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California Courts Say – Listing Broker Better Disclose Short Sale on Listing!

October 12th, 2010 · No Comments · Real Estate Brokers, Trust Deeds

Recently, in the case of Holmes v. Summer, the California Court of Appeal concluded that broker Realtors in Huntington Beach had a duty to inform prospective buyers that the property listed was a short sale.

What happened? Buyers made an offer on a house in Huntington Beach for $700k. The Multiple Listing Service for the house failed to mention that it was a short sale, subject to lender approval. In fact, there were three loans against the property in excess of a $1M. The seller would have had to come up with $392k to close escrow. Unfortunately for the buyers, they did not learn of these until after their offer had been accepted and they were in the midst of selling their own house in expectation of closing escrow on this one.

The Lawsuit – Buyers sued the listing agent and broker (RE/MAX in Huntington Beach), but not the seller. The Complaint alleged negligence, negligent misrepresentation and deceit. The broker defended vigorously, arguing that brokers are not psychic, they are not able to know if a seller will perform, and that they cannot disclose private financial information. It seemed more salient to me that the broker is not the title company, so they do not have the best information on title and loan issues.

However, the Court waffled on the confidential private financial information—saying on the one hand that the trust deeds are public record and not private and thus brokers could have disclosed 3 lenders, but also acknowledging that the recorded trust deeds alone do not show loan balances.

Recent statistics by RealtyTrac, and reported by the San Francisco Chronicle noted that foreclosure sales (REO’s presumably) made up 43% of purchases in California. Given the timeliness of the topic of foreclosures and short sales, the California Court of Appeals no doubt felt it was relevant to certify the case for publication and clarify the duty of brokers to disclose not only physical conditions of the property but also the financial likelihood of close of escrow.

The Court was careful to state that they were not expanding the duty, “by so holding, we do not convert the seller’s fiduciary into the buyer’s fiduciary. The seller’s agent under the listing agreement owes the seller “[a] fiduciary duty of utmost care, integrity, honesty, and loyalty…” (Civ. Code, Section 2079.1.) Although the seller’s agent does not generally owe a fiduciary duty to the buyer, he or she nonetheless owes the buyer the affirmative duties of care, honesty, good faith, fair dealing and disclosure, as reflected in Civil Code section 2079.16, as well as such other nonfiduciary duties as are otherwise imposed by law. “

What’s the real story? Normally, listing brokers are careful to put information from the seller on the MLS listing, such as square footage and attribute it with a notation like “per seller” or “per County records”. That goes to the physical condition of the property. Additionally, careful brokers are likely to put on the MLS listing, “short sale” and/or “subject to lender approval” which gives the buyers who have a time crunch the ability to look at alternate houses instead, such as an REO property or one that is not a short sale. Agents tend to also give the disclosure package right up front to anyone planning to write an offer, and that package usually has the preliminary title report—which would flag 3 loans with the original loan amounts exceeding the sale price. Clearly, the broker in this case didn’t do any of these things that I consider prudent practice for brokers and agent.

The law on disclosure has been pretty well articulated in cases prior to this one—the seller’s agent has the duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention of the parties. The real problem in this case is that the buyers did not have the information they needed to evaluate whether or not to write an offer for this property.






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