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Upside-Down Homes Create New Pitfall for Real Estate Brokers

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RISMEDIA, October 29, 2010—Painfully aware of the fact that many homeowners are upside-down (or underwater) with their current mortgages, brokers now need to be careful in listing the upside-down home. In Holmes v. Summers (Oct. 2010), a California appellate court ruled that sellers’ brokers can be held liable for damages and costs incurred by a buyer in a failed transaction when the existing debt on the property exceeded the sale price. In Holmes, three deeds of trust created a total debt of $1,141,000 with a sale price of $749,000, making this an extreme example, but the seller’s real estate brokers were still held to answer for not disclosing this information to the buyer, despite the fact that this information was available on the preliminary title report and was a matter of public record.

The buyer did not even bother to sue the seller who had agreed in the purchase contract to deliver clear title. Instead, the focused only on the real estate brokers listing the property. The court found that a seller’s broker has the same duties as the seller 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, then the seller is under a duty to disclose them to the buyer.” The outstanding balances on the notes were not known to the buyer despite the fact that the trust deeds had been recorded and were a matter of public information. The court further reasoned that the broker may be liable “for mere non-disclosure since his or her conduct in the transaction amounts to a representation of the non-existence of the facts which he has failed to disclose.”

The court reasoned that buyers should be made aware of this information before they go to the expense of even entering into an escrow at all. Despite strenuous arguments to the contrary, the court found that the duty of confidentiality to the seller regarding financial information was outweighed by the duties to disclose facts which affect the desirability and marketability of the property. The existing debts were deemed material in these respects. The court specifically found that the brokers and seller should have disclosed that the purchase price would require the approval of two or more lenders in the listing itself.

This ruling will affect the everyday business of each and every broker acting as a listing agent. This case makes it crystal clear that as a selling broker, it is your duty to disclose in the listing to the public, not only the amount of outstanding debt, but also that existing liens may make it difficult to close escrow on a property or impede the transfer of free and clear title. Although not specifically addressed in Holmes, this should end the common practice of simply indicating “short sale” in the listing, as more specific information is required, including that a third party lender must approve the sale for it to be consummated.

In light of this recent ruling and the movement of the courts towards finding brokers liable for the damages of buyers who cannot complete a sale, real estate brokers should pay careful attention to their listings and be fully aware of potential liability for failure to disclose these types of issues.

Brokers should investigate a property’s title as well as any existing liens. If material liens are found, brokers should include in the listing agreement specific authorization from the seller to make the necessary disclosures of these liens. If the seller agrees in writing to disclose those liens and that these are the only liens known, later claims of violation of confidentiality and failure to disclose liens can be mitigated or avoided completely.

For more information, contact Joshua C. Cohen at jcohen@ccmslaw.com, call 626-243-1100 or visit www.ccmslaw.com.

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