It's frustrating to wait for a bank response on a distressed home you want to buy or sell!

It’s frustrating to wait for a bank response on a distressed home you want to buy or sell!

A challenge we’re running into with the market weirdness is the deceptive status of listings in and around San Jose and Silicon Valley.  Sometimes a house or condo appears on the web to be a listing that’s available and ready for your offer, but in fact the agents are no longer accepting offers on the seller’s behalf.

Since a large percentage of our San Jose real estate sales consists of distressed properties (short sales or bank owned properties), the situation is more complicated than with a “normal sale” for many homes.  (Non-distressed listings gleefully proclaim, “this is a NORMAL sale! no bank approval needed!” because they know that serious buyers, particularly highly motivated ones, just want to buy a home without delays and games.)

With distressed sales, the complications usually come in the way of bank involvement on the seller’s side (beyond just funding the buyer’s loan).

REO or bank owned properties require several days to a week for a decision to be made on offers presentedListing agents are the gateways to the banks and if they decide that they have enough offers, that’s it.  So the property may show as “active” and available on the MLS, but the agents won’t take any more offers – they are waiting on a response from the bank. So while the home isn’t sold, it is not available either – it’s in a sort of “availability limbo“.

What would help in this “limbo timeframe” would be updated comments in the MLS (agent section) so that other real estate professionals don’t waste their time.  Recently I showed my buyers an REO in Willow Glen and we were prepared to write an offer after doing a bit of research.  Today I phoned (after last night’s email got no response) and found out that they aren’t taking any more offers but are awaiting the bank’s response on the four that they already have.  It would have saved my clients and me a lot of time had the comments been updated to reflect the fact that they didn’t want to see any more offers.  The best agents are doing this, but some agents (including some of the top producers) are not.

Short sales require that the bank approve any sale (since the bank is agreeing to a short payoff), so the seller has a contingency that the sale is subject to the bank’s approval. (Normally only buyers have contingencies.)  So the sale is really a two-step process.  First, the owner of the home must come to a meeting of the minds with the buyers as to the price and terms of the sale. In other words, they must have a ratified contract.  Second, the ratified contract and other documents relevant to the sale are forwarded to the bank (or banks if there are two or more loans) with the short sale package.  Once the bank approves the sale, then the more normal phase of the escrow begins: buyers put their initial deposit into escrow, order inspections, etc.

When does the status change from “active” to “sold” with a short sale? Although in a sense the property is still available until the bank approves the contract, there is a ratified purchase agreement on the home prior to that and it is, in fact, a pending sale. It’s just pending with a contingency. So the correct answer is that once the seller approves the contract, the home’s status on the MLS and on the web should be changed.  Many agents are showing these sales as “status 2” or “pending release”, but others are showing it as a normal “pending sale” while still others display it as available – the latter of which is wrong.  Lots of confusion there.

To further complicate it, again, agents are the gateways.  The home may be sale pending subject to bank approval and it might be that the bank would want to see a higher offer but the listing agents may be unwilling to present it.

Is that a problem, legally or ethically? It’s not all that clear – it depends on the communication between the seller and the listing agent.  The agent has a fiduciary duty to the seller, not to the bank – so it depends on what the seller wants.  To expedite the sale, some Realtors are virtually bypassing the owners of record and dealing primarily with the banks, and this is an agency nightmare worthy of a lawsuit. The seller is still the client, and that’s the person to whom the agent owes the highest fiduciary duty – not the bank.   The seller probably wants to see the highest price for the home since there is less forgiven debt and less of an issue with “phantom gain” and banks later coming after them for the amount forgiven. The seller needs to be educated and kept in the loop.

A good solution is for listing agents to update their comments appropriately.  Our local MLS is making it more clear what’s required, but even agents with the best of intentions get confused since the house doesn’t “seem” sold until the lender blesses it.

Such are the murky times we’re in.