Why not have the buyer do inspections prior to submitting to the lender?

I am the listing agent on a property that has many problems. I knew that once we got to inspections after the lender approval, it would reveal a failing septic system along with a pest report that would show the termite's were holding hands to keep parts of the structure upright. When I listed the property, I discussed with the seller the short sale process and what usually happens at this point that either the buyer accepts the condition, backs out or I have to renegoitiatefor a credit with the lender.

We received 2 offers on the property and as we reviewed the contract seller says point blank, "I don't want to wait around for inspections and have them cancel in the end." So we countered the highest offer that they were to complete inspections within 10 days of acceptance and they would deposit $5000 into escrow. They did their inspections and decided not to proceed without ordering any formal reports. The lower offer came in with an even lower offer and seller countered with the same terms. They signed it without any questions. But when it came time to remove contingencies, they balked. Partially stunned I reminded them of the what they signed. They eventually came around got the formal reports they wanted and they removed the contingencies today. Bad news is the septic is failing and the pest report is a major document...and the good news is we a submitting at the agreed price and all sorts of written documentation describing the condition of the house.

 

So my question is why don't we do it like this more often? In my opinion the buyer's are better off knowing up front what the condition is instead of waiting forever only to decide to back away. It saves everyone time and once we get approval, we don't go through a time consuming renegotiation.

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Although I agree with your premise, your reason is incorrect. The agents that advocate that the buyer do their inspections before removing a seller contingency is absolutely fine as long as the terms are spelled out on the purchase contract. In other words, having this requirement is enforceable.

All buyers of my listed Short Sales, if desiring a home inspection, septic check etc- get that done in the first 10 days or less. If there are problems they can walk away and get their earnest money back or we can use those reports as part of our negotiations/ They can renegotiate their offer.

I see it as the best for all involved. The buyers are not left waiting for months for an approval and then find out there is an issue that they do not want to deal with. They can move on and find another place. They did spend some money and would have any way- just later in the process. I have only had one SS not be approved in 4 years. I am selective as to what ones I take and to to which sellers I can work with. I do my own negotiations.

Short Sales are not for everyone, whether listing or buying.

There are huge advantages for the seller and the buyer for doing inspections at time of contract. For the seller it's obvious..a committed buyer. For the buyer is gives them the opportunity to see if there are any major issues that may need to be addressed. What better time to address them than when the contract is submitted to the lender for approval? The buyer could save money by having an inspection report with estimated repairs submitted as part of the short sale package.

Satar, NO ON can guarantee ANY property will close.  None of us know the future.  There is inherent risk in any real estate transaction.  Buyers need to do due diligence and that includes inspections, getting appraisals for financing and anything else they need to do to secure the property.  Buyers of properties we negotiate know the risks involved because I have a 5 page disclosure about what to expect INCLUDING the fact the bank will likely counter offer which is why I NEVER EVER suggest to a buyer agent to go in at their highest price offer because there is no room to negotiate.  My average time from submission to approval is 47 days and from that point my average closing time is 23 days and that's because buyers are ready to close.  Now, when a buyer comes to me we make sure that the passing of title is for 90 days out from executed contract OR LESS, so that if we do run into issues, whether bpo, title , MI then we are still within the terms of the contract.

Buyers of any property need to do due diligence and shell out up front money whether REO, traditional, or short sale.

The mere fact that you have a 5 page disclosure only supports my position. Like I stated elsewhere, there are uncertainty and risks with every real estate transaction that contains one or more contingencies. The fact that neither the seller, the buyer or the brokers involved in the transaction have any control over the short sale contingency only furthers my argument against having the buyer pay any upfront fees before the seller contingency is removed.

Let's look at it in a different way. Let's assume your buyer wants to purchase a property in which the seller has a contingency in place that says that the purchase of their property is contingent upon the sellers finding a replacement property and closing on that property. Would you advice your buyer to spend money on this property without the seller removing their contingency? I would hope not. What's worse, is the listing agent and the seller have better control of the removal of this contingency than they do on a short sale.

