Captain Bill's Blog

Oh I love this post!  You have summed up the nightmare of selling REO properties so well.  While I disagree with a lot of the terms the bank insists upon, they are the "800 pound gorilla".  You cant budge them!  I do sell a lot of REOs and my clients are usually willing to go along for the opportunity at a good buy.

An interesting read.  These types of things weren't that lengthy only a year, or so ago.  Now, they are more encumbering to the buyer.  What do they (banks) think will happen with this?  Buyers will get so annoyed they'll move on.  In a contract, anyone can require the other party to perform.  If I wanted to sell my home and have the buyer do 10 cartwheels in the front lawn, I could stipulate that . . . and if the buyer wanted my home they would have to perform cartwhells.  But why would I want to do that, more importantly why would a buyer?

Amen, sooooo scary.

Bill - What a great post!  Righ now, Los Angeles & Ventura counties are saturated with properties that have the exact same requirements as you have described.  Like you, I too go over with my borrowers the kinds of things that will be required of them and how this can affect not only the loan process but their own financial status. 

Thankfully, most of my borrowers will also pass on these types of properties too.  As for the ones that don't (initially), they eventually learn their lesson, the hard way unfortunately.  I'd like to think that one day these listing agents and their bank sellers will finally get it and quit doing crap like this; I'm still waiting for that day.  I just hope that short sale sellers don't have to wait too long before they finally realize that listing agents who do stuff like this really puts them and their home at a disadvantage.

I see a lot of specific instructions in the MLS that are contrary to either law or not in my client's best interest.  They happen on short sales, foreclosures and regular sales.  I suspect as more and more agents become fed up with the publicized violations we will see more complaints filed.

Most of these rules make a lot of sense and enable smooth closings, especially in short sales where there is one chance to get it right. Absence of these rules can ultimately cause many closings to unravel, causing sellers to go to an avoidable foreclosure sale.

The buyers can move on, but the seller can be damaged for ten years or more if the house goes to foreclosure, leading to deficiency judgments and bankruptcy.

The listing agent needs to explain the rationale behind the constraining rules rather than just state them.

I'm not sure that I agree with all of your conclusions, but I did enjoy reading the post! Thanks!

Christi, Carla, Sheila, Donne, Cindy, thanks for responding.

Here's a little more information (for the convenience of any public readers)

Section 9: Seller required title insurance:

Section 9 of RESPA prohibits a seller from requiring the home buyer to use a particular title insurance company, either directly or indirectly, as a condition of sale. Buyers may sue a seller who violates this provision for an amount equal to three times all charges made for the title insurance.

Civil law suits

Individuals have one (1) year to bring a private law suit to enforce violations of Section 8 or 9

Persons who believe a settlement service provider has violated RESPA in an area in which the Department has enforcement authority (primarily sections 6, 8 and 9), may wish to file a complaint. The complaint should outline the violation and identify the violators by name, address and phone number. Complainants should also provide their own name and phone number for follow up questions from HUD. Requests for confidentiality will be honored. Complaints should be sent to: Director, Office of RESPA and Interstate Land Sales U.S. Department of Housing and Urban Development Room 9154 451 7th Street, SW Washington, DC 20410 Email Phone: (202) 708-0502

Here is the potential problem for listing agents:

Listing Agent asks the seller to require the use of XYZ title agency.
Agent does not inform seller that this is a violation of RESPA Section 9.

• Seller gets sued by buyer
• Guess who the Seller will sue?

It will probably only take one of those cases to be highly publicized to stop that practice in non-REO transactions.

Dave, on the other hand, absence of most of those requirements will "most likely" produce more offers, and the Seller can make the decision about which one to accept. With these rules, they will never know how many qualified buyers were turned off by them; nor how many qualified offers were submitted to the listing agent and not submitted to the seller because they were "incomplete" and the seller had given written instructions to not submit instructions. 

Quickfreemlscom, I didn't expect everyone to agree. Thanks for commenting

Very nicely laid out, Bill!

The REO market too strongly resembles the basic ethics of Craigslist. It amazes me that REALTORS® will get involved, either listing or with buyers.

I am fortunate to work in a market where there is strong resale and new construction competition for the banks.

Hi Mike. On two occasions I started to do listings for banks. Several years ago I did a few and did not like the way the asset managers operated, and stopped listing them.

Recently I decided to give it another try, and started listing for another bank. It was the same all over, and worse. They seemed to be completely unorganized, with several people in charge of different aspects, and none of them would communicate more than a short sentence.

Here's an example email:  "Get three estimates to remove the hay from under the house."

I explained that the bank had assigned a Field Asset Company to do the rekey, trash out, yard clean up, etc and they had done the yard clean up and left the hay under the house. I recommended they have the Field Asset Company go back and finish their work instead of paying someone else to finish what they had been paid for.

The response was:  "You were told to get 3 estimates. So do it!!!".

So I told them to reassign all the(4) properties they had assigned to me.

I won't work for unreasonable people who seem to not know what they're doing.

So I won't try to do REO's again. I dont' need their work, and I'm too old to put up with their incompetent ways and arrogant attitudes.

Bill,

We all need to get too old to put up with incompetence and arrogance.

