Can Buyers Sue Short Sale List Agents?

I recently came across an article by Walter Sanford, a former real estate agent who now coaches and trains real estate agents.  The article poses a hypothetical situation, whereby a listing agent successfully moves a short sale to the point of closing…and then the bank reneges.  

To summarize Mr. Sanford’s example:

1. List agent markets short sale property.

2. Buyer contracts with seller for the property.

3. Short sale lender approves the contract.

4. Buyers go to closing and sign their documents.

5. Sellers go to closing…and the lender calls to pull their approval.

Granted, it is quite rare for a lender to pull short sale approval the day of closing, but it’s not uncommon for the lender to pull approval after the buyer has taken some action while relying on the expectation that their short sale purchase would go through.  For example, the buyer may have hired movers, terminated their previous living arrangement, etc.

In addition, the sellers have likely lined up a new home to move into (likely a rental), hired movers, etc.  And of course, the two real estate agents are expecting a commission.

Everyone is now upset, and it’s probable that someone (maybe everyone) wants to sue.  In this case, it’s the lender that has rained on everyone’s parade, so of course that’s the likely target.

But first, how do you go about suing a bank, especially if it’s a huge bank with more money than Bill Gates?  And would you have a chance to win?  The answer, according to Sanford, is no.  The buyer is probably the least likely to be successful, as he doesn’t have a contract with the lender.  Only the seller has a contract with the lender.

The seller is also unlikely to be successful…and this is where the article gets interesting, because we’re introduced to a new term – the “pre-existing duty rule.”

I’m not an attorney, so I had never heard this term before reading this article.  According to the article,

“…under the pre-existing duty rule, an agreement to modify a contract without legal consideration is not valid.”

Essentially, this means that the short sale contract, because it is for an amount less than the original loan, is not enforceable.  So the lender can change its mind.  If you’ve been involved in more than a few short sales, you’ve seen it yourself.  The lender decides at the last minute that the property is worth more than they thought, or the investor on the loan demands more money, or whatever.

For the real estate agent, be careful what you represent to a buyer or seller.  For buyers and sellers, protect yourself as much as possible until the transaction closes and the new deed is recorded.



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