Stop Short Sale Bait and Switch

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This really gets me angry. I think it's past time to declare war on this subject. I hope folks will send copies of this to their legislator and congresscritter and demand immediate action in no uncertain terms. Actually, existing law should be more than adequate to cover this - so send your governor and attorney general such missives, as well.

First, let me share a piece of information that the general public may not be aware of. When there is a prospective short sale of real estate, the listing agent is allowed to continue marketing that property even though there may be an accepted offer. In plain english, it still shows "Active" or "Available" on MLS, among many other things.

I understand the reasons for this. Approximately one in five turns into a completed sale. Therefore, four out of five do not. The people who are selling their property "short" are usually in fairly dire straits, and the wasted time can often mean the difference between selling (albeit at a loss) and foreclosure.

I simply disagree with it, mostly due to abuses by listing agents.

There is an absolute requirement in my local MLS. The property must have the phrase "Offer accepted pending lender approval of short sale" as the very first words in the "Remarks" section, which people viewing MLS and the various other listing services sourced in MLS can see for themselves, without the benefit of an agent, or if they're perusing some kind of gateway that an agent has set up for them. The "Remarks" section is public information, available to the general public, and putting the magic phrase right in the beginning of "Remarks" might cause it to be noticed - if the agents actually put it there.

Instead of this, you'll find this phrase sprinkled everywhere except where it's supposed to be. "Mandatory Remarks" or "Confidential Remarks" (Both of which show to other agents, but not to prospective buyers), buried deep in the "Remarks" where it won't likely be noticed, or in the "Supplemental Information" section.

I just today had another reminder of this. Some clients from out of town came in and wanted to view properties. I called the agent on this one particular property listed for below nearby comparables, who swore there were no offers. So I took my clients to that property. They liked it. After due consideration and several days time during which we found out their first choice wasn't going to work, they decided to make an offer. Great! I start up WinForms, e-mail them the offer paperwork, start writing a pre-qualification letter, and call the agent, who swears there are still no offers. This is 4pm on a Friday. I get the email with the signed offer back, and first thing Monday morning present the offer. Except that over the weekend, there have miraculously appeared no fewer than four offers for tens of thousands of dollars more, and that they had an accepted offer that my client's offer was not competitive with, despite my client having offered full asking price - I know about short sales. Considering the fact that I had tried to call the agent over the weekend and gotten no response at all to multiple messages, I find that impossible to believe. They weren't working over the weekend. Their office wasn't working over the weekend. Exactly when did all of these offers come in? Either they were lying to me Friday, or they were lying to me Monday. Since my client isn't interested in the property at the higher price, I hope for their sake that they were lying to me Friday, but this is still a violation of the duty of fair and honest dealing. I found the magical phrase today, though - buried deep in the supplemental information, where it doesn't really mean anything, and certainly won't be any obstacle to innocent buyers who don't know any better than to use the listing agent calling them about the property.

Furthermore, there is an epidemic of mis-representing the asking price on short sales. "Low-balling," to use the common parlance, only this is coming from the listing agent. More than half of the short sales I check out are priced so low that there is no way on this planet that the lender is going to accept even a full asking price offer. Our offer was marginal - the comps showed something not too terribly much higher, so the offer was reasonable, especially considering the fact that the "No tax for income from debt forgiveness" dies in about six weeks and is not likely to be renewed.

But combine an already accepted offer with continued marketing and a low asking price, and you have nothing other than the classic trick of "bait and switch". An asking price is a representation in writing of an offer that the seller would be glad to accept. But if the seller would not be glad to accept that offer, it is false advertising plain and simple. An offer of that asking price would not have even been considered, seeing as they have an offer for tens of thousands of dollars more that they have accepted. There is no way on Planet Earth that a full price offer for $x is going to be accepted when there is a fully negotiated purchase contract for $x+40,000, or even $x+1000. You know it, I know it, even the communist die-hards still left here and there, mostly in western universities, know it. Even if the lender might have considered such an offer before the higher offer was received, they are not going to do so now.

Let us consider: Why, then, is the property marketed at a price lower than any conceivable offer which might be accepted?

Plain and simple, it is so that the listing agent can meet prospective buyers for other property. They are using this property, marked to a price well below the market which it cannot really be obtained for, as a lure to draw in prospective buyers. These agents are putting out an advertisement that essentially says, "I have a property for sale for tens of thousands of dollars less than it's really worth!" They don't have that property for sale at that price; they don't really have it for sale at any price. Until and unless that buyer with the current contract bails out, there is a cloud on that title and the seller is not free to sell it to anyone, no matter the asking price.

(I know it's "subject to lender approval of short sale," but if the lender were to refuse a given offer, than accept one for a lower price, that would certainly be fodder for all kinds of lawsuits starting at Equal Housing Opportunity and going from there - not to mention that you are kidding yourself if you really think there is a possibility of a lower offer being accepted by the lender right after a higher one is rejected. Several months on, maybe, if nothing else is submitted in the meantime. Right then? No)

So the listing agents are using a property they don't really have at a price they definitely don't have it to lure prospective buyers into contacting them, hoping to sell them something else. Have I missed anything? Oh, right, they are still hoping to persuade some folks it may be worth enough over the asking price to be worth making such an offer. But if an offer comes in for "merely" the asking price, they are going to tell the party making it that such is not good enough. I therefore submit that the property is not for sale for that asking price, which makes a representation that it is for sale thusly FRAUD.

