Blog
Legal IssuesThe hidden truth: The seller is short
The saga of one unhappy client illustrates the necessity of knowing that a transaction is or may be destined for short sale. The client was a buyer whose offer of $175,000 was accepted. The buyer’s agent, before preparing the offer, observed the notation in the MLS that the property was not likely to sell short. Further, the seller’s disclosure statement indicated “no” to the question: “Are you aware of any judgment, encumbrance, lien, overdue payment or support obligation, or other debt against the property that cannot be satisfied by the proceeds of this sale?”
Jim Goldsmith, Esq.
You can image the buyer’s surprise when four days prior to the expiration of the residential tax credit program, she was informed that the sellers were short by $8,000 which they did not have! Since the transaction had never been identified as a short sale, no effort had been made to obtain approval from the seller’s lender to sell short and any attempt at the eleventh hour was destined for failure (having a binding contract by April 30 was a necessity and an agreement subject to seller’s lender’s approval may not qualify for the tax credit).
The buyer’s agent, also somewhat shocked by the late turn of events, asked the listing agent why he had not been informed of this possibility. The listing agent confessed that the sellers were “upside down” but they thought only to the tune of about $7,000. Besides, the sellers had preliminary discussions with their credit union and were under the belief that they could have borrowed the $7,000. Unfortunately, when the time came to make application for the loan, they were denied.
Regardless of the outcome, which is as of this writing uncertain, there are clear lessons to be learned. Sellers who are selling short but anticipate coming to settlement with borrowed cash may be in for a surprise. When buyers settle using borrowed funds, they make that fact known to the seller who will demand to see evidence of financial capability, usually in the form of a lender’s prequalification letter. Had our buyer known that the sellers were relying on borrowed funds, wouldn’t she have been as justified in asking to see evidence that the sellers would have the funds to settle?
By not disclosing the possibility of the sellers falling short of required funds, the listing agent deprived the buyer of the opportunity of making an informed decision, as well as the opportunity of assessing the likelihood of a successful settlement. Whether this conduct may result in civil liability or disciplinary action by the Real Estate Commission is very much fact-dependent — but certainly the possibility exists.
It is not the standard of practice in Pennsylvania that buyer agents financially qualify sellers. But this situation may suggest that is it time we do so. A buyer agent who is armed with a seller’s payoff information could quickly calculate whether the seller is likely to be short. If so, is the matter to be handled as a short sale with the risks that a lender will not approve or will the seller be bringing cash to settlement, in which case, where are the funds to do so?
PAR has forms to support short sale transactions:
• Short Sale Addendum to Agreement of Sale (Form SHS)
• Short Sale Addendum to Listing Contract (Form SSL)
• Notification to Buyer of a Potential Short Sale (Form NSS)
• Guidelines
|
Jim Goldsmith, Esq. is an attorney with Caldwell & Kearns and serves as general counsel to PAR. A substantial portion of his practice is dedicated to providing advice and counsel to real estate licensees and representing and defending real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. He routinely counsels employers on employee relations issues as one of the voices of the PAR Legal Hotline. |
No related posts.
Print This Article
Another great article both thought provoking and informative. I have been part of many short sales, the idea I have utilized for them and on other listings is get an authorization signed for a payoff so that you can order a payoff when you list the property, this way both you and the seller will know what is owed. I would love to see this authorization in the Listing contract and possibly on the sellers disclosure.
The less stress the better, the only problem that has surfaced is the charge of 10-100 for the faxed payoff however that is cheaper than no sale.
Thanks
Jim
Absolutely awesome article. Seller Agents need to evaluate the Seller’s financial situation and prepare them for the worst case scenario. I have run into situations where you can clearly see that Listed Price is based on what the Seller needs instead of what the market value is today. When you approach and question the Agent about values and what is going on-they sometimes have no clue about the Seller’s financial situation. In the end, it is doing the client harm especially if their expectations are that of being able to get enough from the sale to get them out of their situation not to mention the cost, time and frustrations to the Buyers!
Another great article and what a great resource this is for ALL agents and brokers!