Mike if everyone would stop putting up with it, they would have to change.

Unfortunately, there are too many who are willing to jump in bed with them and put up with their abusive tactics.

Bill - I'm with you, if Realtors/agents and buyers would just stop putting up with their crap, they would have to change their ways.  The problem is that there are still just way too many people who not only put up with their crap but even come back for more and more and more and more and......

great blog post with  lot of detail and truth about the industry.  In a pefect world we cold tell the banks what to do with their policies...doesn't appear that the federal government will provide any help either..does it ever?? LOL

Mike; Donne; I'm honored that you chose to reblog my post.

Paddy, we can tell the banks what to do. I did. I dropped 4 listings back in their lap when I got the arrogant attitude treatment from an incompetent that couldn't follow up and have the person who didn't do the work complete it. After all they had been paid.

The unfortunate part is that so many agents are just so willing to get in bed with these guys and they can't say no to their abuse. Then when agents take those bad procedures and place them on short sales and traditional sales, they just help perpetuate the problem.

I'm so glad Donne added this to her weekly re-cap. My jaw is on the floor. I'm not even in your market and this just pisses me off!  The whole point is to successfully transfer real estate from a seller to a buyer, not to try to rig it up to make it any harder than it already is. The per diem fee is crazty, too, unless the bank agrees to pay $200 for every day THEY hold up the transaction. Even more crazy is asking YOU to kick in if the transactions doesn't close in 30 days. I would love to see some RESPA suits over this, too.

I recently re-worked my next-action plan for expireds . . . to pass on any sellers who need to short sale to someone else who will put up with this.

Bill, I was just talking with an appraiser the other day about the same issues, he said it is happening nation wide.  I don't know why the bank/short sale seller makes it so difficult to work with, they want the property sold or not??

Alison; Rita; thanks for your input. It's amazing why they think all those restrictions will help sell the home. Or do they?

My personal opinion is that some of the short sale listing agents are playing a numbers game. They are strong marketers and listers who get a lot of short sale listings. They have assistants and the assistants work the easy ones. Their closing averages are fairly low. I've checked some of them with high listing counts and find around 30% closing averages .

If the buyers play by their rules, they will work with you; otherwise they won't talk to you, and the seller is likely to be one of the homes that ends up in foreclosure.

If one of these agents lists 300 short sales a year and his/her assistants close 30% of them (100), and if the ones that sell average a commission of $4,000 each, that's $400,000 income which is a pretty good year. Of course that leaves 200 homes to go to foreclosure.

I once had a client who was buying an REO as an investment. We had a quick close (2 weeks) which was delayed because of the REO company. They TRIED to charge my clients a per dium fee and were  quickly told that if they didn't get their butts in gear and get the deal closed, my clients had grounds to sue them for breach of contract. The deal closed and there was no per dium charged. I, however, always warn clients away from this company now because of the bad experience I had. After hearing that experience, if they still want to write an offer, I will, but so far none of them have wanted to!

I don't know if buyers have many options of standard sales in your area, but when I see unreasonable rules imposed by sellers and their agents, I counsel my buyers accordingly. Some short sale agents have started to see themselves as substitute shot-callers like REO asset managers (maybe that's what they "wannabe"). When I see their listings I know there is an ego problem and the going will be tough. Buyers in our area are fortunate that there are plenty of standard sales to choose from.

I was smoking out the ears about being forced to use the seller agents title company until I realized that you really do "get it" and understand that they cannot do that. Among other penalties for violating RESPA, the seller can be liable for triple the cost of the title insurance.

Illegal kickbacks from title companies are alive and well....why else would a listing agent be upset that the buyer is paying for their own title insurance and saving the seller some money?

My buyers always pay for and choose their own COMPETENT title company...the grief I get is endless..."the seller wants to pay...you can't do that...and my very favorite, I WON'T LET YOU...

grrrrrr....

Eve in Orlando

PS: Read Fannie Mae bank addendums page 1 #2B....Yet I had an agent say "Yes, that is what is says, but that is not what we do."

Bill, isn't selling in Arizona fun these days?  Choke, gag, gasp for air, LOL.  Seriously, one thing that struck me in your blog is your buyer having to had his credit repulled.  Same day pulls are okay and will not hurt the FICO scores, but different day pulls do.  Then, the buyer has to write an explanation and probably provide PROOF that the other contracts didn't go through.  When was the last time you got an REO agent to actually send you a cancellation notice?  Heck, I'm lucky to get a phone call, maybe, possibly, a email, but an actual sheet of paper that takes 2 minutes to print from zip forms - - nope, I haven't seen a one. 

Bill, that is quite a list.  It would have to be a heluva deal to take those terms.

Life's too short. Tell the bank to go jump in a lake, and find someone else to work with.

Bill...Very valid points and excellent post.

