Exclusive Real Estate Representation

Disclosure Requirements in Short Sales

Q 1. Must a real estate transfer disclosure statement be given to a buyer in a short sale transaction?

A Yes, if the property being sold is a residential 1-4 unit dwelling and the transaction doesn't fall into one of the regular TDS exemption categories. No exemption exists for a short sale transaction in which the borrower sells the property to an outside buyer, using the sale proceeds to pay off the lender. See Sales Disclosure Chart for a list of all the exemptions from the TDS requirement.

Q 2. Must other disclosures be given to a buyer (or seller) pursuant to a short sale?

A Yes. Short sales are treated just like any other sales transaction. See C.A.R. legal article, Sales Disclosure Chart, for a summary of the disclosure requirements.

Q 3. Suppose a distressed seller enters into a contract to sell his/her home to a buyer pursuant to a short sale. Should the listing agent inform the lender if and when other offers are made on the property?

A Probably. Although the lender is technically not a party to the real estate contract, lender approval is nearly always a contingency of the agreement. Therefore, REALTORS® should obtain the client’s permission to keep the lender apprised of any relevant developments, including the presentation of other offers.

Q 4. Should a listing agent working with a distressed seller attempt to negotiate a future listing agreement with the lender?

A No. Listing agents working with distressed sellers owe them a fiduciary duty. Since in a short sale situation a lender could choose to foreclose on the seller, the lender's interests are potentially adverse to the seller's interests. Attempting to negotiate a future listing agreement with the lender raises the issues of "to whom is the agent's loyalty devoted" and "has the agent violated the fiduciary duty he/she owes the seller." The safer practice is to avoid putting oneself in such a position.