Thought provoking read Jim, as usual. I agree that Seller’s Agents in general need to do a better job probing the Seller’s financial situation at the time of the listing. This way proper disclosures can be made if necessary. It also gives the Seller’s Agent a jump start on compiling a hardship package. What concerns me here is the Buyer’s Agent responsibility. I think we can all agree a statement in the MLS such as “not likely to sell short” was red flag that should have been persued or at a minimum questioned by the Buyer’s Agent. However, what about a similar situation where no red flags existed for the Buyer’s Agent to identify in the MLS. To what extent do Buyer’s Agents have to go to ensure that the Seller has the ability to deliver marketable title? For instance, if public record indicates that a Seller of a $100,000 property purchased the home in 2007 for $97,500 with an FHA mortgage, should the Buyer’s Agent persue documentation that the Seller can clear title and pay their respective closing costs without selling short? If the Buyer’s Agent doesn’t require such proof up front or early in the transaction, are we then sitting “liability ducks” for the Buyer’s attorney when their settlement is canceled due to the Seller’s inability to clear title – even if the Seller failed to disclose such a shoortfall? As always, I feel tha a REALTOR is at their highest probability of liability when practicing Buyer Agency.
One way for a listing agent to perform their “due diligence” is to utilize the “ADDITIONAL INFORMATION (OPTIONAL)” box on the last page of the listing contract. I find that since it states “optional” it is often skipped by most agents. However in Section C. it refers to Mortgages & Equity Loans and after that there is a small unsuspecting but extremely important check box. “Seller authorizes Broker to receive mortgage payoff /or equity loan payoff information from lenders.” Once filled out and check it provides two benefits to the Listing agent. 1) If for some reason the sellers bank and the buyers title company aren’t communicating very well and the title agent can’t seem to obtain the payoff in a timely fashion, it enables the Broker to step in as an advocate for their client and help move the transaction along. I have had this happen a few times either because of a bad title company or a non-responsive sellers bank. 2) It enables the listing Broker to obtain the payoff info from the Sellers bank and if the house is to be sold below the equity position the listing broker can have a conversation with their client and determine if the seller has the funds needed to close or if the property needs to be sold short. Armed with this info at the time of listing, the listing broker can effectively market the property in a true an accurate way and will prevent a few surprises from coming up along the way.
Great article Jim!
This is happening very often. A Listing Agent has the repsonsibility to investigate further if the Seller states I I think I owe $—-, but I’m not sure”, or “I have not paid my Mortgage in 9 months.”
Just Listing the property and hoping everything will work out in not acceptable.
Hhmmm. How about a “seller’s payoff contingency” in the AOS? that way the payoff need not be disclosed during negotiations… somthing like “within 5 days of execution, seller must disclose all lien amounts and past due taxes”. Then the buyer could bail before paying for other costly inspections & appraisals…or the buyer could jump in the cross-your-fingers-boat too if the amount is high! I guess there’s lots of ways this could be addressed. It should definitely begin with the listing agent making sure the box is checked on the listing contract that gives the agent the right to obtain the payoff amounts…and then actually getting that payoff in writing.
Great post! Agents need to fully explore the “well we think we’ll be okay” attitude–and be assertive. Article 1 requires honesty–could be a code violation in there somewhere….not only that, two agents ended up spinning their wheels–it is one thing to waste your own time, but it’s unconscionable to waste someone else’s!
Very informative! My concern is that even if we have the payoff, we do not know that taxes are delinquent or other lienable items. This often throws sellers off. You get the old “I didn’t realize”, but it all comes out in end. I agree that Sellers are so concerned with Buyers being pre-approved first (Which really means nothing}, yet they are not required to show proof that they can close.
The times they are a changin’
Well put James. Short sales are a struggle; have been and in some cases seem to be getting worse with lender delays and lack of responses. Bringing this scenario to the attention of agents and brokers can only serve to help us help our clients. Thank you!
Another thought provoking article. Thank you as always.
I wonder if we need to revisit the property disclosure to drill down further on this issue. The simple “yes” or “no” answer to a possible short sale does not uncover this type of circumstance so I wonder whether we need to ask if the sellers need any assistance other than the sale proceeds to relinguish any liens. We do that for the buyers on the BFI and leveling the playing field seems like something worth pursuing.
I also wonder why a listing agent would indicate that a sale would “likely” not be “short” or whether there was a delay in advising the buyers that the credit union loan was not going to happen.
We have recently added a seller default clause to the listing contract and I hope that triggers a deeper discussion about the reality of getting to closing.
Thank you again.
Andrew
Great article. You bring up a good point. In this time of falling property values, I strongly believe that sellers should be required to provide some evidence of the fact that they will not be short at the contract price. I like your suggestion of sellers having to disclose their payoff amount at the time of the contract.
Thanks!