It’s bad enough that a short sale can take six months to close. It’s even worse when the short sale payoff lender decides at the last minute to change the terms of its agreement.
Can they do this? In short, yes.
After all, they are the ones who are agreeing to take less than what is owed in order to complete the transaction – they are under no legal obligation to agree to do this.
Here are some recent short sale nightmares that I have seen:
Despite the HUD-1 having been first provided to the two short sale payoff lenders in November, a final approval was not obtained until April. The problem that arose was that one of the short sale lenders would only approve a commission of 3% in the transaction, since they determined that the listing agent and the buyer’s agent both worked at the same brokerage, and the short sale lender would not allow more than 3% commission to one broker.
The broker agreed to lower the commission from 5% to 4%, but the short sale lender would not allow this to net out of their funds, consequently meaning that the seller had to come out of pocket for the additional 1% (roughly $14,000). This was not a problem for the seller, but the short sale lender determined that if the seller could come up with an additional $14,000 to pay the broker, then the seller could pay that $14,000 over to the short sale lender.
Thus the short sale lender increased their required payoff by an additional $14,000. Since now the seller had to come up with an additional $28,000, he was no longer able to complete the deal. The broker relented and had to agree to lower the commission on the HUD-1 to 3%, at which point the short sale lender also agreed to lower their payoff by $14,000, but only if the commission remained at 3%.
Often commissions are whittled down by the short sale lenders, and often at the last moment. The most common scenario involves the short sale lender requiring that the seller come up with a specific amount of funds to close, say $5,000, but the seller not having this money. The only way to close is for the agents to lower their commission so that the closing can take place.
Another nightmare situation involves seller closing cost credits to the purchaser. Often the short sale lender will either not allow the credit at all or limit the amount of the credit. Purchasers and agents should be careful when negotiating a short sale contract that the agreed upon seller closing cost credit may not survive the short sale approval process.