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In A Short Sale, Who Represents The Lender?

Twin Cities February closed sales showed that bank owned foreclosures were 35% of the month’s closed units and short sales represented another 13% – making Lender-Mediated homes sales almost 50% of all residential home sales in the Minneapolis/St. Paul region.

On a bank-owned home the Seller is of course the bank and therefore the Listing Agent represents the bank.  On a short sale however, the Listing Agent represents the Seller, which in this case is the current homeowner.  So while the agent must treat all parties honestly, their loyalties and fiduciary duties are only to the Seller.

This situation leads to several issues:

Unfamiliarity with Lender’s Process
With the large number of lenders and servicers out there, a listing agent working on short sales may have had only a few experiences with the lender in the past (if any) and therefore may not be fully educated on the idiosyncrasies of how that lender processes short sales.  This can lead to delays in the short sale process from the lender requesting additional and/or revised documentation.

Submission of Offers
In many circumstances, the listing agent clearly states on the MLS listing that only one offer will be signed and submitted to the lender and any subsequent offers will be held by the seller as backups.  While this provides great encouragement for the first buyer to stick around through what can be a very lengthy response waiting period of 4 weeks to 6 months, it means that even if a subsequent offer submitted is for more money, that offer is very unlikely to ever be seen by the seller’s lender.

I’ve been hearing more about the occurrence of non arm’s length transactions, which are transactions where parties involved are related, do business together, or are otherwise connected and are colluding together.  In these cases there is often an abuse of the situation that is being conducted to the benefit of the buyer and/or seller without the the seller’s lender’s knowledge.

Pricing and Negotiating
When an agent lists a bank-owned or traditional seller listing, pricing and market time are carefully considered and discussed with the Seller.  In the case of a short sale where the seller is receiving little to know monetary compensation at closing, the seller and agent may be more motivated to procure an offer in the least amount of time possible and hence list it for sale below true market value.  Same thing when an offer comes in from a buyer – the seller and agent are likely to counter anything that affects the likelihood of a successful closing or if the offer is incomplete or incorrectly filled out, but they have little incentive to negotiate on price with fervor.

While the introduction of HAFA may mitigate some of these issues, it still does not change the fact that the lender has no advocate for their best interests involved at the transactional level.

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Teresa Boardman
Teresa Boardman

You do a nice job explaining this Aaron. I am always torn on short sales. My heart goes out to the sellers and I honestly want to help yet at the same time it often isn't in my buyers best interests to pursue the short sale. You make a great point about no one representing the bank.


TwinCitiesRealEstateBlog.com is not a Multiple Listing Service MLS, nor does it offer MLS access.
This website is a service of Aaron Dickinson of Edina Realty, a broker Participant of the Regional Multiple Listing Service of Minnesota, Inc.