LEGAL NOTES

In response to the increase in short sales and foreclosures, the National Association of REALTORS® (NAR) has outlined a new rule to help Real Estate agents better disclose and understand the status of properties in multiple listing service (MLS) databases. According to NAR, the board of directors "approved new model rules for MLSs that would enable practitioners to alert one another to potential short sales and put them on notice about the sharing of any reduction in gross listing commission required by a lender. MLSs are given the authority to decide whether or not their participants have to disclose reasonably known short sales."

The new NAR rule is an important one for agents, as it helps them understand what they—and their clients—are getting into before they make an offer. About one-third of total purchases in June were short sales' that reflected foreclosures or distressed properties, according to NAR estimates. Short sales can be complex, time-consuming, and offers have a high risk of being declined. Many agents and buyers would prefer to avoid them for these reasons. On the other hand, short sales can be a mutually beneficial opportunity for buyers and sellers, as they often mean a good deal for buyers and a way to avoid foreclosure for sellers. For some, short sales are well worth the risk. Whether or not they are willing to take on this risk, most agents want to be informed early in the process that a property is a short sale, so that they both properly advise their clients and make an informed decision about whether to take on the deal themselves.

The current MLS systems have not supported agents’ need to know about potential short sales. Over the years, various local and regional MLS systems have created definitions and disclosures that describe the status of the properties they list. Many have outlined individual policies and rules for foreclosure properties and short sales. Short sales are typically defined as transactions in which the lender agrees to accept less than the full amount due on a mortgage when a property is sold in order to avoid a costly foreclosure process. By most definitions, a short sale occurs when a lender accepts a discount on a mortgage to avoid a possible foreclosure auction or bankruptcy, while a foreclosure is the process through which the lender repossesses the underlying property when a borrower defaults on his or her mortgage through nonpayment.

While these definitions are widely accepted in the Real Estate industry, there are some differences of opinion when it comes to how and when to classify a property as a short sale property on the MLS. MLSs have been largely inconsistent, causing confusion among Real Estate professionals who use them. According to NAR, simply defining a short sale is a challenge, as a short sale doesn’t actually take place until closing, when it is determined that there is not enough money to pay off the loan. For example, an agent might list a house at $400,000, and the outstanding loan amount may be $360,000. If the offer is above the loan amount, then the house would not qualify as a short sale.

In addition, deciding when a short-sale possibility should be disclosed is an important issue, as waiting for lender approval on short sales or foreclosures can take a long time. Agents and buyers need to know ahead of time if the deal is contingent on bank approval or if it may take several weeks to go through the process. However, in many cases, buyers and their agents are in the dark for various reasons. For example, properties that are bank-owned or potential short sales are not listed as such because banks and sellers fear that listing this status might attract low offers or scare away potential buyers. Therefore, listing agents, who have a fiduciary duty to represent the sellers' interests, may not list this status, even though potential buyers and their agents would like to see it.

For this reason, members of the NAR trade group's Multiple Listing Issues & Policies Committee recently addressed the issue during the association's annual conference in Washington, D.C. The new NAR rule favors the informed interests of potential buyers over the possible privacy desires of sellers and banks. Under the new rule, all MLSs must provide their members with the means to disclose that a given listing is a short sale. MLSs, at their discretion, may require that such disclosure be made. The MLSs must also give listing agents an area in which they can communicate to other agents that the offer of compensation may be adjusted as a result of the short sale transaction.

In support of the new rule, NAR defined a short sale as a sale in which "a transaction where title transfers; where the sale price is insufficient to pay the total of all liens and costs of sale; and where the seller does not bring sufficient liquid assets to the closing to cure all deficiencies." While it is impossible to determine if a short sale is indeed a short sale until closing, NAR encourages listing agents to disclose the possibility when he or she "becomes aware that the listing price may not be sufficient to permit the seller to fully satisfy all encumbrances and pay the seller's closing costs, including the listing broker's offer of compensation."

While this new rule is not legally binding, it is important that MLS members understand what their membership obligations are when it comes to disclosing potential short sale to prospective buyers in the appropriate sections of their listing. While NAR requires that the short sale options be available to all MLS members, the organization put the final decision of whether disclosure is required in the hands of the individual MLSs. For example, the New Jersey MLS now requires disclosure and even suggests language for the status: “potential short sale, subject to lender/bank approval.” But the state of Virginia holds that sellers have a legal right to keep their personal and financial information confidential, so the Virginia MLS cannot require the listing agent to disclose such information—which has the potential to damage the seller—without written permission from the seller. But all MLSs now give listing members the option to disclose, if they choose to.

Whether or not you agree that short sales should be disclosed, the bottom line is that the new NAR rule has changed MLS membership rules across the nation, and it is the responsibility of all Real Estate professionals to learn what their local rules are when it comes to short sales.

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Disclaimer: The above is not intended to be, nor is it legal advice, and should not be relied upon for any reason. Even though this article maybe disseminated throughout the U.S., the material covers only Nevada law, and no other. E RealEstateExec and Exec MediaGroup, LLC expresses no opinion on any other state's law, nor about the handling of any particular legal situation. You should consult your attorney, accountant or business advisor before undertaking any action. No attorney-client relationship is created between E RealEstateExec, Exec MediaGroup, LLC and the reader.