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  1. #1
    Join Date
    Dec 2010

    Default Legal Remedies for Buyer when Short Sale Seller Not Acting in Good Faith

    My question involves real estate located in the State of: California


    Thanks in advance for any feedback you can provide for my question.

    I am a buyer in a contract to purchase a residential home from a short sale seller; which is subject to the lender's approval. The CA short sale addendum was included in my contract which notes that my earnest money deposit remains uncashed until lender approval, and the time period for contingincies does not begin until lender approval. There is only one loan on the property, and the lender has not yet responded with their approval yet. My offer was higher than the ask price, which was in line with area comps; so there is a good chance that the lender will approve it.

    My question is that I am very concerned that this seller is merely using the short sale process to extend the amount of time they can remain in the home until the bank forecloses and they are forced to leave. The seller has demonstrated their lack of motivation to sell by refusing to allow their listing agent to show the house to anyone but me, in the 5 months that the house has been listed on the MLS. Further, the seller did not accept my offer until their house was scheduled for auction by their lender. At that time, almost a month had passed since my offer had been presented to them.

    My agent and the seller's listing agent then drafted counter offers to establish that my offer was back in force, after having been expired for several weeks. When the listing agent arrived at the seller's home to pick up the executed counter-offer, the seller refused to allow the agent in the home, believing that the agent was there with another buyer in an attempt to obtain a back-up offer. Only when the seller was assured that the listing agent was not there to show the house, did the seller allow the agent in her home. I share these facts to establish why I am concerned about the motives of this seller in engaging in a short sale to me.

    I have done a little research and have learned that a short sale seller can file bankruptcy right up until the day before the close of escrow; even after the bank has approved the offer, and the buyer has done all inspections & removed his contingencies. It would be horrible for our family if after we give notice to our landlord, pack our things and prepare to move at close of escrow; to suddenly learn that the seller had filed bankruptcy, and has no intention of moving.

    I understand that a buyer could sue for specific performance, but engaging a lawyer would be costly and I am unsure whether I could collect any reimbursement for the fees I spent for inspections, escrow, and emergency housing for my family; if the seller files for bankruptcy protection before close of escrow.

    I don't want to make my family a pawn in a short sale seller's game of extending their mortgage-free stay in a home as long as possible. Here are my specific questions:

    1.) What protections do buyers have in short sales?
    2.) Is it true that a seller can back out of their contract to sell after it has been approved by the lender, escrow is opened, and claim protection under bankruptcy?
    3.) Is there any way for a buyer to re-affirm in an addendum to the contract with the seller, that if the seller decides to file bankruptcy after escrow has been opened, they agree to hold the house outside of the bankruptcy estate and complete their short sale?
    4.) If nothing else is possible, could the buyer attend the seller's bankruptcy meeting of creditors and ask that the bankruptcy trustee force the seller to complete their short sale?

    It seems like the sellers and banks hold all the cards in short sales, and buyers have little power except to cross their fingers and hope for the best outcome. It seems counter-intuitive to me that buyers have no legal recourse or protection in these matters, but the many stories I have heard of short sales gone wrong seem to indicate that.

    Sorry for the long post and all my questions, but I am trying to determine my remedies in advance, if the seller were to file bankruptcy just before completing this transaction.

    Thanks so much for your feedback and advice!

  2. #2
    Join Date
    Sep 2005
    Behind a Desk

    Default Re: Legal Remedies for Buyer when Short Sale Seller Not Acting in Good Faith

    1. Buyers have whatever protections they build into their contracts. If the contract, for example, allows the buyer to walk away if certain deadlines aren't met, the buyer may do so.

    2. If the seller is willing to discharge civil liability in bankruptcy and qualified to file for bankruptcy protection, the seller can file for bankruptcy protection.

    3. You could attempt to negotiate such a provision but you would need both a seller who was willing to sign it and a clause that, in bankruptcy court, would be deemed sufficient to in fact take the home sale and associated claims outside of the bankruptcy. (And then, no matter how well-drafted the provision, you could still end up litigating its validity in the bankruptcy court.)

    4. Odds are that the borrower would allow the house to go into foreclosure rather than trying to keep it in the bankruptcy estate.

  3. #3
    Join Date
    Dec 2010

    Default Re: Legal Remedies for Buyer when Short Sale Seller Not Acting in Good Faith

    Thank you very much for taking the time to answer my question so thoroughly. I greatly appreciate this feedback.

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