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Short Sale Deficiencies – Risks for Real Estate Professionals and How to Manage Them

When property owners face financial hardship and can’t afford to pay their mortgage anymore, they may try and sell quickly to avoid foreclosure. They typically take what they can get, and a short sale could result when the seller doesn’t receive enough cash to pay off the mortgage balance. Short sales can occur when someone has purchased a home for a higher-than-market price. Or they may have overcapitalized with renovations done with borrowed money which means the value of the property is less than they owe. Other reasons for short sales include relationship breakdowns and the death of an owner, which necessitates a quick sale for a lower price. A short sale “deficiency” is the amount of the mortgage still owed after the quick sale. 

Managing Risk When Dealing With Short Sales

Real estate professionals need to consider the following when dealing with short sales: 

Short sales are sold ‘as is’

Short sale properties are sold ‘as is’, which means the sellers won’t do any improvements or act upon any issues found during a home inspection. If you’re acting for a buyer who is considering purchasing a short sale property, ensure they understand what buying a home ‘as is’ means. 

Short sales can take longer to close

Just getting the approvals for a short sale can take months. Closing can take much longer than a typical sale. All parties need to be aware of the increased timeframes. Real estate professionals should ensure their clients understand this and that it is outside of the agent’s control.

Short sales are more complex than normal sales

Short sales must be pre-qualified and approved by the lender before they can be sold. Most sellers won’t hesitate to tell their real estate agent that it’s a short sale when they want the home to sell quickly. It is the responsibility of real estate professionals to do their due diligence to ensure they have all relevant information about the property they are listing. This includes asking the seller about their mortgage and any encumbrances on the property where applicable, so you can determine if it is a short sale or not. 

Never sell a short sale property to a family member or friend

Real estate licensees have a fiduciary duty to act in their client’s best interests. You must not benefit from the short sale (other than your normal commission) and you should avoid anyone close to you benefitting from the short sale. Selling a property to a family member or friend because it’s a bargain puts your reputation at risk, and you may face a lawsuit for breach of duty. 

Never provide advice about short sale deficiency judgments

Real estate professionals are experts in real estate. Don’t get drawn into conversations about what might happen next, whether that is potentially a short sale deficiency judgment, potential bankruptcy procedures or anything else. Deficiency judgments are initiated by the lender and decisions are made by the courts — real estate professionals cannot help with this or provide advice to the seller. 

An example of a situation that could arise is when a lender’s short sale approval letter doesn’t state they will pursue a deficiency judgment. Laws about deficiency judgments vary from state to state. Often approval letters may state the lender reserves the right to pursue a deficiency judgment, but it’s not within the scope of your role to interpret the lender’s future intentions. You are not a legal professional or in any way connected to the lender, so a real estate agent professional cannot answer this. 

Recommend all parties seek independent legal advice

Whether assisting a seller or buyer, recommend they seek their own independent legal advice from a qualified attorney before entering into any agreements about a short sale property. 

Records in short sales are important

The National Association of REALTORS® (NAR) recommends real estate professionals record any discussions they have with a seller about a short sale. They state the listing agreement should include the seller’s acceptance that any offer on their property will be subject to the lender’s approval of the offer. It is also worth notice that sometimes lenders will ask real estate brokers and agents to take a reduced commission on the sale of a property. The NAR also suggests the listing agreement includes a statement that any offer on the property is subject to an agreement by the listing broker to accept the commission approved by the lender.

See also Managing Short Sales.

Protect Your Real Estate Business Against Lawsuits

Real estate can be a risky business and dealing with short sales can make it even riskier. Having a trusted insurer like CRES can help you defend a claim if a lawsuit is filed against you. CRES specializes in real estate E&O Insurance. With CRES E&O + ClaimPrevent®, you’ll also have access to our qualified team of real estate attorneys who can answer questions and help you prevent lawsuits. 

As part of one of the largest insurance brokers in the world, we can choose from more E&O options than just about anyone. Let us do the shopping for you.

Contact us at 800-880-2747 to have a confidential discussion about your insurance today.

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