Short Sale Earnest Money Risks

On the Outer Banks, short sales are not as successful as they are elsewhere. A buyer trying to purchase an Outer Banks short sale risks losing their escrow/earnest money deposit if the sale does not go through. There are a lot of reasons why a short sale may never come to fruition.

Sometimes, there the deal is worked out between everybody involved and the property is heading to closing. The buyer has paid for the appraisal and the home inspection and the house is all ready for the new owners when it is discovered that the short sale department of the bank did not communicate with the foreclosure department. The foreclosure department ends up foreclosing on the house without realizing it would have sold for more if they had just waited a little while.

Most of the time a short sale dies is because there is a second mortgage on the property. The holder of the second mortgage or lien will have to agree to take nothing or maybe settle for pennies on the dollar. If the second note holder does not agree, and most of the time they do not agree, then the property will end up going to foreclosure. One common similarity between most of the property owners on the Outer Banks is that they have seconds mortgages on their investments.

Another commonality is most Outer Banks foreclosures where short sales first. Only about 30% of the short sales avoid foreclosure.

If the seller gets foreclosed on during the short sale process it usually comes as a surprise to them because they thought they were going to be able to complete the sale and move out on an arranged schedule. If they get evicted they usually leave town with their tails between their legs and they do not leave a forwarding address. The last thing on the owner’s mind at this point is helping the buyer get their earnest money back.

Their signatures are needed to release the earnest money deposit back to the buyer. Without their signatures the buyers will have to wait and then work with the county clerk court to get their money back. It is a time consuming process.

Sometimes it is simply because the banks are so unorganized and have such a hard time retaining employees to handle the short sale. If a transaction ends up on the desk of 4 or 5 different asset managers you might be looking at a deal which is not going anywhere.

This is why it is best to use as small an earnest money deposit as you possibly can. This way if you do not have access to your money for a while you will not have to put your house shopping plans on hold.