How to Handle Offers on Short Sales: Primary, Backups, and Earnest Money

How to Handle Offers on Short Sales: Primary, Backups, and Earnest Money

What “Success” Looks Like in a Short Sale Offer Strategy

• A ready, willing, and able primary buyer advances cleanly through lender review

• One or more qualified backups remain warm without legal or reputational risk

• Earnest money (EM) signals good faith but remains fully refundable until lender approval terms are accepted

• All clocks and contingencies are explicit in writing, aligned with state forms and brokerage policy

• Paper trails (updates, notices, approvals, counter terms) are organized and defensible

Step 1: Choose the Primary Buyer (and Keep a Bench)

• How to pick the primary
• Proof of funds or solid pre‑approval from a lender that understands short sale timing
• Flexible closing window and tolerance for underwriting changes after approval
• Realistic expectations about valuation disputes and repair requests

• Why backups matter
• Lender approval doesn’t guarantee the buyer will accept the final terms
• Valuation or net proceeds can shift; having a bench protects your seller’s certainty

• How to keep backups “live” without trouble
• Use clear written notices that another offer is advancing with the lender
• Get backup offers signed with backup position stated, or get non‑binding LOIs if your market allows
• Calendar check‑ins every 14–21 days to confirm continued interest

Step 2: Right‑Size Earnest Money (Signal vs. Snare)

• Collection: Use a neutral escrow or attorney trust account. Never accept funds directly to the seller.

• Refundability: Your short sale addendum should make EM fully refundable for any reason until lender approval is received and accepted by the parties.

• Amount: Local norms vary. Consider a modest deposit (e.g., 0.5–1.0%) with an automatic step‑up or second deposit after lender approval.

• Timeline safety valve: Allow buyer cancellation and refund if approval isn’t received by a stated date (e.g., Day 75) unless extended in writing.

Step 3: Contract Language That Prevents Landmines

• Short sale approval contingency
• Buyer may cancel if lender terms differ materially or are not received by X date

• Inspection, financing, and appraisal
• Keep contingencies in force through lender approval or explicitly restart after approval
• State that deadlines toll during the approval period and resume upon delivery of lender approval

• Closing date mechanics
• Closing to occur within X days of lender approval delivery (e.g., 21–30 days)

• Addenda alignment
• Ensure your MLS short sale addendum and purchase agreement say the same thing about refundability, clocks, and deadlines

Step 4: Package the Offer for the Servicer (Yes, Packaging Still Matters)

• Contents checklist
• Fully executed purchase agreement and short sale addenda
• Buyer proof of funds or DU/LP pre‑approval less than 30 days old
• Estimated settlement statement (HUD/CD) with net that fits program rules
• Any required affidavits or arm’s‑length certifications
• Occupancy disclosures if required (FHA/VA/GSE have nuances)

• File hygiene
• One clearly labeled PDF, logical order, consistent file names
• Cover page noting key terms and requested approval deadline window

Step 5: Manage the Waiting—Status, Valuation, and Resets

• Status cadence
• Proactively update the lender every 10–14 days with buyer status and backup bench
• Log every contact in writing and keep email threads tidy

• Valuation disputes
• When BPO/Appraisal comes back high, respond with a short, data‑driven package:
• 3–5 truly comparable sales with adjustments noted
• Condition photos and bids for material repairs
• DOM and list‑to‑close ratios in the micro‑market

• Resets
• If approval expires or buyer balks, move a backup to primary and resubmit immediately, referencing the prior file number if helpful

Step 6: When to Pivot the Primary Buyer

• Pivot signals
• Buyer rejects lender counter terms without a viable counter‑proposal
• Buyer stops providing updated docs (proof of funds, addenda)
• Buyer attempts material retrade without valuation support

• Pivot process
• Notify backups that primary may change; confirm they remain interested
• Update lender that a new primary is pending; submit replacement buyer package within 48–72 hours

Earnest Money FAQ (Fast Answers You’ll Need)

• Can EM be non‑refundable before approval? Generally no—avoid this. It increases disputes and does not speed approvals.

