Is the Seller Liable to the Buyer for Refusing to Close a Short Sale?

Sellers Who Cancel a Short Sale
••• © Big Stock Photo

Question: Is the Seller Liable to the Buyer for Refusing to Close a Short Sale?

A reader asks: I am a very mad real estate agent, and I'm contacting you because I think you would know the answer to this. My buyers are purchasing a short sale. The listing agent gave us a copy of the short sale approval letter and told us we were approved. My buyers then paid for an appraisal, and we did a home inspection, plus a pest inspection. They spent more than $1,000 in upfront fees. Now the seller refuses to close the short sale. Can we sue the seller or make him close? Is the seller liable to a buyer for refusing to close a short sale?" -- California REALTOR®

Answer: It's probably a good thing you're asking me whether the seller is liable to the buyer for refusing to close the short sale because the answer you'd get from a short sale lawyer might be: "Hot dog, let's go to court."

I think almost anytime you've got a lawyer in a position to make a lot of money based on the lawyer's advice, you might have a conflict. It's like asking a surgeon if she should operate. Like asking a hairdresser if you need your hair cut. Or asking a Nordstrom sales clerk if you should buy those Jimmy Choo red patent-leather pumps. Yes, oh, yes.

On the other hand, by asking me about a seller's liability, I can't render a legal opinion because I am not a lawyer and I do not practice law. As a real estate agent such as yourself, I cannot give legal advice. I can, however, share with you my personal thoughts about a seller's liability based on my own experiences from handling short sales in California.

I certainly can sense your anger in this situation. Here, you have buyers who believed the seller was cooperating with the short sale and, based on this belief, the buyers spend a lot of money investigating the property in preparation to close. You might feel duped and misled. You might feel that the seller breached an implied good faith covenant in the contract.

But there are two important pieces of documentation that are probably included in your purchase contract, which will let the seller walk away from the short sale.


The Short Sale Addendum Lets the Short Sale Seller Walk Away From Closing

C.A.R. is constantly changing and updating its real estate forms, and the short sale addendum, SSA, is no exception. Many other states follow suit and utilize similar forms to explain the consequences of a short sale because the standard purchase contracts do not address short sales.

The short sale addendum says the buyer and sellers do not have to agree to any of the short sale lender's terms. You might say the fact the seller let your buyers spend money on inspections meant the seller had given implied approval. A court might disagree and say the approval needs to be in writing because all real estate contracts must be in writing.

The short sale addendum also says the buyer and seller are responsible for their own costs, even if one of the parties cancels the short sale.


The MARS Mortgage Relief Notice Lets the Short Sale Seller Walk Away From Closing

The Mortgage Assistance Relief Services Offer of Mortgage Relief Notice is the result of a ruling by the FTC known as MARS. All real estate agents who handle short sales in every state are supposed to give a copy of MARS disclosures to the seller before the seller is obligated to pay a commission. And yes, sellers pay the commission in a short sale. Commissions are paid from the proceeds of sale.

The basics of MARS is as follows:


  • The seller can stop doing business with the listing agent at any time.
  • The listing agent is not associated with the government nor approved by the government.
  • The short sale lender might not approve the offer.
  • If and when an offer is issued by the short sale bank, the seller has the right to reject the offer.
  • If the seller accepts the offer, the seller will pay the fee stipulated to the listing agent.
  • If the seller rejects the offer, the seller does not owe anything to the listing agent.
  • The amount of the listing agent's fee is spelled out.
  • If the seller stops paying the mortgage, the seller's credit goes down the tubes and the seller could lose the home.

So far, in California, agents are not required to give buyers a copy of either of the MARS disclosures -- not the MARSSN nor the MARSMRN. It is my personal opinion that since the MARS docs let the seller cancel the short sale at any time prior to written acceptance of the short sale approval letter, the buyer should be made aware of this disclosure.

The bottom line is a short sale is typically a distressed sale. In distressed sale situations, homeowners have specific rights. Nobody is likely to be successful at making a seller sell her home as a short sale if the seller doesn't want to sell. A short sale is an election. But it doesn't mean you won't find a lawyer willing to have a go at it.

At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.