Short Sale question

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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

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 4 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.
Examples:
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.


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