Listen to your Auntie Mabel… Disclose

A few years back, my office provided short sale processing and negotiation services for a local agent. This agent had the property listed for sale as a traditional sale—whereby the lien holders would be paid in full. Yet, no buyers were interested in the property because the list price was too high. So, she lowered the price and… suddenly her traditional sale became a short sale. I remember this particular transaction because she had called me to ask whether she should disclose on the MLS that the property was over-encumbered.

I thought about that agent just a few days back when I was reading the legal page in the California Real Estate magazine. Sonia M. Younglove, Esq. provides a great explanation as to why it is so important to disclose. According to this article and to the 4^th District California Court of Appeal in Holmes v. Summer (2010), Realtors® have a new duty to disclose that a property is over-encumbered.

Here’s the skinny on Holmes v. Summer (2010):  Buyer Holmes signed a contract to purchase a property for $749,000. Holmes did not know that the property had three liens totaling $1,141,000, and the lenders had not yet agreed to accept less than the amount due on their deeds of trust. The listing was not advertised as a short sale. Holmes sold his existing home in order to purchase the property and then learned that a clear title could not be conveyed. (Ooops.)

The buyers sued the seller’s broker who argued that the seller was planning to pay off the existing liens ($392,000) prior to closing but then changed his mind.

The court concluded the following, “When a real estate agent or broker is aware that the amount of existing monetary liens and encumbrances exceed the sales price of a residential property, so as to require either the cooperation of the lender in a short sale or the ability of the seller to put a substantial amount of cash into escrow in order to obtain the release of the monetary liens and encumbrances affecting title, the agent or broker has a duty to disclose this state of affairs to the buyer so that the buyer can inquire further and evaluate whether to risk entering into a transaction with a substantial risk of failure.”

Now despite the fact that there was some serious non-disclosure here and despite the fact that I was not involved in the case (so I probably do not have all the details), I am curious as to how the transaction got to this point. When we take a listing, we always order a preliminary title report or property profile immediately. With the help and support of a title officer, we immediately confirm whether the title can be transferred. When an offer is accepted, we share that report with the buyer. So, why is it that nobody knew that the property was over-encumbered? Why didn’t the buyer’s agent look into the liens before or shortly after writing the offer?

So, listen to your Auntie Mabel, get your elbows off the table. And, please go to the MLS and check all of your listings. Make sure that you have made the proper disclosures. And, if you are not sure if the property sale is gonna be short, do a little homework. What say you?