A Short Sale transaction presents different confidentiality issues from a regular transaction. The most important one is whether the Seller discloses the fact that the transaction could be a Short Sale.

It’s important to note that in accordance with the REALTOR® Code of Ethics and Virginia law, a Seller pursuing a Short Sale is considered confidential financial information. The Listing Agent MUST have the Seller’s permission to disclose such information and the permission should be obtained in writing.

A Short Sales situation may present an appealing financial opportunity to the Buyer, but there are some concerns. Consider the following:

  • Military or executive relocations buyers usually have a limited time to find a home and go through the negotiation process. A Short Sale may not be realistic for that type of buyer. Very few practitioners and even fewer Sellers are proficient enough in the process to have everything in order for a quick decision by the Lender. In the case where a Lender withdraws the approval, precious time is lost for both the Seller and the Buyer.
  • Short Sale Buyers should be diligent in uncovering liens. Sellers who can not make the mortgage payment may not be paying other debt obligations.
  • Remember that in most cases, contracts are ratified when there is a meeting of the minds. The “Third Party Approval” of a Lender is a contingency. It typically takes awhile for Lenders to approve such a sale. Buyer Agents would be wise to put language in the contract that ensures the Buyer’s contingencies (such as home inspections) do not begin until approval from the Lender to proceed at the current price. Otherwise they may be liable for settlement services, home inspector fees, etc…

Buyer Agents must be more diligent. Whether a property is a Short Sale is a fact that is material to the transaction. Regardless of the Listing Agent’s ability to disclose the status of the property, the diligent Buyer Agent should always ask the Listing Agent about the status of a given property.

Virginia Law protects Sellers in a real estate transaction by forbidding the disclosure of confidential financial information by their Agent. As already stated, whether the sale of a property will result in a Short Sale is information that is protected by the confidentiality provisions of the statute. Therefore, unless a Seller has provided written authorization to disclose such information, the Listing Agent cannot disclose whether a sale will result in a short sale to anyone by any means.

Virginia Regulations 54.1-2131 A
3. Maintain confidentiality of all personal and financial information received from the client during the brokerage relationship and any other information that the client requests during the brokerage relationship be maintained confidential, unless otherwise provided by law or the seller consents in writing to the release of such information;

It’s important for the Buyer Agent to also be prudent. One possible solution is to write language into the Offer to Purchase that compels the Seller to disclose their pursuance of the Short Sale, as a term of ratification. Since it is possible for Listing agents to present more than one offer to the lender. The Buyer and their agent may wish to make the ratification contingent on only that offer being presented to the Lender. The above paragraph is purely a recommendation and needs to be approved by the Practitioner’s Broker and legal counsel. However, this paragraph could be very useful in the Offer to Purchase. The first section makes it a requirement for the Seller to disclose if they wish to ratify. If the Seller declines to agree to this term it may indicate that it is an undisclosed Short Sale and the Buyer should act accordingly. The second section is a protection for the Buyer, should the Seller find out in the course of the transaction that they cannot pay off all indebtedness and need to revert to a Short Sale transaction.