By RVAR Counsel David Bullington

 We have continued to encounter short sale situations in our area with perhaps more prevalence than expected, and a few key points on this subject are worth reiterating.

1.  Buyer Beware.  The most problematic short sale situation in my opinion is where the need for lender approval of a sale is NOT disclosed at listing or contract.   As you know from last month’s article in the RVAR Newsletter, disclosure of short sale status is now optional in the MLS and but not required.  If a seller does not agree to the disclosure, confidentiality obligations preclude directly disclosing this fact.  Where not disclosed, the need for lender approval becomes in effect a hidden contingency which can preclude the sale from closing and cause major disruptions.  If you represent a buyer who needs to close at or about the contract settlement date and has limited tolerance for delay or disruption, effective buyer representation may demand inquiry into seller’s financial status (e.g., is the loan in default, can the seller payoff mortgage loans from the sale?) or investigation of clerk’s office records (e.g., determining the original principal amounts of deeds of trusts, the existing of judgments and other liens, and substitution of trustee or bankruptcy filings).  A listing agent who is not authorized to respond to such financial inquiries cannot misrepresent, and an evasive answer in the nature of “I cannot respond” is a significant red flag.

2.  Listing Agent Beware.  A listing agent may also want to do some investigation before undertaking a listing to determine whether the sale has a realistic possibility of approval and closing.  This inquiry should typically include checking the land records, as the existence of judgments and tax or other non-consensual liens may make the short sale unworkable and bankruptcy or foreclosure the only viable options.  Also, the listing agent may want to determine whether the seller can demonstrate financial need and otherwise meet the lender’s requirements.

3.  Multiple Contracts.  A situation which has arisen with some frequency in our area and evidently has been commonly encountered in Northern Virginia is where two or more “competing” contracts for the same property are signed subject to third party approval by seller’s lender.   Depending on the language used, a seller who has accepted one such contract may not be precluded from accepting others as the contingency can only be satisfied as to one contract.  As the outcome will ultimately depend on the language used, from the listing agent’s perspective, legal advice would be prudent to ensure clarity of language before accepting additional offers to protect the seller from claims under multiple contracts.  From a buyer’s perspective, care should be used to limit the amount of time the buyer is held captive to the contract while awaiting third party approval that may never come.  Lem Marshall, in his excellent article on short sales in the May/June issue of Commonwealth Magazine, recommends framing the language of the offer so that acceptance and contractual obligations do not arise until the third party approval is obtained. Another option is to establish a time period for satisfaction of the contingency acceptable to your buyer (e.g., “subject to obtaining all third party approvals on or before …..).