Short Sale Abuse

When a listed property will sell short, is the listing agent obligated to submit all written offers to the seller's mortgagee? I'm hearing from selling agents who complain that their buyers' offers are not being submitted to the seller's lender for consideration. In some cases, the buyer agents are told that the property is being purchased by another buyer (in many cases a property rehabilitation "specialist") from whom the property may then be purchased. What is anticipated is that the specialist will buy the property at short sale and immediately sell the property to the buyer whose offer was never submitted to the original seller's lender! In many cases, the ultimate purchaser pays no more than what was first offered to the original seller!

Does this make any sense? My guess is that the specialist purchased the property for an amount somewhat less than our original buyer had offered. The original buyer's offer, however, was never submitted to the lender and therefore never approved. It is likely that the specialist's offer was represented to the lender as the only, or highest offer. Based on that representation, the lender approved the sale.

The seller, who is not going to receive any proceeds from any sale, went along with the sale to the specialist, even though that offer was lower. Why? That is the hard part to figure. For a seller who may be liable for the loan deficiency, it is better to sell for the highest possible price in order to have the lowest possible deficiency.

The only parties to benefit from such a scheme are: 1) the specialist who buys low and sells higher; and 2) the licensee who participates in two transactions, thereby making more in commission.

These transactions are not transparent. They smell bad and should be avoided! It could be argued that a listing agent who represents the seller has no duty to advance the interest of the seller's lender by selling at the highest possible price. A legal and academic debate of this issue would be interesting, but we will save that for another day and I will just offer my opinion: a listing agent who intentionally keeps an offer from a seller's lender with the knowledge that the property will sell for less than the highest available offer, is committing fraud and exposing himself/herself to criminal and civil liability.

The only reasonable way of listing a property for short sale is to assure that an appropriate short sale addendum is part of every offer and that every offer is submitted to the seller's lender for consideration. If a seller or anyone else precludes you from sharing the offer with the lender, consider withdrawing from the transaction. Just because you are unaware of any short sale having been audited or becoming the subject of a criminal investigation, does not mean that it will not happen. Buyer agents may consider making offers contingent upon submission to seller's lender within a set period of time. Circumventing the listing agent by advising the seller's lender that you are submitting an offer is not likely an unethical or illegal act in and of itself. If you are aware that the lender has already approved a short sale, then care should be exercised so that you are not intentionally interfering with a contract already made.

Copyright © James L. Goldsmith, Esquire, CALDWELL & KEARNS, P.C., 2009
All Rights Reserved

Jim Goldsmith 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. He and his firm represent and defend real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. Jim also defends REALTORS® in disciplinary hearings conducted by the Real Estate Commission. He routinely counsels employers on employee relations issues and is one of the voices of the PAR Legal Hotline. He may be reached at www.realcompliance.com.