Short Sale question

UPDATED: Sep 30, 2022

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Short Sale question

Is it legal for a realtor to encourage sellers to go the route of a short sale
abd accept a low ball offer for a house that is on the line between short sale
and breaking even, and then working with a buyer to flip the house?

Asked on December 31, 2016 under Real Estate Law, New York


SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 5 years ago | Contributor

A real estate broker owes his/her clients a "fiduciary duty," or duty of good faith, honesty, and competence. So this may be a breach of that duty, but it depends on the facts. You write that the house was on the line between short sale and breaking even--that doesn't mean that a short sale is automatically a bad choice, since it save you from the uncertainty of waiting for a better offer and from potentially months or longer of carrying costs. And the fact that the buyer then flipped the house doesn't automatically mean dishonesty--it depends on how feasible it would have been for *you* to do what the buyer is doing.
1) Assume the short sale left you obligated for $20k, but that the monthly carrying costs (mortgage, utilities, taxes, insurance) are $3k. In that case, after 6 2/3 months, you'd be break even on a a break even sale vs. short sale--and if the sale took more than 7 months more, you'd come out ahead on the short sale. So the question becomes, what is a reasonable guess on how long it would take to sell the house at a break even level? If it's only another 2 - 3 months, this was bad advice and possibly a breach of fiduciary duty; if around 6 months, it's a reasonable choice--you could have gone either way; if it might take a year or more, it was good advice to sell now short. So it depends on the facts. For reference, there are two houses in my small town in northern NJ (near NYC) which have been on the market for 2 years+ each because the pricees are two high, so it could be that your home would languish on the market if not short sold--it depends on the pricing, your market, etc.
2) Say that the home can be flipped for $50k - $100k more for putting in $10k - $20k of cosmetic work (e.g. remove wallpaper and neutralize colors, remove carpet and restore hardwood, some new lighting, some staging, etc.)--then it was likely a breach of fiduciary duty to not advise that. But if it would take some real experience flipping or a contractor's skill, plus considerable capital, to make $80k-$100k+ of changes to down the road sell it for $150k - $200k more...that's a huge investment and risk and might be beyond you, so it would be reasonable to recommend selling the house now short to a flipper who has the money and skill to turn it around, rather than you takig on that time, effort, and risk. Again, it depends on the facts.
If you believe that under the facts that the broker did act disloyal to you (bad advice) and in his/her own interest (was self dealing), then you could sue him or her for breach of fiduciary duty, to recover the money you should have made on the home.

IMPORTANT NOTICE: The Answer(s) provided above are for general information only. The attorney providing the answer was not serving as the attorney for the person submitting the question or in any attorney-client relationship with such person. Laws may vary from state to state, and sometimes change. Tiny variations in the facts, or a fact not set forth in a question, often can change a legal outcome or an attorney's conclusion. Although has verified the attorney was admitted to practice law in at least one jurisdiction, he or she may not be authorized to practice law in the jurisdiction referred to in the question, nor is he or she necessarily experienced in the area of the law involved. Unlike the information in the Answer(s) above, upon which you should NOT rely, for personal advice you can rely upon we suggest you retain an attorney to represent you.

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