I have a 5 page disclosure because there are a bazillion buyer's agents who still do not know a whole lot about short sales and expect to make an offer and close in a month.  Having disclosures sets up the expectations from the beginning, along with outline the process. 

If each side have a firm understanding of the process, then we have a much more solid deal going forward.

Realistically, it's not up to me.  It's up to the buyer.  on your second scenario, if a buyer wants to put in an offer on a property where a seller has a contingency regarding suitable housing, I would weigh how much my seller wants the house before I give an "opinion" on the matter. 

You have a 5 page disclosure because neither you, the seller, the buyer or the buyer's broker have any final say to the removal of the short sale contingency and you want to make sure everyone knows that. If you were able to get short sales approved under the terms outlined by the buyer and seller, there would be no need for a disclosure. You would just outline the contract terms within the agreement.

If each side have a firm understanding of the process, then you still have no guarantees moving forward.  ;)

On my second scenario, you represent the buyer. What would you advice the buyer to do when the seller wants the buyer to pay for a home inspection before the seller removes their contingency on finding a property? Apparently you have an answer for us buyer agents on a short sale, surely you can answer this question as well?

Wow! there's really a lack of ability to see nuance!

THIS IS ALWAYS RIGHT!

Really!? Paint with that broad of a brush?

In our area (also Northern Chicago Metro) a short sale falls through half of the time. Two buyers, one sale.

 

 Well, if almost half of your contracts don't close why should buyers plunk down their money up front. If the sale is pre-approved (hafa, pfs, has a short sale agreement the lender will still honor), then great, I'd encourage my clients to do the home inspection up front.

If there's two loans, listing agent has closed two short sales (but is now a short sale expert), and there's a sherrif sale set five months away, I'm going to advise my buyer to wait and see if the short sale is approved (if they decide to move forward at all).

 

For all of the millions of deals that fall somewhere in between, I'm going to go over the likely advantages and disadvantages with my client and leave my broad brush for painting my garage.

Haha Jim. Even in cases in which the short sale is pre-approved, I would be upset if my inspection found something majorly wrong with the property because now we have to wait and see who is willing to compensate for the difference in perceived value for the property.Will the lender lower their net so we can close before the buyer's rate lock expires? Will the brokers contribute to this? Can I squeeze anything from the seller?

Smitty makes a great point about having a buyer's agent come in lower than their original offer. Even then, I expect Smitty to tell me what is wrong with the property and how much will it costs.

Satar, here is where you make my point.

If your buyer makes an offer and finds a bad roof, bad heating, septic issues, etc., I would NOT want the buyer to go forward without LOWERING their price $20,000-$30,000 and providing me with the appropriate inspection and contract estimate so when the BPO is done, I can hand those right over.  Once a lender can see exactly why the offer is SUPPORTED by inspections, contract estimates, etc., then I have almost a 100% better shot at getting my sale approve.

Again, once approval is issued, we can just close.  No need to go back and forth with the lender. 

Why would I waste a seller's time for 3 months if a buyer was not ready to close and may run into issues after approval?

I have always advocated that the inspections be done upfront, however, I put the burden on the listing agent and/or seller. Since I have one shot with the foreclosing lender, I need as much information as possible upfront about the property so I can better negotiate with the buyer and the seller's lender.

What's your take on title reports? Do you do them at the time of listing or do you wait till you find an interested buyer and put that costs and burden on them too?

If you're a buyer's agent, you don't negotiate with the seller's lender.  The burden of inspection typically ALWAYS goes with the buyer.  Things that the seller is usually responsible for in a sale many times in a distressed situation become the responsibility of the buyer, inspections, sewar inspections, fire inspections, CO's, etc. - However inspections are historically the responsibility of the buyer and unless the seller in a short sale has excess funds, which many don't, then that responsibility still remains the buyers.

*I* pull title, the minute the property goes under contract.  I know exactly where the issues lie up front so I have clear to close when approval is issued.

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