Avoiding Short Sale Fraud: Disclosures to the End Buyer

As a real estate coach, I want to make sure you understand how to cover your butt in case something goes wrong. I’ve been writing about short sale disclosures because they protect everyone involved in the transaction. Short sales are one of the most misunderstood transactions in real estate, and the usual real estate purchase and sale agreements aren’t enough to cover everything in this particular area.

Like your seller, your end buyer deserves some disclosures as well. The typical purchase and sale agreement will cover common legal disclosures about the house, such as the presence or absence of lead-based paint. It will also pass on any information from the homeowner in default about any major problems with the house. You probably already know this.

When a property is sold through a short sale, however, there are other areas that need attention as well.

First, it must be disclosed in the purchase and sale agreement or contract that the transaction is “subject to written short sale approval that must be satisfactory to the seller.” It will be helpful if you use that exact language in your contract. The end buyer needs to know that, if negotiations fail and the homeowner or the bank will not cooperate, the deal is off and the property has to go through the foreclosure process before it can be sold.

It should also be disclosed that “the short sale transaction needs to be completed or closed before being able to complete the sale to the end buyer.” This ensures that everyone knows that the deal is also cancelled if something else goes wrong and the closing cannot take place, even though the bank approved the transaction.

Since there is an investor involved, the end buyer must also be made aware that the short sale investor has no actual knowledge of the condition of the property because the short sale investor has never lived in the property. If you’re in Texas, ask your attorney about the significance of the term “as is, where is.”

Finally, if the end buyer or their representative asks what legal basis the short sale investor has for selling the property, the short sale investor must be able to provide appropriate and legally valid documentation verifying their position to sell the property. Such documentation could be a recorded notice of option (option contract) that specifically gives the investor the right to list, market, buy, and then resell the property during the term of the option period.

One extra rule of caution: If the investor is marketing the property on the MLS via a real estate agent, make sure that the rules of that local MLS board are being followed.

No matter what state you do business in, the exact wording of a contract is important.

Don’t give your end buyer any nasty surprises.