Pitfalls of Highest and Best Offers

The Fredericksburg area real estate market is definitely heating up.  With a hopping real estate market comes less inventory, multiple offers, and more competition.  Today’s housing inventory is moving fast, and buyers need to be wary of writing offers they may not be able to close. 

It’s 2012 and banks are getting wise to pricing and negotiation tactics.  Banks are also sick of hemorrhaging money and need to find a way to stop the excessive bleeding.  A not-so-new tactic for pricing properties has emerged, list it low – sell it high.  Yes, sellers are actually listing their homes at low prices in hopes of garnering multiple offers and creating a bidding frenzy, thus increasing the sales price.  This is wreaking havoc with buyers and buyer’s agents.  After several years of properties being listed at reasonable prices, buyers are falling for this marketing trap.  They see a home listed for $260,000, fall in love with it, write an offer, only to find out there are 6 other offers and the seller now wants the “highest and best” offer.  Keep in mind, this is not just a bank tactic, but short sale sellers and traditional sellers are now playing this game.  

If a buyer is making a decision based on their emotions, they may be tempted to bid higher, even higher than proven market value (recent solds in the area).  This can lead to some pretty serious problems.  If a listing is a short sale, the offer the seller accepts may not be an offer the bank is willing to accept.  A property may be listed at $260,000, gets a ”highest and best” offer of $285,000, and the bank comes back and says they will only accept $295,000 to allow the short sale.  That’s a $35,000 difference between the list price and what the bank will accept.  Or, what if the bank accepts the $285,000 price and then the appraisal comes in at $275,000.  How is the buyer going to make up the difference or do they really expect the bank to lower their expectation… that the buyer set by offering such a high sales price. 

This is a foreclosure problem, as well.  Many banks are now making buyers who write offers over list price sign an addendum that states the buyer is responsible for any difference in contract price and appraised value.  But wait, the bank listed the foreclosed property at a low price in hopes of getting higher offers.  And, the bank put the perspective buyers in a “highest and best” situation.  Yes, yes they did.  The bank is trying to mitigate loss.  Your high offer is helping them do just that.  (Also, please pay your taxes so banks can get more bail out money).   

Ultimately, it is the buyer’s responsibility to make sure they are writing offers they can follow through on.  It is also the buyer’s responsibility to make sure their offer price is within market value and that the home will meet lending guidelines.  A good buyer’s agent will walk you through the pitfalls of “highest and best” offers.  A great buyer’s agent will help you decide if you are even eligible to play this high stakes real estate game.

Oh, the banks are at it again!  News has surfaced over the last 2 weeks that GMAC Mortgage and GP Morgan Chase are suspending foreclosures in 23 states (Virginia is NOT included!).  Bank of America announced late last week they were halting foreclosures in all 50 states in order to investigate their foreclosure process.  But this raises an important question:  Have banks been foreclosing on borrowers who are not delinquent?  Will this latest action save a borrower’s home? 

My opinion on this matter may not make me any friends, so let me start by saying that I do not support predatory lending.  I also am an advocate for short sales and think that banks need to be more willing to work with short sales with legitimate hardships.  However, if you have defaulted on your mortgage, the only recourse the lender has is to foreclose.  Last time I checked, we still weren’t giving houses away.  I don’t think many people signed their mortgage paperwork while intoxicated, drugged, under undue duress, or without being told some disclaimer about the terms and conditions of the mortgage.  I do think that many consumers took out very risky loans because they were caught up in the mentality that real estate was a guaranteed quick money maker.  I do know that there are some exceptions to this rule.  I have had clients that really didn’t know what they were signing.  Or, they were told one set of mortgage terms, but at the settlement table there were different terms.  They felt that they had to sign the papers or be in default of the contract.  But, I’ve found that these consumers haven’t waited until the 11th hour to get help. 

So, will consumers who are in default be saved from foreclosure by these latest moratoriums?  The answer is a resounding NO!  Defaulting borrowers will still lose their homes.  Banks will continue to foreclose on homes when the borrower proves they can’t pay the mortgage.  What this moratorium does is gives banks the opportunity to let the government and consumer know that they are not the evil vultures they are portrayed as being.  These investigations will assure the banks that their paperwork is in order. 

In states, like Virginia, that adhere to nonjudicial foreclosure, this moratorium has little bearing on the market.  Virginia borrowers sign their rights away when they sign their mortgage instrument at the settlement table.  There is a clause in the deed of trust that states that the borrower gives the lender the right to repossess the property if the borrower fails to make their mortgage payments when the mortgage payments are due.  There is no court action that needs to be taken for the lender to pursue a foreclosure.  Simply, it is very easy for a lender to foreclose on a property in a nonjudicial foreclosure state.  Foreclosure has a very quick timeline in Virginia, as well.  Some foreclosures in Virginia may have to start over, but the house will still be foreclosed.