Jerry Gray CRB,CRS,GRI,SFR / Allen Tate Realtors / Winston Salem, NC / 336-918-2433

Congrats on the featured post!  One of the best posts I've seen so far.  You hit the nail right on the head.   I'm personally sick and tired of the rules, ridiculous policies, and 'take it or leave it attitude' that selling REO's and Short Sales entails.   I remember all the hype about everyone wanting to be an REO Listing agent.  I contemplated going after this because it seemed like this is where the money would be but after the horror stories I heard about working with these asset managers I decided not to and I'm glad I didn't.    Unfortunately I do have to deal with it from a buyer's agent standpoint and yes it's sickening the things that these Banks and listing agents are getting away with.  I once went at it with a locak REO agent who insisted that my CASH buyer obtain an LSR (loan approval) from Prospect Mortgage.  It was the most ridiculous request I've yet to be presented with.  This was a CASH buyer with Current Proof of Funds, Why on earth would he need to speak with ANY lender?  Since I and Buyer refused to comply with this request the listing agent did not submit our offer on the basis that our offer was incomplete.  Too bad for them, because I sold him another property just down the street that was easier to work with and even paid me a Bonus.

Banks and Short Sales Agents are taking away all of our Negotiating Power.  It's all their way or the high way and unfortunately some buyers are desperate enough to jump through all the hoops for a shot at home ownership. 

Amanda, Sylvia, Buyers Broker in Florida,Juli, Coarl, Tim, Jerry, Denise

Thank you for your comments.

So far there are only positive comments, and presumably by buyers agents.

It would be good  if some of the listing agents who are using these terms in short sales and traditional sales would respond and provide some of their reasons behind the practice.

Bill, as a short sale real estate agent, I haven't used these terms.  However, I have had to pay out of pocket for almost every short sale to have utilities turned on for inspections in order to abide by the contract.  And if there was a non-refundable earnest money for 60 days, a lot of the buyers would not back out the week before I get short sale approval.  Your points are valid.  For every short sale, I normally receive 3-5 offers and still have some go to foreclosure because they all backed out of the contract.

So, for me, more strict requirements would make my life a lot easier.

To make things worse, our MLS now requires when an offer is submitted, it show Pending short sale.  Just like Under contingency contract, it stops or slows the showings and offers.  This year, more of my short sales have gone to foreclosure because of this clause, so I'm working with an attorney to revise the addendums in my contracts to allow the short sale to remain ACTIVE on the market.

Great post!  Congratulations on the feature.

A lot of these practices simply make members of our profession look bad.  People make things way too difficult.  On the same note though, I see a lot of buyer agents submitting incomplete paperwork over and over forgetting addenda, dealing with buyers who are not truly qualified, etc.

Barbara, thanks for weighing in. While more strict requirements may seem on the surface to make your life easier, it may not produce the offers, because as most comments here show, the buyers agents are turned off by them.

A 60 or 90 day non-refundable deposit is really not going to stop the buyer from walking. If they want to walk they will, and they'll find something in the banks approval letter to not approve. It just makes it more difficult on everyone.

Of course let's not forget the root of the problem is the banks taking so long to respond. Buyers become impatient and see that they're losing the opportunity to buy another home. That puts the problem on the backs for the listing and buyers agent.

Rob, I don't know why some agents are so sloppy when it comes to the paperwork. And yes, the first thing the buyers agents should do is to get their clients pre-qualified.

Bill, I love this post.  Some of the REO requirements are ridiculous, and should be illegal.

Bill - I know that you want more listing agents who use these things to weigh in and explain them, but I am in the school with those who absolutely do not like the banks' requirements and thinking.   I can not explain away these things for you.

Interesting points but most of them seem to be included in one form or another on all recent sales.  I'm doing a HUD now where I have to ask for permission to turn on the utilities even though there is a rider that permits the buyer to do a home inspection to find issues. How can you do that on a house with no electric?

I can't remember the exact words but the buyer would be charged $500 or so more but not using the sellers 'preferred title company' in another state.  Half the paperwork was messed up & not filled out per IL law. 

I would advise a buyer not to put in an offer on a short sale that demanded no return of EM until 60 days had passed. If it's not on the initial (board certified) contract deemed acceptable we shouldn't be adding all these sort of demands.

I wrote an offer on a Fannie Mae property recently.  I had been talking to another agent who had also written an offer to FM, thus I knew a few things in advance.  When calling the listing agent to inform of a offer being written, I ask for the 14 page adendum, that supercedes the contract.  I was told that the addendum wouldn't be sent until the offer was accepted.

I said that if the addendum supercedes the contract, then shouldn't the buyer get the chance to see what the seller will require up front, not after the fact.  Oh, not 1 thing can be changed on the addendum!

STUPID.................................

Hi Bill, outstanding post. From my perspective, I see this as two different issues. On the REO side, as much of a PITA as their paperwork and demands are, the "bank" is the seller and can stipulate whatever terms they want. I think buyers need to go in with their eyes wide open, but at the same time remember that often they are getting a very good, below-market deal, whereas the "bank" is taking it in the shorts. If they can recoup some of their loss by asking to use a cheaper title company (and in my experience, it is not required to use their title company, but they only will pay for the owner's policy if their preferred company is used, which is not a RESPA violation per the interpretations I have read), or by asking the buyer to prequal with their company (and yes, I have had at least one buyer take them up on their offer to finance), then that is their right. The buyers right is to say no thanks and move on. If the house doesn't sell because of onerous terms, they have no one but themselves to blame. I think REO agents have little to no input on what goes on here.

