Short-Sale Buyer Has Legal Recourse

Question: Our brokerage firm represents a buyer that is purchasing an industrial building in the Scottsdale Airpark area. This purchase is a short sale that has recently been approved by the bank, and our buyer is completing the due diligence for the purchase of the industrial building.

The market has improved since the purchase contract was signed almost three months ago. Our buyer just received a letter from the seller’s attorney stating that the seller is no longer willing to sell this industrial building, and is willing to release the earnest money back to our buyer. The seller’s attorney says that the delay in getting the bank to approve the short sale is the problem. Escrow could not even be opened, however, until the bank approved the short sale. Therefore, our buyer could not even begin with the inspections and the other due-diligence requirements.

Is there anything that our buyer can do now?

Answer: A short sale of real property is similar to all other sales of real property with an additional contingency. In other words, in addition to the typical contingencies such as due-diligence inspections and the buyer qualifying with a bank for a mortgage loan, there is the additional contingency of the seller qualifying for short-sale approval by the seller’s bank.

If all contingencies can now be removed by the buyer, the buyer can file a lawsuit for specific performance of the contract, and record a Notice of Lis Pendens (“lis pendens” is Latin for “pending litigation”) which will prevent the sale of the industrial building to another buyer. If the buyer is successful, the court should also award the buyer any reasonable attorney’s fees.

The court order granting specific performance can require the seller to sign the deed (and the seller can even be jailed for contempt of court if the seller refuses to sign the deed), but usually the court will simply order the clerk of the court to sign the deed to the buyer.