• Who holds EM? Use neutral escrow or attorney trust; follow brokerage policy and state law.

• Can we increase EM after approval? Yes. Use a second deposit trigger upon lender approval or after appraisal.

• What if lender approval takes too long? Use a time‑out clause that allows buyer cancellation and refund after X days.

Agent Script Library

Buyer vetting and offer framing (compact pack)

• Vetting checklist
• DU/LPA or full underwrite, proof of funds ≤ 30 days old, rate quote, lender familiar with short sales
• Willingness to inspect pre‑approval, agree to refundable EM until approval, accept 21–30 day close post‑approval

• Offer framing email to listing agent (template)
• “Clean terms attached. EM refundable until approval, second deposit on approval, clocks restart on approval, 21–30 day close. Buyer pre‑underwritten; proof attached.”

• If competing offers
• Present appraisal‑gap cap, inspection limited to material defects with capped credit, and fast post‑approval milestones

• Setting expectations with the primary
• “Because this is a short sale, your deposit is fully refundable until the lender approves and you accept those terms. We’ll keep you posted on timelines and any counter terms.”

• Keeping backups warm
• “We’re advancing another offer with the lender. If anything changes, would you like me to re‑engage you as a live backup? I’ll check in every two weeks so you’re never in the dark.”

• Handling valuation disputes
• “The lender’s valuation came in high. We’re submitting three stronger comps, condition photos, and contractor bids to support your price. Expect a response in about a week.”

Compliance and Risk Notes

• Follow your broker’s escrow and earnest money release procedures

• Use state association forms; avoid freelance language unless attorney‑approved

• Document wire instructions by phone using verified numbers

• Maintain a clean audit trail of all lender interactions and buyer notices

Related Training for Your Team

Agent cheatsheet (printable)

• Before you submit
• Single‑PDF packet + evidence index
• Estimated HUD shows compliant net
• Buyer proof (DU/LPA or POF ≤ 30 days)

• Offer terms that travel
• EM refundable until approval; second deposit on approval
• Inspection clocks restart at approval; close in 21–30 days

• Backup discipline
• Keep 1–2 warm backups with written notices and 14–21 day check‑ins

• Valuation plan
• 3 comps + photos + repair bids ready within 72 hours if value misses

• Escalation
• Day 10–14: request negotiator and valuation ETA in writing; supervisor if no movement

• Building short sale packages that pass intake on the first try

• Fast valuation rebuttals: how to write them and when

• Backup buyer management without ethics complaints

Bottom Line

Recommended next steps for agents

Case studies and examples

• Primary + two backups, approval in 62 days: Listed at attention price, posted repair bids day one, kept EM refundable. Primary balked at lender counter; pivoted to Backup #1 within 48 hours and closed in 23 days

• Appraisal miss salvaged with terms: Buyer accepted a 1.5% buydown credit instead of price cut; lender approved revised net with minor timing change

Advanced scripts (copy‑paste)

• EM language for addendum
• “Earnest money is fully refundable for any reason until written short sale approval is delivered and accepted by both parties. A second deposit of $X is due within 3 business days of approval.”

• Backup notice to buyers’ agents
• “We are advancing another offer with the lender. Your buyer is in backup position. If the primary fails or terms change, we will notify you immediately. Please confirm continued interest every 14 days.”

• Valuation rebuttal cover note
• “Attached are three comps within 0.5 miles closed in the last 45 days, condition‑adjusted. Photos and bids document $18,400 in required repairs. Based on absorption and DOM, a value of $X is supported.”

Expanded FAQ

• Should I pause inspections until approval?
• Run basic inspections early if access allows; it reduces retrade risk later. Keep timelines flexible in writing

• Can I accept multiple EM deposits?
• Use neutral escrow with clear deposit triggers. Avoid collecting funds directly and follow state rules

• Do backups need signed agreements?
• Where allowed, signed backup offers are stronger than LOIs. Use your broker’s guidance and local practice

Resources for your templates

• Short sale addendum, EM clause, backup buyer disclosure

• Intake checklist and file name convention

• Valuation rebuttal packet outline

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