Q: (Joni Craig)       I found a short sale listing on the MLS that would be a perfect owner-occupied home for one of my buyers. However, the confidential remarks state “[i]nvestor offers only. Seller would like to stay and rent for $800.” When I called the listing agent, she said there were no exceptions – that selling “only to an investor” was part of her listing agreement with the owners. Is this legal? My understanding is that a short sale cannot financially benefit the sellers in any way, but this certain sounds like they stand to benefit greatly if this arrangement works out (specifically by getting to stay in their home at a below-market rental rate.

A:       Joni, technically I don’t think wanting to sell your house to an investor is “illegal.” However, as you state, almost all short sale lenders prohibit the seller from getting money at the close of escrow or staying in the house after closing. For that reason, most lenders require that all parties sign an “Arms Length Transaction Affidavit.” This document, signed under oath, typically states that there are no side deals between the parties. So, while the MLS listing you describe is probably ok, the only way to get this deal approved would be to lie to the lender and deny any lease agreement has been made. Of course, such a lie would be fraud and something we need to avoid.

Q: (DiAnne Krumm)       My question is does a listing agent have a legal obligation to disclose all offers to a lender in a short sale or does the fiduciary relationship with the owner take precedence over this?

A:       DiAnne, you are right when you say that our fiduciary duty in a short sale is, like in all cases, to our client, in this case the seller. We do not have a similar duty to the bank. As a result, it is our duty to present all offers to our seller and let them decide whether to accept it or not. As you imply, however, a short sale is somewhat different than a normal equity sale. After all, it is not the seller’s money that is at risk, it is the lenders. As a result, it is my preference that, provided the Short Sale Addendum is part of the Offer or Counter Offer, all offers be accepted by the seller and delivered to the bank. Then the bank can decide how to proceed. In my opinion, we should advise our sellers that this is the best way to proceed. However, what do we do if the seller says that they want to pick only one offer to send to the bank or stick with one that has already been submitted and reject any new ones? Because our client is the seller and our duty is to them, in this case I think you need to proceed as follows:

1.     Advise the seller of the risks of not accepting and forwarding new offers (that their deficiency and tax liability may be higher if the new offer is for more, and that the bank may believe their failure to submit every offer was fraudulent):

2.     Advise the seller of the benefits of not accepting and forwarding new offers (that any previously submitted offer will not be put at the end of the line and they may get quicker bank approval, thereby avoiding an increased risk of foreclosure);

3.      Advise the seller to speak to their attorney; and

4.     Get the seller’s instructions, IN WRITING. If the seller refuses to accept an offer and instructs us not to submit it, and we gave them the proper advice, we would be satisfying our obligations to everyone by following their instructions.
As I said above, I would prefer is we submit everything but, when faced with seller instructions to the contrary, we would be ok if we follow this procedure. Let us know if you have an questions.