Real Estate Brokers Need To Exercise Care When Handling A Short Sale

Wed, 06/15/11
By: Philip J. Terry

A U recent opinion, Holmes v. Summer[1] held that a listing broker was obligated to disclose that his client was attempting to complete a short sale. The facts of the case are not unique but the ruling is significant and worth taking note. The buyers and the seller agreed to a sales price of $749,000. However, neither the seller nor the listing broker advised that the property was subject to three deeds of trust totaling $1.1 Million and that the lenders were unwilling to accept less than full repayment. After entering into contract, the buyers sold their house to finance the transaction. Without the lenders' compromise, to close escrow, the seller would have to deposit over $350,000 and the seller had no intention of doing so. Escrow did not close and the buyers thereafter learned the details and sued. The trial court ruled in favor of the listing broker but the Court of Appeal reversed holding that the buyers faced a substantial risk that the seller would not be able to close escrow and transfer title free and clear of liens and therefore the listing broker should have disclosed the encumbrances and the lenders' unwillingness to compromise the debt. The Court highlighted the general rule, i.e., the seller or the seller's broker must disclose facts materially affecting the value or desirability of property which are known by or accessible only to the seller or broker. The Court further emphasized that information surrounding liens affected both the value and the desirability of the property.. Waiving aside the broker's argument that such information was confidential, the Court noted the existence of liens was public knowledge and held the broker had a duty to disclose the circumstances that caused the sale to fall through, i.e., the liens exceeded the sales price and the lenders' unwillingness to accept less than full repayment.

This case is significant not only because of the timeliness of its subject matter but also because of the broad nature of the opinion. There are many reasons why an escrow might not close. Armed with this opinion, a prospective buyer, with the benefit of hindsight, can claim a listing broker failed to disclose any number of substantial risks relating to escrow. At a minimum, a broker should be up front that a listing involves a short sale and should explain the potential role the lender may play in the success of a short sale. More importantly, the case is a reminder that the courts' view of what information affects the value or desirability of property for sale is relatively broad in scope and that picking and choosing what to disclose and what not to disclose to make a sale carries real risk for both a seller and the listing broker.

1] (2010) 188 Cal. App. 4th 1510