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.

Homeowners and investors can consider lease options as tool

As the owner of real estate assets that have been used and abused by the current market, I have had the opportunity to evaluate my long term goals.  I have always used the business mindset with the belief that my rentals can pave the path to retirement down the road.
 
Have you evaluated your own real estate holdings?  Are you the owner of a house you would rather see “sold?” Are you a landlord by default?  Here is a thought – try renting the assets with a concurrent lease option.  Who is it best for? This fits an existing investor looking for income, and anyone with a “due on sale” clause that has considered selling on contract.
 
There are many benefits to concurrent lease options, but they are not for the faint hearted.  If you have a business mindset about owning a rental, this option could be for you.  Contact me for a full article on this topic.

For more information and a private consultation on how to use your own real estate assets to your benefit, please contact me.  We can discuss value, reasonable rents, concessions, capital improvements, and the prospect of increased cash flow with a lease option.  The best business person does their due diligence and makes wise decisions based on facts.  Now is the time to evaluate your real estate holdings with a long view.

September Market News

September Market News

Having the long view in real estate investing

Having the long view.

My name is Kathryn King and I am an investor as well as a Realtor and company owner.  I work with owners of homes and small investment properties, mainly built of houses and duplexes and other small buildings.

Thinking over what sort of message I have, I started thinking about a financial book I have been reading.  It was written near the year 2000.  In the final chapter the author talks about taking a long view with regard to investments in the stock market.  Reading this at the end of this financial book was a breath of fresh air.  I need the long view in real estate for career, clients, and my own investments.

I don’t know about your experience of the past 18 or so months, but my experience as a person employed in the field of real estate and as that of an investor has been trial and tribulation.  I have experienced many things that I could view as failures and I think the opportunity lies in the ability to see them as hiccups on the ride.  To remain detached and keep stride I like the concept of taking the long view.

I did not have a short view or a “flip” mentality wit h regards to my real estate holdings.  However I did not anticipate the increased turnover, the decrease in rents, the sharp increase in concessions, and the literal demise of commercial real estate in the midst of an attempted reverse exchange.  With these experiences and the news repeatedly reminding me of the state of our nation, I somehow became a short view investor, losing sight of the end goal!  I can say the same is true for home owners and investors I know. 

Change has hit my segment of the market on a huge personal scale.

1. Clients and friends are being foreclosed on.  For many this is their financial vehicle going away.

2. Buyers have lost their jobs in the midst of home shopping this year.

3. Sellers are not understanding CAP rates—they never had to think about that in this decade.

4. Increased vacancy rate has had a very personal impact.

5. Default rental owners struggle with the concept of supply and demand, and rent as a pricing function.

6. The climate has required an ability to understand change as it is directly under foot.

7. My clients do not readily understand that economic factors are relatable to their investments in a very real and large sense. 

The end result of my experience is to plan for today’s economic climate as the future, and not to plan for increase revenue or rents in my planning.

There has been a powerful lesson in this period in time.  For one I had to remember that I purchased real estate investments as part of a long term retirement plan.  I had ideas about retiring early and the change of economy has helped me to take seriously the exit planning if I intend to take the plunge some day.  Another thing that I learned is to value that which we cannot place a dollar figure on.  In this time I have found opportunity to appreciate health, family, my new husband, my dogs, great weather, and the companionship of friends.

What makes a smart real estate investment nowadays?

It all depends on if you want cash flow, write off, appreciation.  What is your objective and what is your financial condition?  The best of all investments will give you good cash on cash return (the function of your down payment as related to the annual income after expenses), good value retention and appreciation, low maintenance, and tax benefit.  But how do you get there?

Many of us don’t have a pile of cash laying around to get us started.  I personally am not a believer in the get rich quick antics that I hear about on TV.  I believe in simple hard work and smart investing, so here is how I got to where I am.

I started by making my first home a rental after I had owned it about a year.  I moved because I didn’t like the area, but for some reason liked the concept of real estate as a wealth building vehicle.  When I turned this house in to a rental I had to buy another one to live in.  Owner occupied financing is more affordable so this was a great option.

About 1.5 years later I bought another house.  This one was an impulse purchase!  It had good potential (a fixer, indeed), and the house I was living in had grown small.  This third house was in Woodstock, a still sleepy urban neighborhood that had promise.  I fixed it up, fell in love with living in that great walkable neighborhood, and decided I had enough of moving.  I settled in and stayed over 10 years, while I did more investing.

About a year later I tried my first tax deferred exchange (a 1031 exchange), and sold that first house to get a better house in a better neighborhood.  With each of these houses I tried to get the rent to pay the payment.  Within reason, as long as I was not tapping the equity, these houses came close to paying for themselves when comparing cash flow only.  When tax write off and appreciation were taken in to effect, they were all adding up to growth in value and potential for wealth.  With all of these houses I put relatively little down, which helped with the cash on cash return.

What should you take in to consideration when deciding to invest?

1.  Amount of down payment

2.  Loan terms

3.  Area

4.  Design of home or investment

5.  Realistic rent

6.  Expected vacancy rate

7.  Minimum return on investment desired

8.  Length of time you intend to hold the home or investment

9.  Capital improvements required

10.  Reserves for replacements

This list is just a start.  There are infinite considerations when purchasing real estate.  Feel free to meet up with me at my monthly forum, Landlord Study Hall.  We have been meeting monthly for over 6.5 years and welcome your attendance.  Read more at www.landlordstudyhall.com.  This month we will delve into notices, terminations, and evictions.

More on this story next blog post!

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