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Posted on November 16, 2010

Q: In a short sale, do Listing Brokers have a duty to disclose how far underwater the Seller is?

A: If you're in California, the answer may be "yes".

In Holmes v. Summer, G041906 (Cal.App.4th, filed October 6, 2010), a recently decided California appellate case, the court ruled that the sellers' brokers can be held liable for damages and costs incurred by a buyer in a failed transaction when the existing debt on the property exceeded the sale price. The court found that the brokers owed a duty of disclosure to the buyers.

No doubt, Holmes was an extreme case--three deeds of trust created a total debt of $1,141,000 with a sale price of $749,000--but the seller's real estate brokers were still held to answer for not disclosing this information to the buyer, despite the fact that this information was available on the preliminary title report and was a matter of public record.

The court found that real estate agents have the same responsibility as sellers to disclose information they have that affects the "value and desirability of the property."

In Holmes, the seller and the listing associate withheld from potential buyers knowledge of three mortgages against the property totaling $1.141 million.  The sellers accepted a buyer's offer of $749,000, but the deal fell through when the sellers couldn't deliver clear title.  So the buyers sued the real estate firm and the court found that the real estate practitioner had a greater duty to disclose facts affecting the desirability and marketability of the property than he did to protect the privacy of the seller.

It is my customary practice to make immediate inquiry with Sellers and in the public records to try to ascertain the status of a seller's mortgage liens at the outset of every short sale transaction that I work on.  Buyers certainly want to know information like this as they determine how much (or whether) to make an offer in a short sale situation.  Why bother putting up earnest money or wasting time, if the short sale is not viable?

Analysts say this decision makes it incumbent on practitioners with short sale listings to provide specific information about circumstances surrounding the sales, including approvals required for the sales to close. Admittedly, Holmes is a California case and not Washington law, but it certainly seems like good advice to listing agents out there. 

In light of this recent ruling and the movement of the courts towards finding brokers liable for the damages of buyers who cannot complete a sale, real estate brokers should pay careful attention to their listings and be fully aware of potential liability for failure to disclose these types of issues.

So the question for Listing Brokers with short sales in Washington: is it really enough to just check the box "Yes" to short sale and "3rd Party Approval Required" on the NWMLS Form 1 Listing Input Sheet?

To read Holmes v. Summer in its entirety:

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