escrow has to release so they release it to the courts and there you have it.... It is very frustrating.

Valerie- Your state has more detailed addenda than Florida. I have a recent case where the buyer is requesting return of escrow and cancellation-- BEFORE dates have been met for lender acceptance time frame. Their agent tells me they have simply found a house they like better. They don't care if final approval is received, they are walking.

DEC

2008

Wendy, This all get s back to agents not understanding short sales. Recently I have had the opportunity to be on the selling side of a couple of short sales. Even though I have fully signed and accepted contract the agents still have not placed the properties pending. They are under the impression that they don't have to do that. They are treating contracts as offers and they are wrong.

I did have a buyer agree to forfeit his deposit last month after he changed his mind the day before closing. The property got sold at auction the following week. So needless to say the buyer's actions cost the seller a lot of money. This is serious business and needs to be treated as such.

Your post is right on the money as always.

Bryant - The agents' behavior is out of control. The spectrum includes the agent who writes multiple offers for a buyer with no intention to perform on all of them (as I wrote in Sly Short Sale Buyer) to the listing agent who runs his short sales like an auction. Board rules don't help- my local association of Realtors has changed short sales rules from "ok to leave them on the market with NO disclosure" to "you must pend them" to now again- "leave them on the market with an agent disclosure". I just don't think this area can be regulated. Your buyer did the right thing by forfeiting his deposit. Thanks for you comment.

Technically, when it's a contract depends on the contract. We have some short sale deals here. The buyer makes an offer. The banks take so long to respond to the offers that they have expired before the seller has signed anything because the seller has been instructed by his bank not to sign anything until they agree. So, in my case, the contracts really aren't contracts because they have only one signature (the buyer's) and that has expired before the seller signs an acceptance. We have several condos doing a short sale and those buyers who have either waited around for the past 5 months while the banks decide to respond or the ones who have jumped on board now after the other buyers have moved on are the ones who are getting to purchase the property!

Wendy, it happens on non-short sales, too. I talked to a buyer this morning who is "contract pendng" on a house. He made it through the option period, had his inspections done, and now he wants out. I explained that he will forfeit his earnest money, the option fee, and the cost of the inspections. I suggested he consult an attorney since I am not licensed to practice law. We'll see what happens on Monday.

Bridget, Yes, when the contract is only signed by the buyer it is an offer. BUT I am talking about signed by both buyer and seller. What's evident is that short sale customs are vastly different all around the country.

I used to like short sales and had few problems. But several months ago the banks got harder to deal with and took longer to give an answer. Is this due to the bail out and them waiting to see if they can make more money from the govt?

Toni I agree with you. I have a young man that wanted to put a contract on a REO. But when I told him that he would be spending money upfront and he may not even get the house he reconsidered. I only deal with REO property if they drag me whining all the way.

Lorrie - Good advice to the buyer. I have a SELLER defaulting on a short sale, too. He is under contract, but called Bank of America asking for loan modification. He left me a voice mail, and has never returned my calls since or released the escrow/emd for the buyer!

David - I think the banks still have not geared up enough to handle the volume. That would help solve a lot of employment problems if they hired the right number of people, telephone reps, computer programmers, administrators!

I consider it a contract until the bank gets back with a response on the offer-the banks need to hire more people to handle the short sales in a timely manner.

Pat - If you don't consider it a contract, does your seller not sign it?

We also have a law in our state that if the short sale is scehduled to close within 20 days of a foreclosure sale everyone and their brother is liable..... this was a law that passed this year that pretty much tied a lot of agents hands as far as helping people try and sell their homes instead of a foreclosure - the law made not only the AGENT a "consultant" with a whole lot of extra liability but the "buyer" as well which left the agent and the buyer being liable if the seller felt they were taken advantage of. It allows the seller to sue the agent/broker and the buyer up to 100k if they somehow felt they lost their equity or didn't get a fair price for the home. There's more but that's sort of the short version of it.

The agent cannot even approach a seller with any type of words that inferred they could"help" them or that they would talk with the lender and so many other limitations- Supposedly it is being changed in the next session but it put everyone at so much risk most agents/brokers chose not to work with the sellers and buyers because of it. It is and was quite a hoopla. And it was all done to protect equity scamming and it basically HURT the rest of the sellers that could have sold their homes rather than going through foreclosure. grrrr... Our local Assoc and NAr is working to get it changed and it won't be soon enough!

Valerie - That is a frightening law in Washington! We don't have anything like that in Florida, other than a foreclosure rescue law that Realtors are thankfully exempt from, as long as we charge regular fees, I believe. Yours seems to be a case of "over" consumer-protection.

Wendy, some people seem to think that a contract with a bank is not a contract. Just had one fall apart, due to bank's slowness to respond with signatures, and it was a foreclosure that had been on the market for almost a year, not even a short sale.

