The 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?”

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