Now that we understand that subsequent offers in short sale situations are material facts in the negotiation between seller and lender, we can develop practices and strategies to meet the resulting obligation of honesty, good faith and fair dealing. Timely disclosure, we know is the key to meeting these obligations. That being the case, the time to resolve the subsequent offer dilemma is when negotiation is opened with the lender on the first accepted short sale offer. What are needed are sound business practices that anticipate and handle subsequent offers in short sales before the offers are made. In short, practices that get the seller and agents in front of the situation by anticipating the situation.
There are only a handful of possible ways in which subsequent offers can be handled in short sales. One is to not market and not accept subsequent offers. Another is to accept subsequent offers in a “backup” position and send them to the lender sequentially as the lender rejects them. Another way is to request offers for a specific period of time, then close the offer period, stop marketing and send the best offer to the lender. Another is to accept all offers on a short sale contingency and send them all to the lender. Yet another is to send only offers better than previous offers by a set amount and then only until a certain cutoff date. Which among these alternatives is best depends on the circumstances.
There may be situations where the size of the deficiency doesn’t concern the seller or where there simply isn’t time to mess with subsequent offers. In such cases, the agent would submit the first offer with a cover letter or email (or phone conversation with a follow-up letter or email) that says due to the circumstances the seller will not market or seek subsequent offers. If the lender says nothing, they have agreed to that approach. If they do say something, the seller can negotiate with the lender to resolve the issue. That may involve postponing a foreclosure, taking only backup offers or whatever is necessary. Meanwhile, the accepted offer is in the works and the seller’s and agent’s duty of honesty, good faith and fair dealing has been met by communicating their intent to the lender.
Communicating intent to the lender is the key to meeting the duties of honesty, good faith and fair dealing. For instance, another way to handle the multiple offer potential would be to advertise (MLS comments are advertisements) that the seller will entertain all offers for a specified time (three weeks, a month, six weeks, whatever) and then accept and forward the best offer to the lender. Buyers would then make offers with an expiration date longer than the specified period. A buyer could, of course, revoke their offer at any time prior to the seller’s acceptance at the end of the period, but so what? To make this work, all that is necessary is to work out the details with the seller and inform the lender of how the seller intends to proceed. Silence is again agreement for honesty, good faith and fair dealing purposes. If the lender objects, the seller and the lender can work out the lender’s problems.
If the situation is such that the seller intends to continue marketing and accepting better offers to forward to the lender, then the thing to do right at the beginning is to establish some criteria with the lender regarding subsequent offers. That can be done with a cover letter that accompanies submission of the first accepted offer. In the letter, the seller can tell the lender they will continue to market for a specific period of time and accept and forward better offers. This lets the seller decide how long he wants to continue looking for a better offer and to define “better.”
How long the seller wants to seek better offers depends on the situation. Certainly, the foreclosure date is going to be a factor. There may be other considerations for the seller based on lender plans. Since all that is happening here is that the seller is covering his honesty, good faith and fair dealing obligation, setting a marketing time or criteria for determining a better offer is just informational. The same is true of defining what will be considered a better offer. The idea, again, is to communicate to the lender the seller’s idea of what is reasonable in the circumstances. If nothing is said by the lender, the assumption is that whatever the seller decided is considered reasonable. If something is said by the lender, the matter is negotiated and resolved.
There is a final scenario that should be mentioned while we are talking about communication and resolving matters by negotiation. There is a movement in some areas of the country to have sellers accept subsequent offers in short sales in what is termed “backup position.” This means the seller will accept, but not forward to the lender, any subsequent offers in short sales by having buyers agree to a backup position before the seller will accept an offer. This approach confuses the sale agreement with the lender/seller agreement and raises a couple of serious issues.
The first issue arising when sellers take backup offers in short sale situations is whether the backup offer is better in the sense of reducing the lender’s potential loss. If it is for a higher offer, accepting it as backup and not forwarding it raises the same honesty, good faith and fair dealing problem as simply rejecting the offer. As far as the lender is concerned, an offer not forwarded is an offer that is hidden. As we have already discussed, hiding better offers while negotiating with a lender to reduce the payoff on a loan raises very serious liability problems. Calling the hidden offer a backup offer doesn’t change anything with respect to the relationship between the lender and the seller.
To use the backup offer approach safely when a subsequent offer has the potential to reduce the lender’s loss, the seller would need the lender’s approval to treat subsequent offers as backups. That can be done by communicating in a cover letter to the lender, with the first accepted offer just like with other processes, the intent to take backup offers. Don’t be too surprised if the lender disagrees on this one. We are talking here about subsequent offers that are better in the sense of reducing the lender’s potential loss. In reality, a seller would be free, without any further communications with the lender, to accept in backup position an offer for less money than the one already forwarded to the lender.
The key to a successful short sale lies in understanding that in negotiations with a lender over how much money the lender is willing to forgive, the seller cannot hide from the lender other offers that have the potential of reducing the lender’s loss. The way to deal with that obligation is to tell the lender what you are going to do with subsequent offers when you submit the first one. If the lender doesn’t object to the plan, the seller has met his obligation of honesty, good faith and fair dealing. If the lender does object, the seller negotiates a process the lender will agree to. That way, you never get into a situation where the seller is hiding material information from the lender.
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