BROKER RISK MANAGEMENT
WEEKLY PRACTIVE TIP
Broker Risk Management (“BRM”) has received a number of inquiries and requests for a refresher regarding short sales. Several BRM clients are now involved in short sales. BRM will include short sales in its upcoming fall risk management webinar scheduled for October 6, 2025. In the meantime, the following provides a summary of basics and questions and answers regarding short sales.
A short sale involves the sale of real property where the amount of the liens exceeds the seller’s net proceeds from the property. When taking the listing, a listing agent should determine whether the property is being sold generates sufficient equity to cover all financial liens and commissions. To prepare this evaluation, the listing agent should review a preliminary title report as soon as possible to determine the amount of financial liens recorded against the property. The agent should review the liens with the seller to determine how much is owed.
If the sale is short, the seller’s acceptance of any offer must be made contingent upon approval by seller’s lender(s)/lienholders that they will take less money than is owed to allow the close of escrow. If such condition is not included, a seller could be forced to pay any deficiencies out of their own pocket, placing the seller in a tenuous position, particularly, if the seller does not have funds available to make up any shortfall. BRM recommends that CAR forms Short Sale Addendum (SSA on zipForms) be utilized in a seller counter offer for this purpose.
Short sale Questions and Answers:
QUESTION NO. 1: I am a listing agent and the sale of the property is going to be a short sale. Do I have to disclose that fact to any buyer?
ANSWER: Yes. A California appellate court case specifically held that a listing agent must disclose to a buyer, prior to entering into a purchase agreement, if a property is going to be a short sale. However, if the listing agent knows that an offer is coming in, it is wise to advise the buyer’s agent of the short sale since the buyer may not wish to be involved in a transaction where the certainty of seller clearing financial liens is in doubt.
QUESTION NO. 2: I am a listing agent. An offer was received and accepted by the seller. Thereafter, a new lien showed on an updated preliminary title report. The transaction is now a short sale. Do I need to disclose this fact to the buyer? How do I handle the transaction?
ANSWER: The lien and fact that the sale is now a short sale must be disclosed to the buyer. See the above-referenced discussion of an appellate court decision regarding this issue. Recommended handling includes initially discussing the lien with the seller. Likely, the seller was aware of the lien and did not disclose it to you or the buyer, which is a problem. Because the seller failed to disclose the lien, the contract is not subject to approval by seller’s lienholders. Therefore, the seller will be required under the contract to make up any shortfall. If the seller fails to do so, the seller could be subjected to a specific performance lawsuit by the buyer. If the seller has any questions regarding handling, please refer the seller to a qualified California real estate attorney.
QUESTION NO. 3: I am a buyer’s agent and the property is being sold pursuant to a short sale. How do I know if approvals have been obtained by the lienholders (lenders)?
ANSWER: Ensure that the title company confirms that all liens are being paid off prior to closing the escrow. See paragraph 2 of CAR form SSA. It is important that you have a confirmation in your file indicating that all liens have been paid off.
QUESTION NO. 4: I represent a buyer. The 45 days have passed, as set forth in Paragraph 2.A. of the Short Sale Addendum and the seller still does not have lender approval for the sale of the property. Can the buyer cancel the contract and receive the buyer’s deposit back.
ANSWER: Likely yes. Obtaining approval of the sale from seller’s lenders is a condition set forth in the SSA. If the seller is unable to fulfill that condition, the buyer can cancel without penalty.
PRACTICE TIPS:
- Listing agents should always question their sellers regarding the indebtedness against the property.
- When taking a listing, if there is any doubt that the seller has sufficient equity to cover all existing liens, obtain a preliminary title report from the title company, and advise sellers to contact all lienholders to obtain the present payoff balances of all financial liens.
- In addition to the numbers of loans against the property and the amount remaining on those notes, such things as pre-payment penalties, arrearages and penalties because of non-payment, tax liens, judgment liens, mechanics, liens, and other matters of record requiring payment at close of escrow will determine whether the sale is a short sale or not. Approval of all such lienholders will be required.
- If it is a short sale, listing agent should:
- Prepare a net sheet for the seller, and to be used to confirm for seller’s lender(s) that sale of the property will be a short sale;
- Add to the listing agreement, and review with seller, the CAR Short Sale Listing Addendum (SSLA on zipForms) which covers issues related to selling a property in a short sale.
- Include a Short Sale Addendum form (SSA on zipForms) which confirms that the contract is contingent upon the seller clearing title prior to the close of escrow, and fulfills sellers obligation to disclose that fact in writing to the buyer.
- For the sake of both the seller and buyer, their respective agents should ensure that the title company obtains a clearance of all financial liens, and that you receive a confirmation of that fact for your file.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is an attorney-client privileged communication for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management LLP. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry but rather are intended to suggest good risk management practice