Tips on Inspection Periods for Short Sale Transactions

As most of you have likely seen, the demand in today’s market for short sale properties is very high, with decreasing inventory and a large pool of buyers.  In fact, property prices are increasing in many areas because of this high demand, and short sale sellers are often receiving many offers – some possibly even above asking price – within the first day of listing.  In this kind of market, short sale sellers can be more selective than ever in choosing how to list the property and which offer to accept.

In regards to the inspection period, most short sale contracts in recent years provided that the buyer’s inspection period commences upon bank approval of the contract.  As we all know, it usually takes months to obtain bank approval due to the time it takes a lender to complete the approval process.  Since the inspection period allows the buyer an “out” of the contract for virtually any reason with no consequences, many buyers will sign contracts on several properties, wait for the first one to be approved, and then cancel the remaining contracts at the inspection period.  Obviously, this loophole has burned many short sale sellers who wait months for bank approval only to have the buyer cancel the contract.  When this happens, the seller must obtain a new contract with a new buyer and then begin the months-long negotiation process all over again.  And if the property is in foreclosure, there may not be enough time to obtain approval of a new contract before the property is sold at auction.  Even worse, this can happen multiple times with a single property, with a seller, the realtors and the short sale negotiator expending hundreds of hours to obtain bank approval for several contracts, none of which close.

Because of these risks, we suggest the inspection period for most short sale contracts to begin upon execution of the contract.  The natural response from most agents to this suggestion is, “My buyers do not want to spend the fees for an inspection before they know whether the bank will even approve the deal.”  This is a very valid point, and there are several options to work around this issue:

First, the buyer should be informed that it is in his/her best interest to complete the inspection before the lender approves the price.  Why?  Because, if the inspection reveals a major problem with the foundation, roof, or other significant defect that clearly affects the value of the property, the buyer will obviously want to reduce the purchase price.  It is clearly better to adjust the purchase price before submitting a contract to the lender, rather than waiting for the bank to approve a higher price only to request a reduction due to the inspection report.

Also, the parties can negotiate regarding the inspection fees.  For instance, the seller can offer to reimburse the cost of inspection if the lender does not approve the contract.  Or, the parties can split the fees.  Some sellers even choose to purchase an inspection at listing and provide the report to any potential buyers.  We find that standing firm on the inspection requirement is a good way for sellers to weed out the less serious buyers, and we all know that short sales are typically much more successful where the buyer is seriously dedicated to purchasing that particular property.

As always, should you have any questions regarding any of the foregoing, please do not hesitate to contact a member of the Berlin Patten team.


Berlin-Patten, PLLC

This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.

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