This week a California court just made short sales even riskier for conventional real estate agents and brokers, ruling in Holmes v. Summers that “sellers’ brokers can be held liable for damages and costs incurred by a buyer in a failed transaction” when the sale price of the property is less than the debt on the property[1]. While in the case that went to court, the seller’s brokers failed to disclose three deeds of trust that created a total debt load of over a million dollars while the home sold for $749,000, thereby breaking the part of their contract with the buyer in which they promised to provide clear title, this ruling has serious potential for all short sales. The information on the deeds of trust was available on the preliminary title report and was public record.
Experts speculate that this ruling will likely “end the common practice of simply indicating ‘short sale’ in the [real estate] listing” of a property to make the property more attractive. Essentially, the ruling does not change the fact that in a conventional short sale, the broker needs to make it clear that a lender has to approve the short sale as well as the seller and the buyer, but now that buyers can actually sue sellers’ brokers for damages in failed transactions, it does lead to the possibility that some agents and brokers will steer clear of short sales, at least in California. The court reasons that entering escrow alone, even if the deal ultimately fails, costs the buyer money that they should not have to pay if they were not in possession of all information about liens on the property.
Do you think that this is fair? Should this be the seller’s broker’s responsibility, or the buyers?
Thank you for reading! Your comments and questions are welcomed below.
[1] http://rismedia.com/2010-10-28/upside-down-homes-create-new-pitfall-for-real-estate-brokers/
This example just shows how important full disclosure is with any part of a short sale transaction. With the right disclosure statements signed by all parties, a broker or investor should be able to avoid this type of litigation or at least come away form it unscathed. The very definition of a short sale is that the property is over leveraged, so I am not sure why disclosing all liens and their amounts would make much of a difference. In North Carolina, the MLS listing does only ask if the listing is a “potential” short sale. We make sure to go a step further, as investors, and list that the short sale is subject to both seller and bank acceptance. In addition, we counter all offers with an addendum signed by the buyer that states the same thing along with other disclosures and a hold harmless statement. These are signed by both the buyers agent and the buyer before any funds go into escrow.
There has to be more to this story. Way to general for the Holmes vs Summers.
This is interesting. I think it’s good that more disclosure needs to take place up front in the transaction. I have seen many deals enter into escrow and we get ready to fund and they say they still don’t have approval on a 2nd lien. Then, 2-3 more months go buy and then the appraisal expires!
Now that we loan officers are financially on the hook if we originate a bad loan, I guess it seems only fitting that the publc is coming after agents who don’t do a good job of making sure their short sale listing has full approval from all lien holders.