A short sale is a whole nother ball game. When short sale listing agents decide to play lawyer and draw up multipage documents detailing endless outrageous terms such as the ones you list and requiring signatures from everyone and their cat, things have gotten out of hand; they are at least doing their sellers a disservice, if not setting themselves up for potential legal problems down the road. I picture a conversation, after the foreclosure and subsequent deficiency judgment, between their client and another agent perhaps, in which it is revealed that no buyer would look at their property because of the ridiculous terms. Use your imagination what happens next.

I predict a rash of class action suits down the road.  The bank may be the seller, but nowhere does that give them the right to violate state and federal law with impunity... and they presently do.  Buyers who are attorneys or who have engaged attorney services have seen banks back down quickly on most of the points to which we object.  You have to qualify with them until you offer a legal challenge, at which time your loan status update from another lender is right fine.  Same with the title company of their choice, the septic certificates and transfers, turning on utilities, etc.  A lot of this is due to Realtors "going along". 

I advise my clients to avoid properties with onerous seller requirements and if they want to proceed, advise them of relevant law and their right to raise objections backed by statute. 

Several years ago the hospitals in Arizona formed an association to decide what they would pay for temporary staffing services.  When we protested that was a violation of antitrust laws, we were told "maybe, but if you want to work in this state..."  Last month I submitted all the hours I worked during those years for payment and up to triple damages, the hospitals lost the class action suit.  The banks think it won't happen to them.  I wouldn't agree with that.

That is the joy of selling REOs and Short Sales. However, the buyers do need to realize that since they are buying distressed properties at a 30-54% discount from the standard market, there is always a price to pay for getting a deal.

Closing is the goal, so why would any agent advise their client to consider such a property, would you?

Informing clients about the buying or selling process of the property is essential and securing their understanding and commitment is very important to closing any transaction. 

 Bill, great post!  I haven't sold a lot of Bank REO properties, but some of these terms are ridiculous.  I will definitely advise my clients ahead of time and what to possibly expect. 

Wow! I hadn't realized there was so much anger on REOs and short sales - the problem I run into is when the listing agent is not savvy about short sales or REOs. Now, having said that - let me give you the other side - please do not take this as a negative - I am not defending banks, just giving you the other side. Having been an REO Asset Mgr and Loss Mit Negotiator for 15 years has been the best thing I ever did -Prior to that I was an agent for several years and returned to this side over 3 years ago. When I was a loss mit negotiator, there were 5 of us that closed approx 20 to 25 deals per month, when I left in Feb '08 there were 15 negotiators and they were closing 50 to 60 per month, I'm sure that number has grown. When I was an REO Asset Mgr in '92 I had approx 75 files, in 2006 I had 275 files, we couldn't hire enough people and it was not cost effective so we starting outsourcing our files. When I left in Feb '08 only 10% of our portfolio was "in-house", a few months after I left it was 100% outsourced.

The number 1 reason banks have guidelines or restrictions is to lessen a potential lawsuit and ensure a quicker, smoother closing. Title companies are chosen by the banks because the title company is usually the one that handled the pre-foreclosure for title search and title has already been opened - if that title company failed to clear title or a "cloud" was found after the foreclosure, the bank can hold this title company responsible. The listing agent never selects the title co for REOs. In Texas, the seller normally selects the title co. so this has not been an issue here. Some banks will allow the buyer to close at his title company but the title is provided by theirs and they will not pay the buyer's title company for any seller fees.

I don't like per diems and most of the time the banks will waive it for a legit reason.  Most AM's have 150 to 250 files, the contract must be absolutely perfect, banks not only rely on the listing agents but the selling agent as well to present a "clean" contract with no errors (again to lessen a lawsuit). I cannot count the number of times I had buyers needing more time to close for various reasons, the extension was granted for another week and guess what, the buyer changes his mind. Precious marketing time has been lost. 

Some banks require Multiple Offer Forms even if there is only one offer because the offer submitted has not been executed, so if another offer comes in before the banks execute the contract they have the right to to proceed with the 2nd offer. This is where I see some agents go wrong - when an offer has been submitted to the bank that is acceptable to them, it means that the bank will review this contract, once the contract is received by the bank, it can be denied because the contract had errors, etc. When the listing agent tells you that the bank has accepted your offer, this is misleading,- the bank has NOT accepted your offer - the bank has agreed for the contract to be submitted for final review and approval. I repeat, the bank has not accepted your offer/contract until the bank has fully executed the contract and returned it to the listing agent. Look at it this way, on a regular sale - everything is agreed to by phone or email these days, then seller accepts and the buyers agent submits the contract to you for seller to sign. While going over the contract with the seller you noticed that buyer had checked that seller would pay for a survey but this is not what was agreed to - same thing with REOs, many times we have negotiated the preice, etc only to find the actual contract is entirely different from what was agreed to.

The reason some banks, Chase, BoA, Wells Fargo etc require that the buyer is pre-approved by them is because too many times in the past we received a pre-qual letter only to discover that just before closing, this pre-qual letter is false and the buyer was scrambling to get approved by another lender.

Even though electronic signatures are becoming popular, it is a liability to the banks. They might come around someday as they did faxed and emailed copies but I don't expect that anytime soon.

