A ruling by the California Court of Appeal could make it a lot harder to find a seller-side real estate agent willing to offer properties on short sale, at least in that state. The court held a seller's agent liable for the buyer's costs in a failed short sale transaction when the agent did not specifically notify the buyer that the bank needed to approve the sale -- even though that information was a matter of public record.

What happened in the case was that the seller of the home was underwater on the mortgage (a deed of trust in California). The sale price on the home was $749,000, and the total debt on the home, through three deeds of trust, was $1,141,000. Although the deeds of trust were listed in the preliminary title report and were a matter of public record, the real estate listing did not mention the home was on short sale and the agent did not tell the buyer.

Realtors May Be Reluctant to Take On Financial Responsibility for Short Sales

The California court found that, as the seller's agent, the realtor shared the seller's duty to disclose "facts materially affecting the value and desirability of the property which are known or accessible only to him and also knows that such facts are not known to, or within the reach of the diligent attention and observation of the buyer."

The court held that a buyer has the right to be told that a home is being offered as a short sale before they go to the expense of entering escrow. The fact that the sale would have to be approved by a lender (in this case three lenders) materially affects the property's desirability and marketability.

The seller's real estate agent argued that agents have a duty of confidentiality to sellers regarding their financial information. However, the court found that the seller's duty -- and by extension the agent's duty -- to offer clear title to the property and to disclose any defects outweighed the duty to keep the seller's information confidential.

By failing to disclose the underwater mortgages and the short sale, the court said, the seller's agent had cost the buyer money, and the agent was required to repay it.

Florida Real Estate Agents May Proactively Change Their Contracts and Listings

The California court specifically said that the real estate agent should have explained that the transaction would require lender approval in the real estate listing.

Joshua Cohen, a California lawyer who handles professional liability cases, assumes that will mean that California real estate agents will no longer be able to get away with simply indicating "short sale" in real estate listings. At the very least, they will now have to indicate that a third-party lender will have to approve the sale. They may also have to specifically list the total debt on the property and the number of lenders involved.

In order to keep real estate agents interested in handling short sales, Cohen recommends getting written authorization from sellers to disclose the required information. They may also start requiring sellers to indemnify the agent in any lawsuits related to nondisclosure.

This is not yet the law in Florida, but sellers of real estate may well find their contracts with real estate agents changing nonetheless.

Source: RISMedia, "Upside-Down Homes Create New Pitfall for Real Estate Brokers," Joshua C. Cohen, October 29, 2010