WARNING: Court Establishes NEW Listing Agents Duties To BUYERS in a Short Sale

California Court Establishes NEW Listing Agents Duties To BUYERS in a Short Sale — Highly Likely to be adopted by Florida Courts

The California Courts have made it clear that there is an affirmative duty to disclose material information sufficient for a prospective BUYER to make a judgement about the likelihood of a short sale getting approved.  The Court of Appeals held that under California law, where a seller knows of facts materially affecting the value or desirability of a property that are known or accessible only to him and also knows that such facts are not known or within the general observation of a buyer, then the seller is under an affirmative duty to disclose such facts to the buyer. The Court further recognized that a real estate agent may be liable "for mere none disclosure since his or her conduct in the transaction amounts to a representation of the non-existence of the facts which he or she has failed to disclose"

The Court determined that real estate agents have an affirmative duty to disclose matters that pertain not only to physical defects but any matters that otherwise affect the desirability of a buyer to purchase property. Such matters include the affirmative duty to disclose an impediment to the ability of the seller to convey free and clear title to a buyer. And, the court observed that the duty to disclose the financial impediments was to occur before the buyer executed the purchase agreement.

The Court rejected the argument that there was a lack of contractual privity with the buyer and that the disclosure of financial information relating to the seller would be a breach of confidentiality. Instead, the Court articulated the rule that when a real estate agent or broker is aware of financial circumstances that would require the cooperation of the lender, the agent had a duty to disclose the financial circumstances to the buyer so the buyer could evaluate the risk of entering into the transaction which had a significant risk of failure. The Court based its new rule on upon the policy of preventing future harm and considerations of moral blame compelling the imposition of duty on the part of a realtor "never to allow a desire to consummate a deal or collect a commission to take precedent over his fundamental obligation of honesty, fairness and full disclosure toward all parties".

The California Appellate Court said the decision Holmes et al vs. Sieglinde Summer, Case G041906   represents a progression within the court system to define and expand the responsibilities of a real estate agent handling short sale transactions.  There are any number of financial factors that can lead to an increased likelihood of an inability to successfully close a short sale transaction. These factors include: private mortgage insurance, deficiency exposure, unpaid HOA liens, sellers inability to make cash contributions and /or sellers relative financial health. All these factors, and others, weigh heavily in the ability to successfully close a short sale transaction. As such, the listing agents knowledge or awareness of these financial factors may arguably be considered as information that is relative to the buyers decision as whether to enter into a purchase agreement, and hence, within the scope of the financial information for which a listing agent is affirmatively required to disclose.

This reaffirms that short sales are not regular sales and that special care must be taken to ensure appropriate disclosures on all sides.