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Source of Title Blog

Realtors' Duty to Disclose in a Short Sale
by Robert Franco | 2010/11/27 |

Mr. and Mrs. Holmes saw a house listed for sale in Huntington Beach, California on the Realtors' Multiple Listing Service with an advertised price of $749,000 to $799,000.  The listing indicated that the "seller was motivated."  The Holmes made an offer, and after a counter-offer they agreed to purchase the home for $749,000 with a 30-day escrow.

In order to close on this purchase, the Holmes sold their house. What the Holmes did not know was that this was a short-sale involving three lenders and a total of $1,141,000 in loans. And, the lenders had refused to lower their payoffs to accommodate the short sale. Appearing that the property could not be transferred to them free and clear of all liens because the debt on the property far exceeded the agreed sales price, the Holmes filed suit against the real estate broker for failing to disclose this situation.

Source of Title Blog ::

Mr. and Mrs. Holmes saw a house listed for sale in Huntington Beach, California on the Realtors' Multiple Listing Service with an advertised price of $749,000 to $799,000.  The listing indicated that the "seller was motivated."  The Holmes made an offer, and after a counter-offer they agreed to purchase the home for $749,000 with a 30-day escrow.

In order to close on this purchase, the Holmes sold their house. What the Holmes did not know was that this was a short-sale involving three lenders and a total of $1,141,000 in loans. And, the lenders had refused to lower their payoffs to accommodate the short sale. Appearing that the property could not be transferred to them free and clear of all liens because the debt on the property far exceeded the agreed sales price, the Holmes filed suit against the real estate broker for failing to disclose this situation.

Because it seemed very unlikely that the seller's could satisfy any judgment, the Holmes did not include them as defendants in the case.  The trial court found that the Holmes had a great case against the seller and it appears that they were only suing the broker to find a deep pocket.  Thus the trial court dismissed the case without leave to amend the complaint.

Foreshadowing the opinion, the court of appeals stated in its first paragraph the following:

Particularly in these days of rampant foreclosures and short sales, the manner in which California’s licensed real estate brokers and salesmen conduct business is a matter of public interest and concern.” When the real estate professionals involved in the purchase and sale of a residential property do not disclose to the buyer that the property is so greatly overencumbered that it is almost certain clear title cannot be conveyed for the agreed upon price, the transaction is doomed to fail. Not only is the buyer stung, but the marketplace is disrupted and the stream of commerce is impeded. When properties made unsellable by their debt load are listed for sale without appropriate disclosures and sales fall through, purchasers become leery of the marketplace and lenders preparing to extend credit to those purchasers waste valuable time in processing useless loans. In the presently downtrodden economy, it behooves us all for business transactions to come to fruition and for the members of the public to have confidence in real estate agents and brokers.

The court stated as a general rule that "where the seller knows of facts materially affecting the value or desirability of the property which are known or accessible only to him and also knows that such facts are not known to, or within the reach of the diligent attention and observation of the buyer, the seller is under a duty to disclose them to the buyer."  Also, when the seller’s real estate agent or broker is also aware of such facts, “he or she is under the same duty of disclosure.”

A real estate agent is clearly under a duty to exercise reasonable care to protect those persons whom the agent is attempting to induce into entering a real estate transaction for the purpose of earning a commission.  However, the brokers argued that this particular bit of information regarding the liens did not affect the value or desirability of the property; therefore they had no duty to disclose. 

The court wasn't buying this argument.  First, it found that only through disclosure of the short sale, and vast amount of debt on the property, before the sales contract was signed could the buyers "weigh the risks of entering into an agreement, and preparing their finances and related affairs to facilitate completion of the purchase, considering there was a significant possibility the transaction would fall through."

The brokers also argued that "a diligent buyer could have done a title search before making an offer on the property to avoid exactly the situation that occurred." To which the court stated:

This argument is unpersuasive for two reasons. First, even though a title search may have divulged the existence of recorded deeds of trust against the property, it would not likely have disclosed the current balances of the promissory notes secured by those deeds of trust, unless foreclosure proceedings had been commenced. Second, it is not typical in a residential purchase in California for a buyer to perform a title search on each property of interest before deciding whether to make an offer on one of them. Rather, it is more typically the case that a preliminary title report is provided to the buyer during escrow, so that the buyer can determine, before closing escrow, whether there are any title defects that are unacceptable to the buyer. Moreover, when a buyer makes an offer to purchase the property free and clear of all liens and encumbrances, and the seller agrees to sell on those terms, the seller impliedly represents that he or she expects to be in a position to deliver title free and clear.

The court ultimately found that the Holmes were able to state a cause of action against the brokers for failure to disclose the fact that this was a short sale with a very slim chance of being able to deliver clear title at the advertised price. It also found with respect to the Holmes' claimed damages that "it should be perfectly foreseeable to an experienced real estate agent or broker that one who is purchasing a $749,000 residence may need to sell an existing residence in order to make the move."  Thus, the court of appeals reversed the trial court's dismissal.

