Avoiding Short Sale Fraud: Disclosures to Real Estate Agents

What’s the one thing that short sale investors need to disclose to real estate agents and brokers? I’ll give you a hint - it’s on the MLS.

Every time an agent or a broker looks at the MLS and views a house that you’re working on, they should be able to see the status of your efforts to negotiate a short sale on that house.

At all times that the home is listed by either the investor or the homeowner, it should be disclosed in the MLS listing that it is subject to third-party lender approval. This is short for “This home is in foreclosure, and we’re trying to get a short sale together. If you want to buy this house, we’d love to talk to you, but you may need to wait a bit to actually close on the house.”

If the home is listed on the MLS, and the discount has already been obtained from the lender, then you need to disclose that written short sale approval has been received. This tells the agents and the brokers that “This house is in foreclosure, but we’re ready to close. Find me a buyer!”

It’s only fair, right? Agents and brokers should know what they can tell a client to expect from the situation if their client falls in love with a house they see on the MLS. They should be able to give them a realistic picture of what it will take to buy that house if one of those messages appears in the listing.

Real estate agents and brokers should also know whether an offer on the house is already being considered by the lender. Why? Because not every offer on a house in foreclosure should actually be submitted to the bank.

Asking a lender to evaluate and approve a short sale offer takes a different approach than listing the house at a price below the total payoff, hoping to receive some offers, and then hoping the bank agrees to close the deal with one of them. That’s not exactly how it works. Lenders must receive a legitimate arms-length offer and supporting documentation regarding the homeowner’s financial hardship. They need the whole short sale package, and they can only look at one offer at a time.

Loss mitigation departments have a system that looks at each individual offer as a part of the whole package. If a bank believes that an offer is legitimate, they will conduct their own investigation to see if that particular deal makes financial sense to them. They will pull credit reports, get interior and exterior appraisals or broker price opinions (BPOs), and verify the information on the financial statements in the short sale package, among other things. They’re trying to make a decision about whether that offer is a good deal for them.

I have read a lot of mortgages in my career, and none of them say anything about a requirement to submit all offers received while in default or during the short sale process. This may be the case with REO sales, but not with short sales.

The other reason that you shouldn’t submit backup offers has to do with contract law, and there’s a lot of common sense here. When you submit a short sale offer to a lender, you are laying the groundwork for a contract. Secondary offers are inappropriate at that point. If the first buyer has a problem with that, they may have a strong claim for damages from tortious interference with their contract. That second offer could get in the way of their ability to retain their first right to be the end buyer of that house.

Real estate agents and brokers are an important part of a short sale transaction. Just remember that the right disclosures and procedures make that transaction go much more smoothly.