Agent’s duty to disclose a short sale situation

QUESTION: I have a wealthy client who recently asked me to list a residential property for sale. He purchased the property as an investment many years ago. Although the market where the home is located has substantially recovered, this particular property is still under water, i.e. it is worth less than the current mortgage balance. Is this a material fact that I have a duty to disclose?

ANSWER:  Before answering your specific question, it is helpful to remember some general rules regarding the sale of short sale properties. First and foremost, the general rule is that if a potential short sale situation exists, that situation is a material fact that very definitely must be disclosed by a real estate broker.

The listing agent is in the best position to ascertain the existence of a short sale situation. As part of the listing process, listing agents should not only perform a comparative market analysis to determine the probable sales price of the property, they should also always make the appropriate inquiries of the owner regarding the number and amounts of any mortgages or other liens against the property.

Agents who use NCAR’s Exclusive Right to Sell Listing Agreement (Standard Form 101) can use a review of paragraph 12(g) of that form as an opportunity to ask the seller about all of the potential liens that may encumber the property. A note following paragraph 13(e) of the same form suggests consideration of the Short Sale Addendum (Standard Form 104) if the contemplated sale might be a short sale.

When should the potential short sale situation be disclosed? The Real Estate Commission has published guidance stating that a listing agent is not legally required to “advertise” the existence of a short sale situation in publications, flyers or MLS listings. However, all multiple listing services are required to give participants the ability to disclose the potential for a short sale, and some multiple listing services may, as a matter of local discretion, require participants to disclose that a transaction is a potential short sale.

Despite these general rules, not all situations where a property is under water meet the accepted definition of a short sale. In its 2011-2012 Update Course materials, the Real Estate Commission defined the term “short sale” to be a “sale of mortgaged real property where the proceeds from the sale are insufficient to pay in full the seller’s outstanding mortgage and any other liens against the property and the seller lacks sufficient other assets to pay the remaining amounts due on the secured debts after application of the sale proceeds.”   A similar definition appears in paragraph 1 of Standard Form 104. If your client is indeed wealthy, and can demonstrate to your satisfaction that he has sufficient liquid assets to pay any difference between the estimated selling price and the mortgage balance, the situation you describe does not meet the definition of a “short sale” and no disclosure would be required.