When is a Contract NOT a Contract?

By
Real Estate Broker/Owner with Rulnick Realty, Inc.

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.

All Rights Reserved. *When is a Contract NOT a Contract?* Contact Wendy Rulnick regarding Destin Florida real estate and vicinity. Copyright © 2008 by Wendy Rulnick.

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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Wendy Rulnick, Broker/Owner Rulnick Realty, Inc.

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Wendy Rulnick is the marketing choice for sellers on the Emerald Coast who want to list and get their homes and condos sold in Destin, Sandestin, Bluewater Bay, Santa Rosa Beach, 30-A, Watercolor, Seaside, Rosemary Beach, Seacrest Beach, Kelly Plantation, Regatta Bay, Destiny and more.

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Re-Blogged 1 time:

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  1. 1 1 12/13/2008 09:19 AM
Topic:
Real Estate Sales and Marketing
Groups:
Short Sales and Forclosures ONLY
Default to Short Sale
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Short Sales Pre Foreclosures Bankruptcy and More!
Tags:
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Anonymous
myrtle beach

we are see a lot of crazy offers right now full of outs for people. Especially on condo-tels where financing is most difficult Myrtle Beach Condos

Dec 13, 2008 07:07 AM #28
Rainmaker
1,141,356
Bryant Tutas
Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL
Selling Florida one home at a time

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!!!

Dec 13, 2008 07:47 AM #29
Rainmaker
284,318
Gene Allen
Fathom Realty - Cary, NC
Realty Consultant for Cary Real Estate

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.

Dec 13, 2008 07:53 AM #30
Rainer
45,205
Bob Schenkenberger
Colorado Realty Professionals - Greenwood Village, CO
Denver Real Estate

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.

Dec 13, 2008 07:55 AM #31
Ambassador
890,468
Lane Bailey
Century 21 Results Realty - Suwanee, GA
Realtor & Car Guy

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.

Dec 13, 2008 08:03 AM #32
Rainer
6,755
Jerry Rolling
Keller Williams - Vancouver, WA
CRS GRI ABR Realtor Vancouver WA

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. 

 

Dec 13, 2008 08:09 AM #33
Ambassador
769,457
The Somers Team
The Somers Team at RE/MAX Access - Philadelphia, PA
Real People. Real Dreams. Real Estate.

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 !

Dec 13, 2008 09:40 AM #34
Rainmaker
506,175
Wendy Rulnick
Rulnick Realty, Inc. - Destin, FL
"It's Wendy... It's Sold!"

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 :)

Dec 13, 2008 10:00 AM #35
Rainer
8,699
Kevin Cloutier
Priceless Realty - Cape Coral, FL
Kevin Cloutier - A HouseSOLD Name

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.

Dec 13, 2008 10:01 AM #36
Rainmaker
506,175
Wendy Rulnick
Rulnick Realty, Inc. - Destin, FL
"It's Wendy... It's Sold!"

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 13, 2008 10:07 AM #37
Rainmaker
1,141,356
Bryant Tutas
Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL
Selling Florida one home at a time

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. 

Dec 14, 2008 12:50 AM #38
Rainmaker
506,175
Wendy Rulnick
Rulnick Realty, Inc. - Destin, FL
"It's Wendy... It's Sold!"

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.

Dec 14, 2008 02:14 AM #39
Rainmaker
506,175
Wendy Rulnick
Rulnick Realty, Inc. - Destin, FL
"It's Wendy... It's Sold!"

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.

Dec 14, 2008 02:16 AM #40
Rainmaker
506,175
Wendy Rulnick
Rulnick Realty, Inc. - Destin, FL
"It's Wendy... It's Sold!"

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. 

Dec 14, 2008 02:18 AM #41
Rainer
500
Carol Porter
casa blanca realty - Mount Holly, NC

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 14, 2008 02:26 PM #42
Rainmaker
506,175
Wendy Rulnick
Rulnick Realty, Inc. - Destin, FL
"It's Wendy... It's Sold!"

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 14, 2008 11:32 PM #43
Rainmaker
472,164
Janice Roosevelt
Keller Williams Brandywine Valley - West Chester, PA
OICP ABR, ePRO,Ecobroker

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

Dec 25, 2008 11:43 PM #44
Rainmaker
506,175
Wendy Rulnick
Rulnick Realty, Inc. - Destin, FL
"It's Wendy... It's Sold!"

Janice - Good luck on getting an acceptance.

Dec 26, 2008 02:10 AM #45
Anonymous
cyd weeks

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 22, 2009 04:18 AM #46
Rainmaker
506,175
Wendy Rulnick
Rulnick Realty, Inc. - Destin, FL
"It's Wendy... It's Sold!"

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.

Feb 23, 2009 01:11 AM #47
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