The only time I have not had utilities on in one of my REO properties is because it was "unsafe" - these are usually the "dog" properties. I am required to have them on, the water is on but has been turned off at the meter, the electric is on but might be turned off at the breaker box. I inform agents of this in advance. (again, because agents will leave every single light on, ceiling fan or I even had one that was flooded because they left the water on in the bathtub!)

And repairs can be negotiated if it is Lender required for the buyer to secure the loan.

Now to Short Sales

It is the listing agent's resposibility to obtain as much information from the Seller and Seller's lienholder as possible -

Questions to ask the Seller - lienholder

Is there a 2nd lien? If so, the paperwork doubles - I always call the 2nd and ask how much they will settle for and I am usually told the amount - you will need to check and see if they also have their own short sale package.

Is it in foreclosure or have foreclosure proceedings begun?

Is there MI?

Is it FHA, VA, etc?

Who is the investor?

Does the lienholder have their own Short Sale Forms?

Did the listing agent obtain all the docs from the seller, paystubs, hardship letter, etc. up front from the seller?

Is there HOA? Did the listing agent tell the seller that he will be responisble for the transfer fees, etc?

What is your normal timeframe ro respond to a short sale offer?

If utilities are off it is normally because the seller has already moved and cannot afford to keep them on. In my area, most of the utility companies will turn them on to allow for a buyer's inspections but that varies from city to city. If the agent has stated that buyer is responsible then the buyers agent needs to inform his buyer and let the buyer make the decision.

Again, title company is normally chosen by seller and it is imperative to get a title company that has a closer that is experienced in short sales. I just had one that we let buyer choose and it was a nightmare, this closer had no clue of how to provide an estimated HUD-1!

On a short sale, if lender required repairs/treatment are needed and the seller does not have the money, the buyer can either walk or pay. Some banks will sometimes pay, depends on the bank.

Listing agent should provide  (in advance) clear guidelines and instructions so that the buyer and buyer's agent are not going to waste their time.

A good short sale agent should be in touch with the l

Earnest Money - 60 days? I have never seen that - was this the agent or the bank?

LA should call the Lienholder on a weekly basis for updates and should inform the buyers agent of the progress.

Also, on short sales, banks really do want to see these properties on the market for at least 90 days listed at or just below FMV with reductions as needed. VA likes to see them listed for 120 days.

Buyers agent should ask the listing agent how experienced they are in dealing with short sales, did LA do a BPO, etc., etc.

Now, when I was in the loss mit dept only 30% of short sales actually went to closing and the number one reason is because the buyers "disappeared" as they got tired of waiting. The 2nd reason was incomplete paperwork from the listing agent. There are a variety of reasons for slow responses 1) loan has MI which means the MI Co must approve, which means they will have to order their own appraisal/BPO after mtg bank has submitted contract to them. 2) If mtg bank is the servicer and the loss is great - it might have to be sent to the investor if it is outside the servicers authority, the investor will then order their own appraisal/BPO.3) Incomplete paperwork or needs to be updated.

If the loan is owned and serviced by same without MI, 2nd lien etc, approval should not take more than 3 weeks. The quickest I received an approval was 7 days.

Now the part that no one wants to hear - in some cases it is more beneficial for the bank to foreclose than to do a short sale. Not common, but can happen.

Bill, your post was great and you aired a lot of dislikes and frustrations. I hope than you can reconsider and not entirely blame the banks. The fault can be found on both sides.  The banks have a lot of inexperienced people because of the volume and unfortunately, we have a lot of inexperienced agents as well.

Bill, there are so many issues when dealing with lender owned properties and short sales I do not know where to start. We all know short sales are a challenge, there are a lot of issues with them, first off is it requires a lot more work than a traditional sale and if I see they are offering a lower commission my first thought is the listing agent is not knowledgeable enough to negotiate with the banks and the odds of it getting done are not favorable. Most banks will require the seller in short sale to keep the utilities on as part of the agreement to do a short sale, if they are off and they are asking for the buyer to pay to turn them on, I just see it as another sign that the odds of it getting approved as very slim.

The lender owned addendums's are another story all together, asking for a pre approval from their preferred lender is just a way for them to get more business, as you know the AAR pre-qualification is as good as any, I have lost out on properties just waiting for a call back to get a pre qual from their lender. I have found for the most part the listing agents for lender owned properties are getting such a small commission that they are doing everything possible to do as little as possible, thus all the hurdles.

There are plenty of homes out there, I do show them all to my clients, I also educate them so they can make an informed decission before trying to pursue a home that has too many strings attached.

I once heard a Real Estate Attorney say that Buyer's Had to be Out of their mind to agree to and sign the Bank's Contract/Addendum.

I have to agree, but on the other hand, these are the 'deals' that most of our buyers want to go after and sadly the majority of our local market's listings are distressed.

I personally can't wait for the housing market to turn around so we can get back to traditional sales.

I'm sure glad I'm not trying to buy or sell a home in today's market.

