At the recent mid-year meetings of the National Association of Realtors the Board of Directors adopted new policy regarding the disclosure of short sale listings in a multiple listing service data base. According to an NAR news release, the 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."
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.
For purposes of the new rule, short sales are defined as "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." Short sales have become a fact of real estate life. In more than a few market areas short sales may represent upwards of 20% of the listing inventory.
So, why the rule? As many real estate practitioners can attest, short sales are, to put it mildly, liable to be a pain. They are frequently difficult, frustrating, time-consuming, and have little prospect of closing. In my own Orange County, California market area, the proportion of short sales that close is much lower than the proportion of inventory that they represent. It is not uncommon for a property to go to foreclosure while a short sale application is being processed. Apparent lender indifference, convoluted processes, and interminable failures to make decisions are common reasons cited for the low closing rate of short sales.
As a result, many competent and experienced agents just don't want to become involved with the process of making an offer on a short sale. Others, while willing to take on the task, at least want to be given notice upfront. They want to be able to counsel their buyers. They need not only to be able to advise them of the process, but also of the fact that a sale price accepted by the seller might not ultimately be approved by the lender.
Unfortunately, things like this happen: Mr. and Mrs. Seller have a total mortgage amount of about $800,000. Regrettably, the current value of their home is about $700,000, and they can't keep up the payments. They need to sell. So their listing agent recommends putting it on the market for $625,000. He reasons thusly, "Look, there's no difference to the sellers what it sells for, because they are not getting anything out of it anyway. [I am not saying he is correct about this.] So why not just list it at a bargain basement price and get the whole thing over with?"
But, guess what? Even the bank might not be so foolish as to take a $625,000 payoff when the market might actually yield a price closer to $700,000. Before a buyer gets all worked up about this "bargain", he or she should know that it is a short sale and that the price is going to have to be approved by the lender.
Not everyone agrees that short sale situations should be disclosed through the MLS. Some sellers may feel that the fact that they are "upside down" is a matter that they would prefer to keep confidential. They might be fine with disclosing this reality to someone who has actually brought forward an offer; but it might not be something that they want to be more widely known. A balancing of interests is required here. The new NAR rule would seem to favor the informed interests of potential buyers over the possible privacy desires of unfortunate sellers.