2008 Grievance Committee Report

Short Sale? Buyer, Seller and REALTORS® Beware!

By Donna Grove, Chair
2008 Grievance Committee

Does this sound familiar? You're at your office and you get a call from someone that has been referred to you, and they need to sell their house as soon as possible. You get as much information over the phone as you can, and you make the appointment to meet that night to put the house on the market. That evening you meet the sellers and see the home. As you're speaking to the seller and reviewing their estimated net sheet, both you and the sellers clearly see the house is not worth what they owe. Additionally, they admit they were not able to make last month's payment. Their mortgage balance is tens of thousands more than what the property is worth, and the sellers ask you what the options are.

In a situation such as this, one that is occurring more and more these days, a feasible option is that the house can still be sold if the lender will take less than the payoff. This is called a short sale. A short sale can definitely bring some form of relief to a seller, and both you and your seller should know what would be the ramifications for the seller and his credit.

We all learned early in our real estate career the saying "buyer beware." We also know that now, and especially when we hear the term "short sale," we should probably be thinking "buyer, seller and REALTOR® beware!" Yes, a short sale is a real tool that can be used to help a seller sell their home and relieve the financial burden it has caused. However, at the same time, it can put buyers and REALTORS® in a tough situation.

Unfortunately, a REALTOR® caught in the middle of one of these transactions will face some very tough questions. When bound by the Code of Ethics and Ohio's agency laws, should we disclose the seller's situation to potential buyers and their agents, or should we not disclose, thinking we're protecting the best interests of the seller? If the property can't be sold without a lender's approval, doesn't the buyer have a right to know that? And how will the REALTORS® get compensated? These are all very good questions, and they are not easily answered.

The first big question is . . . Do we disclose, or not?

A REALTOR® should, of course, explain to their seller that disclosure is up to them. However, during this discussion the REALTOR® should know, and explain, both the pitfalls of not disclosing, and the benefits of disclosing. The REALTOR® might even recommend that the seller speak with a real estate attorney to discuss the legal questions he may have. One primary pitfall to the seller of not disclosing, is the likelihood of the property will be effectively off the market for a buyer that can't really wait the length of time that will be required for approval and closing. The primary seller benefit of disclosing is that the REALTOR®, working in the best interest of their seller, and having permission to disclose, can properly market the home to ensure both a successful and timely transaction. In other words, disclosure will allow both parties in the transaction to realize their expectations.

Also part of this analysis is the question, does a buyer and the buyer's REALTOR® have the right to know the transaction will require approval of a third party (the lender)?

The seller, the buyer and the REALTOR® should be informed that the lender will have to approve the sale in order for the transaction to close. In most cases, short sales will generally take longer to close, as the approvals from lenders may take weeks, or even months, depending on the lender involved. Often, a buyer may be moving out of a property he has sold, or from an apartment where he has already given notice, and needs to obtain new housing right away. In such a case, the short sale property may not be a good option for them. No seller wants to lose a buyer, but if the buyer finds he can't wait any longer and walks, the seller's house has been off the market and they have missed other potential buyers that perhaps could have waited. Again, not disclosing the need for lender approval would hurt both the seller and the buyer; when full disclosure would have allowed both parties in the transaction to realize their expectations.

To help guide the members of our Board and MLS avoid problems over the question of disclosure, our MLS Committee makes the following recommendation:

"Members listing property that is subject to a short sale or foreclosure should first obtain permission of their seller, and then disclose in the MLS agent-to-agent remarks (or public remarks) a statementto the effect that: Property may be subject to a short sale, offers will require lender approval.

Having made this disclosure, in advance through the MLS, there will be some protection to the listing broker and agent from a buyer who otherwise might have suffered major inconvenience, or even financial damages. If not informed, they may decide to file an ethics complaint or lawsuit because what they feel was pertinent information about the property or transaction was withheld.

The next big question is . . . How will the REALTORS® be compensated?

This issue is a tough one as well. The cooperative commission offered by a listing broker through the MLS is generally considered to be an unconditional offer on which the buyer's agent can rely. However, in a short sale transaction, before the lender gives their approval they might require a change in, or elimination of, some of the contract terms. Changes might involve payment of closing costs, or providing of home warranties. And often, the listing broker has found out the hard way that some lenders will only approve a short sale if the total commission that will be paid is reduced. The reduction in commission is seldom a set amount, and may vary in relation to how much of the seller's loan the lender will not recover. The listing broker faces a dilemma over how much co-operative compensation to offer in the MLS.

So many of the disputes that come to the Board’s Grievance Committee have as their root cause some failure to communicate important information about a real estate transaction. In the opinion of the Grievance Committee, we can also help avoid what would be inevitable disputes over co-operative commissions if members would also make the following disclosure in agent-to-agent remarks:

In the event of commission reduction by the lender, total commission paid will be shared _________ by the listing and selling broker.

"Examples of how the blank in the above disclosure might be completed include: 50/50 split, equally, 60/40 split, etc." Having informed the other members of the MLS of a potential for reduced commission through the MLS may help the listing broker and selling broker avoid disputes.

Again, while these recommended disclosures are not mandated in our Columbus MLS, I feel that these disclosures be included in the MLS listing data. Such disclosures may, in the future, help avoid what could become ethics complaints from buyers or buyer's agents, and may also help avoid related commission disputes between brokers.

Finally, REALTORS® should network, sharing the information we've learned about short sales. By working together, REALTORS® can overcome the difficulties in these transactions, and at the same time offer the best in service to both our sellers and buyers.

Donna Grove, ABR, CRS,, is the REALTOR®-Broker for Superior Homes Realty in Columbus. Donna is currently Chair of CBR's Grievance Committee, and is President of the Ohio Foreclosure Intervention Specialist Association. More information may be obtained about the Ohio FIS Association and about obtaining the Foreclosure Intervention Specialist certification at the Ohio FIS website. See: www.OhioFIS.com.

Additional Information

There are many sources of valuable information, including the website for our Franklin County Treasurer, which offers contact information for the loss mitigation departments of many lenders, as well as links to the Columbus Housing Partnership, Mid-Ohio Regional Planning Commission, Homes on the Hill and Consumer Credit Counseling Services. These organizations all offer the HUD approved counseling to sellers that is now required for any short sales that involve an FHA loan.

See: www.franklincountyohio.gov/treasurer/foreclosureint/index.html