Virginia - Like I said earlier, we'd solve the employment problems in this country if the banks hired enough people to get the job done! They got enough money in the bailouts to do it, don't you think?

Hey, Wendy - it's just fact that a buyer can withdraw any time prior to their offer being accepted. It's not a contract until it's signed sealed and delivered by all parties to the contract. If there's a contingency on a bank approva, chances are the buyer has a right to walk if the seller doesn't satisfy get that approval by the specified deadline. It's the nature of the beast!

Margaret - Our contracts don't give buyers the right to walk prior to bank approval. There is a time period that the seller's bank is allowed to give an approval. Can a seller withdraw prior to the buyer's lender's approval for financing?

I guess the responses on this post show how confusing short sales can be. And then of course every State is different. If we don't "get it" the consumer doesn't have a chance in hell and that's scary!!!

Sounds again like the world is in a twirl with these things. The buyers agent should be doing a better job of making sure the buyer understands the time frames involved.

I love the dialogue here! It is easy to see that we agents ar frustrated with the short sale process, and the time the idiot banks need to make a simple decision.

Regarding contracts, my opinion is that the Agents need to be better at writing their contract contingencies. Get attorney involved if necessary. A well written contingency will be very specific about how long the process can take, when the other buyer due diligence will take place, etc. If a buyer tries to bail on a deal and they do it within the terms of the contract so be it. If they try to walk outside the terms, than there is a penalty (also specified in the contract) Shouldn't be that big a problem. Either you fulfilled the terms of the deal or you didn't. Black and White, no gray.

Gray = Bad Contract.

The good news is that most states are stepping in to help with this huge problem, and updating the state approved forms to deal with this situation.

Until there is a timeline on the contract from the 3rd party (bank) there is no agreement. I'm sorry that you disagree, but I am not going to let MY buyers wait an undetermined period of time to find out what the response is from the bank.

Would YOU accept a contract from a buyer that said "we will obtain financing..." without a date by which the financing would be secured? Of course not. Until and unless the banks get their crap together and put it in a bag and can respond in a reasonable amount of time (7 days is NOT reasonable, much less 90 days), then they will have to take the lumps.

Finally, in this case there ISN'T a contract when the buyer ans seller agree unless the seller has the capacity to actually sell under the contract. Part of the contract is that the seller is authorized to actually sell the property. in the case of a short sale, they seller CAN'T sell the property.

Banks are making buyers wait so long for an answer it's no wonder that their emotional commitment to the house is fading. Additionally after a two month wait the market has gone down further and the buyer can get himself a better deal.

The only buyers the Banks can get are bargain hunters and wholesale investors because the delays they have introduced into the system have discouraged genuine owner/occupier buyers. These delays are avoidable - the banks have brought low prices and buyers who rescind on themselves.

Wendy, we have buyers sign an addendum in the beginning of the agreement that the property is a short sale and it acknowledges that buyer understand the type of deal that it is. So a buyer cannot get out of a deal per se as it is tighter documentation. Now also, in the addendum, if there is not short sale approval by a certain date, than the buyer can move on too which is analagous to a seller not ready to perform by a specific date too so that way the buyer is not tied up forever and a day. I try on all of our short sale listings to make sure that the right deal is accepted through thorough communication with the buyers agent as well as that extra disclosure addendum... Great question and great points !

Bryant - And you notice most of the responses are lengthy?

Gene - I feel like a broken record every time someone threatens to write an offer on one of my short sales :)

I have also found it a good protection for the seller to request an amount of "deposit" so as NOT to exceed the legal limit in that state for small cliams court actions. For example, if your state has a $4,500 small claim limit, do not accept a $5,000 deposit, make it $4500 deposit so if you need to fight over it later, it will not cost you an arm and a leg legally to get it back. Also, in small claims judgements, the victor receives filing fees and court costs, not to mention a court date far sooner then superior court.

Bob - Clearly we have to tighten up our contracts. But EDUCATE on what IS a contract!

Lane - Yes, we disagree. In my state, we do have timeframes, problem is- buyers don't think the time frames means anything, even when spelled out IN the contract. They believe they have the right to withdraw any old time! That happened in my most recent buyer-bail-out, when the contract spelled out the lender has about 15 days left. The buyers have presented a release-and-cancellation request asking for their deposit back, after the sellers had the house off the market for 60+ days, and I just obtained first mortgage approval. My seller is refusing to sign.

DEC

2008

Lane, All the stuff you mentioned is why a short sale should be the best priced property on the market. In Florida a properly written short sale purchase contract is written just like any other contract with the addition of the contract being contingent upon 3rd party approval within a specified period of time. I usually use 45 days. It IS a legally binding contract. If the buyer changes their mind during this contingency period then the seller has legal rights just as they would in any other contract.

It's also important to remember that we are not asking the lender to approve the contract. They are NOT a party to the contract any more than the buyers lender is a party to the contract. We are asking the bank to accept a short payoff so the seller can close on the transaction.