Your post is inclusive and I don't know where to begin. First, good for you for not listing REOs. You won't be seeing me list them. The headaches I've gone through with buyers buying REO's are too numerous to mention, almost as bad as listing short sales! haha

I list short sales and I absolutely have to use an escrow/title company of my choice. The HUD statement will  be revised more than once, and you would be surprised how many escrow companies just cannot get a HUD statement right for a short sale lender's approval. I don't recommend earnest money to be held for 60 days. From my experience, I find this does not keep buyers in the game any longer than if they do not deposit earnest money. I know of short sale listing agents who require a cross-qual. I haven't gotten in that practice because I do think it rather onerous to make a buyer go through another qualifying process if they are already approved by a reputable lender. I certainly wouldn't recommend charging a per diem on a short sale; that's ridiculous IMO, just like I think it's ridiculous the banks on REO's would charge a per diem. The per diem is to scare buyers and their agents to keep the process moving. As many times as my buyers have needed an extension on buying a REO, the per diem was always waived.

Finally, I present all offers to the short sale sellers, but I definitely have strong opinions on what offer they should accept to present to their lender. This is from experience. Accepting a weak offer will waste time and bring my short sale sellers closer to foreclosure, which is what the short sale is to avoid.

I see your points in many cases here. REO properties are held by banks who don't care about what happens. That is what taxpayers get by bailing out the large banks... attitude. A bank can sit on

Buyers are not required to use the sellers' title & escrow company. They can pick their own typically... but it would be at their expense. It'll be doubling the fees in this case.

I've seen the reason why sellers require a prequal. There had been too many cases of buyers using XYZ Mortgage who is a broker fly by night, who can issue an approval letter only to have it fail a week before closing, thus the seller had the home off the market for that period, and has to give the earnest money back. Per diem charges are to prevent the buyer from dragging it on and taking their sweet old time playing games. Its happened, so there needs to be some form of way to prevent that. Works in many cases... and not in others because some things are totally honest issues that a buyer has no control over. I had an REO once, where the seller let the buyer drag on nearly 30 days to close, and did not charge the per diem.

Short sales are another animal. I'd never tell my buyers to pay for anything unless they know they have a deal. Short sales are way too unpredictable. If bank approval is not there, pay for nothing. Often sellers are pretty thrashed by the time they go through a short sale, so they will not invest any money into the home, and some sellers have no money to invest even in utilities, so they don't care. You cannot get a person who doesn't care, to do anything. Short sales are what they are. Some are better than others. Requiring earnest money to be non-refundable may not even be legal... since without bank approval, no contract is valid. That may be one for law debate.

Thank you for putting into words what we are all feeling.

You were very kind to not mention the benefit to the sellers agent for these "barriers to entry".

The harder it is for other selling agents to make an offer, the more time and likelihood that the listing agent will find their own buyer and make both sides of the commission.

I really appreciate all of you who have taken your time to respond to this posts with your personal input and experience with these properties and terms.

I'm also heartened that everyone, pro and con, acepted this as an issue to be discussed intelligently, and not just as a rant.

Thanks to Cindy Billman #41 who has worked both sides of the street and discussed many aspects of the issues.

Pamelyn #38, in the Phoenix market, the distressed properties are not selling at 30-54% below the standard market. Any home that does sell at that much discount is going to be in worse condition and priced accordingly. In my city, Gilbert, AZ a suburb of Phoenix here is the current breakdown of:

Average Price per Square Foot

$77 REO's
$81 Short Sales
$94 Traditional Sales

The buyers of REO properties are not always getting the bargain they perceive.

• They are buying the property AS IS. That is worth a discount
• The home almost never in as good condition as the traditional owner occupied home. Most require some work, even if cosmetic, to be made move-in-ready That is worth a discount.
• They are only getting a Special Warranty Deed, not a General Warranty Deed. Title insurance has exclusions and does not cover all the differences. That is worth a discount

Therefore, I believe the difference in price is covered by the items above.

Pre-Qualification: I understand that in the past, loan officers were checking off items in the forms that they had not actually done. The AZ pre-qual form is different now, and to my knowledge most loan officers are doing what they have signed off saying they've done.

That aside, when a buyer already has two pre-qualifications from major banks, it's time for the sellers to recognize that "enough is enough", and accept those. Buyers who are losing out to multiple offers cannot continuously get pre-quals for every offer because of the amount of time required, and the possible dings on their credit.

What a great discussion.  I have not foraged into the REO market much and I am an amateur when it comes to these properties, however I know some of the conditions that were listed are against state law in my area, so it is relative. 

I can see both sides of the equation.  The banks have a right to protect their interests and they lay out a lot of terms to help that. However I do feel they sometimes go a little far and discourage potential buyers from even making a good offer due to the hoops that must be jumped through.  A lot of ready, willing, and able buyers pass by REO's for this reason and it would be nice if there was a system in place to help streamline the process and protect both sides.

Excellent, excellent post. How about those fees that the agent with the short sale property also states buyers must pay? The other day I ran into a new one "Buyer to pay 1% bidding fee" I could not find out why or to whom. The listing agent did not respond and his voice mail specifically said not to leave a message. The boards seem to not care, even if you as an agent report an error, you will see the same company repeating it.

I also ran into a short sale situation where for a couple of months the agent kept saying the offer had been submitted to the bank only to find out that the bank never received anything!