Defaulting borrowers should not look at this latest news as the answer to all of their prayers.  This is more of a postponement of the inevitable.  They should still make plans to bring the mortgage current, pursue a short sale, or find a rental.

Many of the foreclosures hitting the Northern Virginia market were purchased as investment properties or turned into investment properties.  As housing prices soared and interest rates dropped, many want-to-be investors entered the market to earn a quick buck.  Some wanted to have a tenant for about a year and then sell it at the new inflated price; some wanted to flip the home in a matter of a few months.  What these investors did not count on was the housing market collapse and how quickly the market collapsed.  Virtually overnight, homes began to languish on the market and many investors were forced to put a tenant into their investments. 

The scary part is that many of these investors took the monthly rent and pocketed it.  They stopped paying the mortgage.  This leaves a tenant with few options once the home goes into foreclosure.  In Virginia, if the home is sold as a short sale while a tenant’s lease is in effect, the lease conveys.  If the home goes to foreclosure, the lease is void and the tenant is served an eviction notice.  Many tenants do not find out that their residence is in foreclosure until they are served the notice.  This leaves little time for them to collect money for a new security deposit (yeah, the security deposit you gave the guy who wasn’t paying the mortgage is probably gone), a first month’s rent, find a new place to live, and move.

On May 20, 2009 the Protecting Tenants at Foreclosure Act was passed as a smaller piece of the Families Save Their Homes Act of 2009 .  This bill ensures that tenants nationwide must be served at least 90 days notice to vacate the property if the purchaser of the foreclosed property intends to occupy the dwelling as their principle residence, and ensures that tenants can remain in the foreclosed property until the end of their lease unless the bank sells the property to someone who plans to occupy the property as their personal residence and 90 days notice to vacate must still be given. 

This is a victory for tenants across the nation who have been or could be effected by foreclosure.  However, this is another hurdle for buyers in today’s market.  Not many buyers are interested in purchasing a property with a tenant in place.  It will be very interesting to see how banks handle this new legislation.   Will they keep tenants in place while the property is on the market as an REO?  Or, will they serve the 90 days notice to vacate as soon as they foreclose on the property and wait to put it on the market?

The real estate market is beginning to see a trend in the time it takes to close on a property.  Unfortunately, it is taking longer to close than it has in the recent past.  Gone are the days of 15-21 day closing periods.  We are now seeing closing periods of 45-60 days on average.  However, buyers in this market usually don’t have 45 days to wait to move into a home.  Many times buyers need housing in 14-30 days.  Combine longer closing periods with an abundance of short sales.  Even though we are being told that banks are streamlining the short sale process, short sales are still taking upwards of 6 months to get approval.  So, where does this leave today’s buyer when it comes to housing between the sale of one home and moving into the new home, or waiting out the short sale approval period?  Many buyers have begun to reexamine pre-occupancy. 

For those of you not familiar with pre-occupany, it is the act of a buyer taking possession of a property before settlement for an agreed upon fee.  The buyer typically pays a security deposit to the seller and a monthly fee, much like a rental payment.  I’m here to tell you that pre-occupancy is a bad idea in this market for a number of reasons.

The seller is a bank in a foreclosure transaction.  I have yet to have a foreclosure bank agree to pre-occupancy.  Why?  If a buyer moves in to a foreclosure before they settle and then realize that there may be more work involved with the property than they originally thought, the buyer may be tempted to move out, default on the contract, and refuse to settle.  Banks are also not equipped to be landlords.  Foreclosure banks already sell properties “as-is.”  What happens if something breaks while the buyer is pre-occupying?  Who is going to fix the problem?  The Virginia Landlord Tenant Act requires some repairs to be made by landlords, banks don’t make repairs.  Pre-occupying a foreclosure isn’t compatible with the way foreclosure banks do business. 

Short sale pre-occupy is an even worse idea.  The sale of the home is contingent on third-party approval.  This approval can take up to 6 months; I’ve seen it take 9 months.  What happens when a buyer pre-occupies a home and then 4 months later the short sale bank denies the short sale?  The buyer gets to move out of the property and into temorary housing while they look for another home.  Or even better, the short sale/foreclosure bank evicts the would-be buyer.  What a headache!  Pre-occupancy agreements involve paying monthly fees, rent payments, for the time the buyer moves in to the time the buyer settles.  Most short sale sellers are already not paying their mortgage.  As a REALTOR, I can not reccomend that any of my buyers pay money to a short sale seller and hope that the seller actually pays their mortgage with it.  Again, it just doesn’t make sense.    

Believe me, I know moving is stressful, especially when you are afraid you aren’t going to have a place to move to.  I’ve would never recommended pre-occupancy, no matter what the market looks like, but pre-occupying a foreclosure or short sale is not the best solution and may cause more problems than you are equiped to deal with.  Talk to your REALTOR about available alternatives to pre-occupancy.  Also, make sure you begin your new home search in time to meet your moving deadline.