Short Sale
Definition: a home sale where the seller owes more than what the home is worth and is asking the lender(s) to accept an amount that is less than the amount owed to them as payment in full.

The same problem continues to come up day after day and I finally have the time and focus to sit down and write about it.  For the last year now, short sales have become a common type of listing in our market and in markets around the county.  A short sale is a “Liar Listing.”  In most circumstances, the seller and listing agent place the home for sale at a price and terms that they have no way of honoring unless the bank(s) agree to that price and terms, which isn’t learned until long after an offer is submitted.  While some responses on short sales can come back in a week or two, it regularly takes 2-3 months or more for the bank(s) to come back with a response and that response is just as likely to be a “no” as a “yes.”  In fact, I find that through a combination of reasons, only about 1 in 3 offers on a short sale is likely to make it to closing.

A short sale is a “Liar Listing.”  In most circumstances, the seller and listing agent place the home for sale at a price and terms that they have no way of honoring unless the bank(s) agree to that price and terms, which isn’t learned until long after an offer is submitted.

A few months ago the RMLS of Minnesota, the governing body behind the MLS database used by REALTORS® throughout the Twin Cities, decided to implement a field called “In Foreclosure/Lender Owned.”  This field was meant to help clear up disclosure issues with these properties and help make it easier to do searches to either include or exclude these listings.  Unfortunately I believe that it has in many cases made things even worse.  Unfortunately the only properties that can be disclosed this way are properties that have actually received an official notice of foreclosure, so the seller has to be 2+ months behind on their payments.  Further, the seller can choose not to disclose it whatsoever.

There is a substantial difference between a short sale and a foreclosure in terms of the procedures for the offer and negotiation process as well as timelines.  More importantly, a bank/lender listing a home for sale at a specific price and terms will accept an offer at those price and terms, whereas a homeowner in a short sale situation has a lender who might accept an offer at those price and terms, might demand a much higher price, or accept no sale at all.

REALTOR® Code of Ethics:

Article 2
REALTORS® shall avoid exaggeration, misrepresentation, or concealment of pertinent facts relating to the property or the transaction.

Article 12
REALTORS® shall be honest and truthful in their real estate communications and shall present a true picture in their advertising, marketing, and other representations.

If a listing is in fact a short sale and the agent knows about it but does not disclose it upfront in the listing, I believe that they are violating the above two articles of our REALTOR® Code of Ethics.  Because they are listing a property for sale at a specific price and terms, if the seller has no intention of honoring that price without approval from a 3rd party from which they have not received any direction, then they are being dishonest about the listing.  Since a price and terms are required to be listed to have the property in the MLS, I believe disclosing the short sale in the MLS Remarks section is proper explanation saying in effect: “yeah, we need someone else to approve this but we’re hoping this will work.”  It at least prevents buyers and agents from wasting time on houses that they have no interest in making offers on.

The current disclosure field then in fact becomes a problem since you cannot use it on short sales that are not in foreclosure and lumps everything into one big basket.  When short sales and foreclosures (lender mediated sales) currently account for 30% of the sales in the Twin Cities, it seems crazy to have such a broad, vague and yet limited field hold so much responsibility for disclosure.

If I ran the RMLS of Minnesota, this is how I’d have it structured:

Field 1:  Short Sale: Yes/No
Field 2:  In Foreclosure:  Yes/No/Not Disclosed
Field 3:  Lender Owned:  Yes/No/Not Disclosed

These three fields would tell agents and buyers all they need to know yet provide the seller some privacy if they requested it.  While if the house is in foreclosure there might be some mechanics that require special attention in the transaction, it could be in foreclosure and not a short sale.  Even if it is in foreclosure, that can bring up questions about a seller’s right to privacy so offering a “not disclosed” field is perfectly reasonable.  Same thing with a lender owned property… I think in this case it is crazy not to disclose it upfront but from an ethics/disclosure issue I’m not at worried about it.  I’d love to only see “Yes/No” for lender owned.

Implementing this revised fields would be a boon to buyers, sellers, and agents.  Buyers looking specifically to buy (or avoid) these listings would be able to do so, sellers would only have qualified buyers schedule showings, and agents could better counsel their clients on the whole process and give better information to their clients.  Last but not least, it would allow Jeff Allen and I an ability to make future foreclosure and short sale reports that much more accurate and detailed since we could split sales activity into “short sale” and “lender owned” categories vs. the current compilation of the “lender mediated sale” category.  Think of the benefits!!!