And finally since foreclosures in Florida are now taking so long, a number of sellers who appear to be short selling their primary homes are not really, they are just living rent free, knowing they will probably have a year if not longer.  

I will only deal with a short sale as a buyer's agent if I know the company and agent handling the property to be reputable professionals and I will only take on a short sale if I have a trully committed seller.  

Bill,

Very thought provoking post and thought provoking ensuing conversation. Although it may seem like REO restrictions and short sale restrictions are the same, they are actually very different and should be treated as two totally seperate classes.

I don't agree with the imposition of many of the restrictions you listed, but some of them are needed to protect both the BUYER and the seller from wasting time and money.

As I said in comment #6 the reason for short sale contract restrictions is to increase the likelihood of a closing. A last minute unresolvable negotiation can cause the buyer to back out and cause the seller to be damaged for ten years if a new buyer cannot be procured prior to the foreclosure sale.

Therefore, numerous conceivable contingencies need to be prenegotiated, even if at contract time they don't exist. Indeed, these restrictions cause many good buyers to pass on short sale listings, which reduces demand and reduces the value of a short sale house. That is not the listing agent's fault. That is inherent to the short sale process with the bank. Since the bank is unable or unwilling to handle contingencies that may arise, buyers have to be vetted more carefully. The restrictions reflect the reality of getting a short sale approved by a cumbersome, disjointed and often illogical foreclosing lender.

Two examples: (1) When FHA is the short sale lender, they will not pay more than 1% of BUYER's closing costs. That restriction needs to be piled into the pre-contract addendum to avoid waste of time and false expectations. (2) Many short sale lenders refuse to pay for BUYER's home warranty. The seller doesn't have the money to pay it. That needs to be added to the addendum. These are just two of many restrictions that don't exist in traditional sales. This is not a gratuitous power play as implied by some of the commentors.

Also, if the banks would process short sales quickly, lets say within 45 to 60 days, it would be easier to be more lenient because we could cycle through 3 or 4 buyer contracts falling through. But, since banks often take 6 to 18 months to approve or turn down a short sale, there is very little margin for error and much less chance for the house to be saved from foreclosure if the buyer walks. Again, the bank's inefficiency is causing less actionable demand for the house.

I agree with you 100% that upfront restrictions will reduce the number of offers. However, the goal is to generate as many offers that have a high likelihood of getting to the finish line. Spelling out restrictions in advance will push away buyers that won't put up with "end game" entrenchments that the short sale lender will likely engage in. I also agree that the seller needs to know about these restrictions and how they impact the pool of future buyers. These restrictions need to be ratified in advance by the sellers, because the seller is the decision maker, not the agent. Also, all offers need to be presented to the seller even if they are in non-compliance with addendums, because the seller is the decision maker, not the agent.

Bill, thanks again for the important post and thanks for all the commentors. It has illuminated the need for better understanding of the constraints that short sale Realtors face, such as Kay in comment in #29. I have written posts detailing  reasons and the impact of short sale contracts falling apart. Your post has inspired me to continue with that series.

Pamela's comment #45 has much merit. Other short sale Realtors may not be commenting because it may be deemed unpleasant to be a contrarian on someone else's post. Thank you for calling for dissenting opinions in your comment #28.

I have elected not to list REO's, but rather to specialize in Buyer Agency for them. In our market in southern Wisconsin, there is a sizable sale price discount for REO's for all the reasons Bill stated, and because of the uncertainty of the closing date. If you don't know when you will be able to move in, it's worth a discount.

Not all of our deals are being hit with all of the clauses you listed, so I have saved samples for my clients to show what they may be facing, and tell them to structure their offer accordingly. Not all of these are good deals, but some clients can save a lot of money by being willing to assume some of the bank's risks. And I give all my clients the name of a good real estate attorney......

In California the banks can no longer dictate Title and Escrow - but they sometimes agree to pay Title Fees if they can pick them.

Believe me, the listing agents are not dictating these terms... we are following instruction from our clients. Most of my banks select title/escrow because that company also assisted with the foreclosure, and they are familiar with the banks contract documents. As far as the preapproval goes... believe it or not, about 1 in 5 buyers witha preapproval letter get denied by my bank. I think that's precisely the reason they do it.

With regard to the short sale, I guess I haven't seen a lot with multiple stipulations in our market area. I open pre-escrow on all of mine, and I prefer that the buyer use the selected title company- not because they are a "favorite", but because they have closed multiple short sales, are quick in getting revised HUD's to me, and have done all the preliminary work on the payoffs, liens, HOA, etc.

Very thought provoking post - seems like it is getting harder and harder to be a buyers agent!

Bill- You stated some great reasons that our job when representing buyers can be so darn frustrating! Thanks for sharing

Thanks again to all who have entered the discussion. Due to time constraints I can only address a few of them.

Dave, #51, I agree that items such as the FHA closing cost limitations, home warranty, etc should be shown. In fact, all buyers agents who will represent buyers should be aware of them and guide their buyers accordingly, even if not posted. If a buyer insists on them being there, then the contract should be rejected by the seller.I feel that buyers agents should be as educated in short sales as listing agents.

