Short Sales explained by Oregon Association of Realtors

Short Sale Single Offer Clause

Q.  Can a buyer have a provision in their offer on a short sale that says the seller cannot submit other offers to the lender until the lender has decided on the buyer’s offer?  What happens if the seller gets three such offers, each with the same clause?

A.  Sure the buyer can have such a clause.  The question is what will happen if they do?  Short sales are seriously misunderstood and difficult transactions.  There is tremendous ambiguity and uncertainty for both the seller and the buyer in a short sale.  The seller wants to avoid foreclosure and may not care much about price.  The buyer wants a deal.  Neither needs the uncertainty associated with an ongoing bidding war conducted by serial offers being presented to some distant, unresponsive, disinterested, overworked employee of a troubled lending institution.  The clause you reference is just the kind of thing you’d expect a buyer seeking to reduce uncertainty would come up with in such a dysfunctional market.

Whether a seller can or should accept an offer with such a clause depends on the situation.  In a short sale, offers are going to be contingent on the seller getting the lender’s consent sufficient to clear title.  That means two agreements.  One is the real estate deal between buyer and seller.  The other is the agreement between the lender and the seller regarding the seller’s debt to the lender.  Making the real estate deal contingent on the seller/lender agreement doesn’t make the lender a party to the real estate deal itself.  The seller therefore retains the right to accept or reject any offer on any terms.  Retaining a right doesn’t, however, mean the seller can do whatever they please.

Whether a particular seller should (normative question) accept an offer with such a clause depends first on the seller’s position.  If there is a chance the lender will demand a personal note for the deficiency, or the seller’s taxes will vary with the deficiency, the seller may have no reason to accept such an offer.  On the other hand, if time is short and the size of the deficiency doesn’t matter that much to the seller, they may like the idea of one offer.  It is, in the first instance, their call. The concern, of course, is that accepting such an offer may somehow defraud the lender or involve the agents in misrepresentation.  Everyone is, and ought to be, a little paranoid about lender fraud after it brought down the whole real estate market.

Fraud and misrepresentation by silence require hiding material information.  A seller negotiating with a lender regarding the seller’s debt to the lender owes the lender the duties of good faith and fair dealing. They cannot hide information from the lender that would be material to the lender’s decision regarding the debt.  Here, that means they could not deliberately hide subsequent better offers without the lender’s knowledge.  In this case, however, that is not a problem.  If the seller accepts the offer, the single offer submission term will be contained in the offer forwarded for the lender’s approval.  If the lender doesn’t like that approach all they have to do is say no.   Of course, that may take a month or two and by that time the seller may be foreclosed, but that just takes us back to the normative question of “should” the seller accept such an offer.

The “two agreement” nature of short sales means the seller must consider both their own needs and their duty of good faith and fair dealing to the lender.  Their own “needs” means answering a context-specific normative “should” question.  Once the seller has that answer, the issue becomes their obligation to deal honestly and fairly with the lender.  That can be done just by submitting the offer with the “one offer clause.”  It could be done by working with the lender ahead of time to determine how to handle such things.  That can be done by phone and confirmed by email.  Remember, on the seller/lender side we are talking about disclosure of material facts relevant to the seller’s debt to the lender.  All that means is not hiding important things from the lender.  The single offer presentation clause is actually an easy one because the disclosure issue is taken care of by the provision being presented to the lender in the offer.  It is secret procedures like unilaterally deciding to take backup offers and submit them serially to the lender without the lender’s knowledge that may cause real problems.

Alright, so what about the multiple offers all with the same single offer presentation clause?  It’s the same thing.  First the seller deals with the offers as offers.  A seller with multiple simultaneous offers will normally reject all offers and ask each buyer to make their last best offer.  It doesn’t matter if the buyers come back with last best offers that all contain the single offer presentation clause.  At that point, the seller will (assuming it is in their interest to accept any offer with such a clause) simply accept the best offer and forward it; just like they would had they received only one offer.  It is just an application of how to deal with multiple offers coupled with how to deal with short sale negotiations.  For more information, you should read the new “Dealing with Multiple Offers in Short Sale” section of the Oregon REALTORS® Risk Management Toolkit.  Contact me at kathryn@kjkproperties.com if you’d like a copy.