This is illegal in California, and in most other states. Substitute "car" for "property" and you have a couple of the elements of the slimiest used car salesperson from fifty years ago, before we ever heard of consumer protections in law. Furthermore, it's entirely untruthful, and it violates several core concepts of the Realtor's Code of Ethics and Standards of Practice. The National Association of Realtors is lying to itself, its members, and the public if they think their claim of improving the industry does not directly conflict with this, and indeed, is not completely contradicted by this policy. The NAR is not after the benefit of the public - they are after the benefit of the major national brokerage chains which control it.

What would I like done about it? Ideally, I'd like all properties moved to "Pending" as soon as there is a fully negotiated contract of sale. Not optimal for the seller, but it is the only way of dealing fairly and honestly with the general public. There is a contract of sale in effect, exactly the same as any other pending property, and if nothing happens to prevent it, that property will be sold on those terms, exactly the same as any other property. Such a thing would only be done over the dead bodies of the major brokerage chains, but it's not like that's a public interest argument against such a course. That this particular contract has one additional contingency is no excuse to treat it any different than any other.

The absolute minimum compromise I am willing to settle for is that the asking price listed in all advertisements reflect the highest current offer as a minimum. If there's an accepted offer for $400,000, it might be acceptable to market it for $450,000 - you should not be able to market the it for $350,000. It isn't for sale for $350,000, and there isn't any rational disinterested judge who is going to believe that it is. You would probably be able to get the current contracted buyer to relinquish their interest for an immediate profit, and it wouldn't break the lender's heart either, to be losing less money than they thought. But there is no way on Planet Earth that the property would actually be available for purchase for $350,000, and to represent that it is is nothing short of FRAUD. Marketing such a property in thus a fraudulent manner is a legal and ethical violation of all the laws and principles of business that have evolved over the last hundred years since there have been Realtors. If the NAR wants to retain the confidence of the public, it is time that they fixed this. If the NAR does not want to act, I intend to do my best to ensure that Congress and the legislatures of all fifty states will.

Furthermore, if the lender has rejected an offer at a certain level, that should also be a "floor" for asking price. If the lender has rejected an offer for $400,000, you can be pretty darned certain they're not going to accept one for $350,000, and marketing the property thus is no less fraudulent than in the previous example. You still have to submit any offers that do come in, but you're not fraudulently marketing the property for far less than there is any chance of someone purchasing it for. If the owner in a non-short sale situation tells you they won't accept $400,000, would you think that marketing the property at $350,000 was ethical? It certainly wouldn't be legal. That lender has to sign off on releasing the trust deed. You can't deliver clear title to a buyer at $350,000, and you know it. In any other situation, with any other commodity, this would be false advertising, subject to severe penalties. Why, then, do we countenance marketing such properties thus?

What can we do as individuals until that happens? I have been putting a requirement to cease marketing the property in all short sale offers I've been making. Move it to "Pending", stop advertising it as available for sale in other venues - or my client's offer goes away, and said clients have a right to sue for damages. This is for my client's protection. Suppose the seller gets another offer for $5000 more than my client's accepted offer - which offer do you think the lender is going to accept? Not to mention that in the meantime, my clients are going to be spending money on for an inspection and appraisal and possibly other things as well. Might the seller, in such circumstances, not be tempted to find an excuse to bail out of that contract, possibly leading to lawsuits and court appearances and judgments (Oh, my!) and in any case, endangering my client's right to purchase that property, which is what they want and where their interest is. If you're putting an offer in on real estate as a purchaser where a short sale may be involved, may I suggest that you do the same?

If you are a listing agent who doesn't like this, may I suggest you get real about investigating which offers are backed by a strong ability to perform, and which are not, instead of some meaningless prequalification or even pre-approval letter that says these buyers might qualify for enough to fund the loan. There are four things I want to know: debt to income ratio, loan to value ratio, credit score, and verification of cash to close. Time in line of work might also be nice to know, but is harder to verify. You can't require anyone to get a letter from your favorite lender, an illegal practice I'm seeing more and more of ("Steering" is illegal under RESPA, and not just kind of).

May I suggest you also get serious about investigating what kinds of offers the lender actually might accept? I know they don't want to tell you what they would accept, but find out how this lender evaluates short sales for acceptance. I mean the actual decision-making, not treating it as a "black box" where you input the standard short sale package and a commission check just might pop out. You're trying to get this property sold, and once you put a low asking price on it, you're probably not getting offers at a higher level than that. In any other situation, this would be violating client interests and fiduciary duty by repricing a property thus. The fact that there is a short sale involved in no way changes this no matter how much you allow yourself to be distracted by it. When your clients start getting tax bills for debt forgiveness here when the current forgiveness expires in a few weeks, you're going to be in a world of hurt legally, as well. Here you are telling the client "Short sell by $200,000? No problem!" and then they get a tax bill for over $50,000 from the IRS, at least part of which would have been avoidable by putting the correct asking price on the property. How do you think a lawyer is going to interpret that? Don't expect any sympathy from the people who have been doing it right, either.

Short sale bait and switch is just as much a violation of good business practice and the law as telling people, "That airport is going to close!" when it isn't, or "that factory isn't an environmental hazard" when it is. Let's all put a stop to this fraudulent practice now.

Caveat Emptor


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This page contains a single entry by Dan Melson published on November 19, 2008 7:00 AM.

You've Got a Great Offer, But Can The Buyer Consummate It? (Cash to Close) was the previous entry in this blog.

Links and Minifeatures 2008 11 24 Monday is the next entry in this blog.

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