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What Should We Put in the ‘Due Diligence’ Section of the Offer?

In North Carolina we now have a Due Diligence Period that can be negotiated and put in the Offer to Purchase and Contract (Offer to Purchase). We could have done it with the old contract but it is now a prominent part of the new Offer to Purchase. In a short sale situation, however, the best thing to put into this section is N/A. Why?

1. The Seller can’t make anything on a short sale. Unless this is a short sale under the HAFA guidelines, the Seller is not allowed to make any money on a short sale. If there was any ‘due diligence’ money paid to the Seller they will have to bring it to the closing as a cash contribution. It is a bad idea to give cash to a Seller (who probably needs it) and then have to ask for it back right before closing….especially if they also have to bring a cash contribution at closing for the short sale or for the release of deficiencies. Depending upon the amount, it could kill the deal….or more likely it would have to come from an agent’s pocket.

2. There is already a built-in Due Diligence Period in a short sale…for free! The Short Sale Addendum accompanies a short sale in North Carolina. This is the controlling document. In other words, if there is a conflict between the Offer to Purchase and the Short Sale Addendum, the Short Sale Addendum wins. How do I know this? It says so right on the Addendum. Anyway, the Short Sale Addendum allows the Buyer to walk at any time and for any reason, prior to receiving the approval letter…….. and the Buyer gets his earnest money deposit back. Most short sales are taking between 45 – 90 days to get approved. That is a 45 – 90 day due diligence period for free.

3. It creates a conflict and/or an unrealistic expectation. What we typically see put into the due diligence section is “30 days from short sale approval.” This theoretically creates a due diligence period that starts the day of approval and allows the Buyer to perform his inspections during that 30 period. There are two problems here: 1) The approval letter usually states that the Buyer has 30 days to close – not 30 days from the end of his due diligence period. As far as the bank/servicer is concerned, the Buyer should have done his due diligence on this “as is” contract prior to making the offer. The bank/servicer is not a party to the Offer to Purchase and is, therefore, not subject to it……and they are driving this bus; 2) The Short Sale Addendum states that the Buyer may walk away from the deal up to the date that the approval is received. After that, the earnest money goes hard and the Buyer is expected to close. Since, as we discussed above, the Short Sale Addendum controls in a conflict, there is no additional due diligence period. If the Buyer is not informed of this at the beginning of the short sale process, you are headed for a conflict. Emotions are high after 3 months of waiting and now you have to let the Buyer know that they have 30 days to close, regardless of what is in the Offer to Purchase and the unrealistic expectation it created.

Bottom line: Get your due diligence done as early in the process as possible (see earlier blog), put N/A in the Due Diligence section and be ready to close when the approval letter comes.