When buying a short sale property, paying more than the house is worth is up to you. The lender can ask for more, but you don’t have to agree.

Q: I listen to your radio show every week – it is always so informative! Thank you for providing such great advice.

I am in the process of trying to buy a home at the beach as a rental/investment property. I put an offer in at the end of May and it was accepted, but the seller required third-party approval from an insurance company.

My agent and I didn’t really understand what that meant. But after waiting for 5 weeks for some sort of answer, it turns out that it is really a short sale. The property was not listed as a short sale, and there were no short sale provisions added to the contract. The seller is a builder (he built the home in question) and used this property as collateral on a bunch of other deals, then went belly up.

So last Friday, the insurance company that owns the paper approved the sale at a price $51,000 higher than my offer because they want to net $20,000 on the deal. The agent came back to me as the buyer to pony up the “extra” $51,000 to make the deal work for them.

I don’t get it – their seller is under water, and they want ME to fork over the difference.

I personally think it was unethical for the Listing agent to list the home as a regular sale (not a short sale) which created different expectations, and never included Short sale provisions in the contract. The seller’s agent want a full commission, though he really is the one who messed us up.

We’ve wasted so much time. I don’t want to overpay for the house—the numbers need to make sense in order to rent it and use it as investment property. I have no idea what the property will appraise for. The seller’s agent says he got a “verbal” appraisal (not in writing) from the first mortgage company for $660,000.

Should I call their bluff? I know that appraisers typically only take comps from the most recent 6 months. The home I want to buy is essentially on the “last row” furthest away from the beach, and are therefore typically valued less. Being that this is a beach community, most of the homes that have sold in the past 6 months have been much closer to the beach, and therefore were sold at much higher prices. So the comps are probably going to be on the higher side.

What are my options? Do you think there is a way for me to counter at anything less than $580,000? Should I walk away? If someone can get back to me soon, I would greatly appreciate it – this deal is pending now. Thanks in advance!!

A: In a short sale situation, the lender has the right to ask you to put up more money, but you don’t have to agree to pay it. You should only pay what you feel comfortable paying, and that shouldn’t be a dollar more than what you truly believe the property is worth.

And, if the amount the lender wants from you doesn’t match your thinking about buying, and more importantly your budget, you should walk away from the deal.

It’s interesting that the listing broker didn’t notify you that it was a short sale, but the agent might not have known – as hard as that is to believe. If this deal was truly between you and your seller, without the third-party involvement, if the seller failed to sell you the property for the contract price, you could sue the seller.

The reality of the situation, however, is if the seller actually had money, the lender would be looking to the builder for cash and not you.

You could talk to an attorney about your litigation options, but we think that you might be wasting a lot more time and money with little chance of getting anything from a distressed seller. The better option is to see if you or your agent can talk to the lender and tell them that you won’t agree to pay anything more.

If the lender refuses to budge, you should find a different property to buy and move on. We’ve seen this movie play out thousands of times over the last seven years: The lender gets fixated on a price that the local marketplace won’t support, and turns down the deal. Years, and several price reductions later, the lender wises up and finally agrees to sell the property at a price that is generally lower than what was originally offered. The alternate ending to this story is that the seller goes bankrupt and the property goes into foreclosure and the lender pockets even less.

As difficult as it might be to say goodbye to this property, buying it for $51,000 extra shouldn’t be in the plan unless you know for sure you can make the numbers work after closing.