This case is a good example of how short sales are so different from ordinary sales.  Ordinarily, it would be of no concern to the buyers how much the sellers actually owes on their mortgages.  But in a case like this, where the sale depends on the cooperation of the existing lenders to take less than the full amount due, the Realtor clearly has a duty to disclose that fact to the buyers. At least this is the rule in California - but it makes good sense and should be a lesson to Realtors across the country.

With the state of our current housing market, short sales are very common.  Realtors who are offering homes for sale, with knowledge that a short sale will be required, should be aware of the process... and they should know that potential buyers will likely be selling their home once the contract is signed to prepare for the purchase.  If the buyers do not know that there is a real possibility of the sale falling through they could suffer economic harm. 

Realizing that many potential purchasers may refuse to even make an offer on a short sale property, given the uncertainty of the deal, it may be prudent to secure commitments from the lenders before advertising a certain price or entering into a contract.  The alternative could be a costly legal battle, and a potential judgment for the would-be-buyers damages.




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Categories: Realtors

1766 words | 7132 views | 7 comments | log in or register to post a comment


WOW!! Unbelievable

Any rookie realtor knows they have to disclose a short sale in the listing remarks.  

I actually do offer a free service to my clients wherin I will do a quick  and limited internet search for purpose of finding recorded mortgages and deeds of trust on properties that their cients are considering putting an offer on. Particularly if it appears that there may be a short sale situation. 

Robert, with your permission, I would like to repost this blog in its entirety on my blog at Activerain.  Can you send me a note of permission please to reblog?   Naturally full credit will be given to you as the author of the blog.  

cperry@preferredtitlegroup.com

 
by CHARLENE PERRY | 2010/11/28 | log in or register to post a reply

The Knife cuts both ways

Heck, if the sale is predicated on off record negotiation (private matters) between the seller and the existing mortgage holders, it would seem to me that any Broker that would be involved in "arranging" the sale would have to be on the hook anyway.

The knife cuts both ways.

If the party purchasing the property was in fact capable of raising the dough for the stated purchase price, and the seller could not deliver, then it is the sellers breach of contract, not the buyers.

If the sellers agent was unable to deliver the property under the terms of the contract (not owning it anyway), then it isn't exactly a deep pockets issue.

If the buyer HAD named the property owner in the suit the result more than likely would have been exactly the same, someone would still have to pay for the sellers breach and any loss sustained by the buyer by reason of their dealing in good faith with the seller and the sellers agent.

 
by Donald Petersen | 2010/11/29 | log in or register to post a reply

Glad to see this issue getting mainstream attention

This was one of the most active posts on my blog in October:

http://titlesearchblog.com/2010/10/07/agents-and-brokers-beware-of-liability-for-buyer-disclosure/

The precedent for sales agents is significant. It opens the door to an agent being liable for discovering and disclosing any number of potential deal-killing problems which until now have been outside their normal practices. A pending divorce, prior insurance claims, or even inspection defects could be classified as similar details the agent is supposed to know about. This particular case is specific to one issue, and is certainly an outlier. It does open a can of worms though.

 
by Dave Pelligrinelli | 2010/11/29 | log in or register to post a reply

Interesting Info

What I'm curious about is why a Realtor/Agent would put themselves in this position in the first place?

www.sonorantitle.com

 

 
by Richard Archambault Jr | 2010/11/29 | log in or register to post a reply

Realtors' Duty to Disclose in a Short Sale

One word:  "Commission."

 
by Larry Ford | 2010/12/06 | log in or register to post a reply

Try this one on for size.

Had a deal in which the listing agent presented a contract with earnest money from the buyer. We knew it was a short-sale. Now to get the short-sale payoff, I had to fax a copy of the contract and preliminary HUD-1 to the lender. Ok, no problem there.

The listing agent then went and kept submitting additional contracts with other buyers to the short-sale lender.  She said that "you have to submit the best offer to the short-sale lender and then the lender chooses the buyer or contract they want to close on."   WRONG! Anyway, to make a long story short, the listing agent almost got reported to the state by the selling agent (realtor for buyer) for having multiple contracts on the same property. Thank goodness the closing was saved for the orIginal buyer.

Also, the lender said that everytime she submitted a new contract, they had to start all over again on putting together the short-sale.

I don't know where on earth this realtor got her information but it took us 5 month to close...

 
by KELLY CASKEY | 2010/12/13 | log in or register to post a reply

Ouch!

Interestingly, I am teaching a Real Estate Law class this winter for the real estate agents licensing requirements.  From my experience as a title agent working with Realtors, I hope to be able to present a practical view of the subject.  I might relate this story in our first class to give them an idea of what kinds of things we will be covering and why it's so important.

Best,
Robert A. Franco
SOURCE OF TITLE

 
by Robert Franco | 2010/12/17 | log in or register to post a reply
Source of Title Blog

Robert A. FrancoThe focus of this blog will be on sharing my thoughts and concerns related to the small title agents and abstractors. The industry has changed dramatically over the past ten years and I believe that we are just seeing the beginning. As the evolution continues, what will become of the many small independent title professionals who have long been the cornerstone of the industry?

Robert A. Franco
SOURCE OF TITLE

 

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