A good short sale listing agent will know what price will be acceptable to the lender. Usually that price is around 92% of market value. Our job is knowing what that figure is AND being able to sell the bank on market value.

One of the issues is that listing agents are pulling a figure out of the air and hoping to get it through. Well it ain;t happening. The purchase price has to line up with current market conditions or it is a waste of time.

The buyers agent job is to make sure they too know the value of the property. If everything is selling at $300K and the short sale is listed at $200K it will not close. You need to be able to explain that to the buyer and move onto another property. The incentive for a buyer to go through the short sale process is about 10% of value. On a 300K property that's $30K. That is worth waiting for 60 to 90 days in my opinion.

All of this gets back to education. The REALTOR(R) and the consumer needs to be educated on how the process works and realistic expectations need to be set a the beginning of the process.

In markets where Wendy and I work we HAVE to learn how to do short sales. There is no other business and if I have to do short sales I would much rather be on the listing side where I can control the deal.

Jerry - You're right about buyers' interest fading and prices falling on other houses enticing them to stray. It makes me sick when I get offers on some properties, rejected by the bank, then months later seeing the market falls below that offer.

Christopher and Stephanie - We have specific addenda that detail time frames for bank response. Buyers walk prior to dates being met. Exactly as the two agents' emails I details in my blog state. The problem is these buyers, through their agents' guidance, don't feel that the contract is enforceable. And the seller doesn't have money to pursue legal recourse, unfortunately. Thank you for commenting.

Kevin - That's a good idea. I have another problem with our common contracts, however, that is the buyer can withdraw with no penalty if they perform a "home inspection" and can cancel for any reason. I have had buyers trump up phony home inspection results and get their deposit back.

Bryant - Thanks for elaborating. I, too, would be reticent to work as a buyer's agent on a short sale because I know how delicate a job it is for the listing agent to get an approval.

I have just joined AR today and the main reason is because of my first short sale. I am on the listing side. Reading all the comments helps justify what I am feeling. The banks should have a more expeditious process. Both the buyer and the seller are not totally comfortable with the "so-called" bank short sale system, which in turn creates a lot of anxiety. Anxiety leads to "Buyer Bail-out" and a lot of liability to the seller. I also think the Banks and Real Estate Commission should get together and streamline the process with new forms designed specifically for this type of transaction. Protect the consumer from liabilities resulting from a bank short sale by providing them a guide from the states attorney to outline proper steps to take for avoidance. There should also be a form given to Buyers and Sellers that releases the agent from liabilities, from unknown issues, that individual banks could impose. It seems as if everyone is "flying by the seat of their britches", if you will. I appreciate this opportunity to learn more through networking with the "Pros"! Thank you for listening!

DEC

2008

Carol - Welcome to Activerain! You are right about all the different methods and "mayhem" that is caused. On the other hand, sometimes states overregulate, as in Valerie's saga about Washington State. The problem, I think, is that banks are still not geared up to handle the volume, and also that investors are still in "shock" mode where their receptivity to short sale offers isn't as realistic as it should be. Best of luck in your short sale deals and your AR networking and learning.

DEC

Since I'm working on my first short sale listing wtih two offers in, I really appreciate this thread. You would think that all those bank employees who had been working in the origination departments would be trained by now to deal with short sales. Guess it aint so. Again, I appreciate all this good information

Janice - Good luck on getting an acceptance.

FEB

Actually, with regards to the FAR/BAR 'as is' contract, a professional inspection is not required, there is no responsibility on the part of the buyer to supply any inspection results much less trumped up ones. All they need to do is submit in writing that they are rejecting the property and exercising their rights under the inspection period clause. If they wish to do the inspection prior to bank approval they have every right to do so and cancel the contract legitimately. And yes, I agree it's a contract. :)

As for escrow, well, I don't require it on the shorts sales I'm doing and I don't encourage buyers I work with to do so either. If it is required by the listing agent then a minimal deposit is given. If they insist on what I would consider 'normal' escrow, then they better be armed with a name of a negotiator they are working with at the bank and full explanation of where they are in the process.

The post I responded to on your blog is an interesting one... the one dealing with mulitple offers on short sales. That's what I'm dealing with now. I was wondering...do you submit the back ups to the bank or hold off until the first deal is accepted/rejected?

FEB

Hi Cyd - We generally use the "Far" contract in my area around Destin FL. I see the FAR BAR occasionally. I think an escrow creates more seriousness on the part of the buyer. Thanks for your perspective.

I do not submit back-ups to the bank. Only if the primary is rejected. First, some banks only want ONE offer. Second, the banks are not bound by our real estate license requirements, nor do they care, in my opinion. If they saw two contracts, and the back-up was a higher price, they would not care if they were supposed to counter the first offer, they would take the second offer. That goes back to an "auction", which engenders less serious buyers and more walk-aways.

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