I also agree that all offers should be presented to the seller. However, many of the agents here have several pages of addendums and state that if these addendums are not signed and included in the offer that it is "incomplete"; and incompete offers will not be submitted.

I can't agree with the short sale seller/agent requiring the buyer to agree up front to pay a per diem fee. That takes away the ability of the agents to negotiate that if the event occurs. With lending being so tight and underwriters going overboard on their redundant document requests for highly qualified clients, causing closings to go beyond 30 days, I would not want my buyer subjected to that per diem fee, so I want the ability to negotiate that away.

While requiring that as a condition of sale "may" help the transaction be completed, it can also unnecessarily cost my buyer an unfair per diem fee. And if my buyer has to pay that fee, s/he may want to recoup that amount from me, unless I had advised them in writing that they should not agree to that up front. Therefore, in order to protect my buyers best interest, and myself, I must advise my clients of the ramifications and advise that they not accept that term.

If I know the listing agent has a good closing record, and if I can see that the short sale has a good chance of succeeding, and especially if the seller is HAFA qualified and the listing agent is prepared to send in an ARASS; and if there aren't other restrictions, then I don't mind recommding the buyer to do the non-refundable deposit. I've done that on a HAFA

Gene #53, the banks never could dictate the title company. They were just doing it because buyers are accepting it.

Julie $54, I understand that with REO's it's the bank, not the listing agent, who is setting the terms. However, that does not make it right.

The banks are in violation of RESPA Section 9 whichprohibits a seller from requiring the home buyer to use a particular title insurance company, either directly or indirectly, as a condition of sale. Buyers may sue a seller who violates this provision for an amount equal to three times all charges made for the title insurance.

The banks require approval with their bank so they can sell the loan. My client had a Bank of America pre-qual. Yet another REO bank required that he be pre-qualified with Chase. Does that mean that Chase is going to do a better job at pre-qualifing my buyer than BofA? 

And the big problem here is that today in Phoenix area, there are multiple offers on almost everything. That client lost two bids to over list price offers. On the next one, a short sale listing agent (not an REO) required a pre-quall from Academy Mortgage. He would not accept the two from BofA and Chase!!! So my buyer skipped that one.

Title companies: Today every escrow officer knows how to do a short sale, and if they want the short sale business they are also fast in preparing HUD's. For my traditional sale purchases I use a title company that is in my service area, which is convenient for my buyers. The escrow officer there is as qualified and fast as any escrow officer in preparing HUD's, and doing revisions. She also responds to phone calls and emails rapidly. So as a buyers agent for a short sale purchase, there is absolutely no reason why I should use the listing agents title company.

I have no problem with a short sale listing agent saying "Request that buyer use xyz title company". That is appropriate, and all other things being equal, I may have no problem asking my buyer if he wishes to use that company. 

I've listed and sold a few short sales for referrals and friends. I've never put any restrictions on them, and have sold them. In them I "Request to use my title company". Requesting is not a RESPA violation. Requiring is.

My escrow officer gets me a prelim title search and HUD, and she knows that the buyer may choose to use their title company. Therefore, when my buyers want to buy a short sale, there is no reason why they should not choose this company.

Thanks for your contribution. It's good for us all to hear both sides.

Debbie, it is frustrating, especially when there are multiple offers on every house.

Listing agents and buyers agents are all trying to do the best we can for our clients. And I think we should all understand how all the different transactions work, and be able to work with them, and negotiate with them, and not place onerous non-negotiable terms in them.

Wow Bill, you opened a can of worms. I agree with most of your blog...only it is not the banks per se, but the people they hire who make these ridiculous rules we have to follow. I have been in the business since the last century and have never seen this much BS in the market, and so many agents who seem to buy their RE license at a swap meet (not naming names here). When I got my license I had to do an ethics course. I wish people would follow the Golden Rule more often. Be glad you are in Arizona. Los Angeles is a zoo!

Like I say... the banks are running the show....

Marion, I'm with you. I work with a lot of relocating clients. One from NJ was here last month and we had games played on us by the seller/listing agent. We made a full price offer with no requested concessions. Nothing for the seller to think about. Submitted the offer at 12 noon, with a 5pm deadline. No response by 5:30. I called; agent said seller accepts our offer and will get contract to us soon. 9pm, no contract. I called; agent said we'll have contract tomorrow morning. More delays until 3pm next day. This time he said: "Sorry, but my client accepted another offer higher than yours".

My client said, if that's the way they do things in Phoenix, maybe I won't move here.

Stephaine, they run the show because agents are allowing them to. Many agents will do anything to list an REO. I won't list them any more. Agents used to get paid well for doing BPO's. But since the hoards of agents started chasing BPO's the banks kept lowering the fee, and agents kept accepting it. I won't do BPO's now either.

Bill, great info! Thanks for the integrity to walk away from the Foreclosure process because of the mess. I wonder what their reaction would be if the offers were put in with clauses that made them think like - "approval by the banks mortgage dept will be done after a nonrefundable payment of $10,000 for adverse reaction to buyer's credit history for unnecessary credit requests so the bank can try to get a new customer" or $1000 per day per diem if the bank fails to close on time!  I'm sure it won't get anywhere, but it will make a point!!