Recently several observation concerning “Short Sales” of properties have raised an eyebrow or two. Several listing agents involved with Short Sale properties (owner owing more to the banks then the selling price of the property) may be working against the owner’s best interest to serve their (agents) best interest.
I’ve recently noticed several short sale properties being sold have been withdrawn from the market after having received an offer. When the listing agent receives an offer, the listing agent then withdraws the listing from the market while the mortgage company reviews the offer and estimates their (bank) loss. Withdrawing the listing removes the home off the market where no other showings or offers are made on the property. Such tactics are counter productive as the agent serves their own interests and stops any other opportunities for additional offers, perhaps higher offers for the seller and the bank.
Realizing it may take four to six weeks to receive a response from a bank concerning the initial offer; agents don’t want to throw a wrench into the pending deal by sending a second or third offer to the bank to review. Certainly if the listing agent has both sides of the deal (listing and buyer) for the property, it becomes even more self serving.
Why not just place the home Under Agreement? The listing agent has an issue with placing the home Under Agreement, because its not. The bank has not accepted the offer and may not for several weeks. The alternative is to withdraw the listing, keeping the home unavailable to other potential buyers and agents.
Unfortunately the banks have no idea the home has been taken off the market. Seeing no additional offers on the property, the bank has limited options. In many cases banks are reluctant to make counter offers as they’re just looking for the bottom line. It becomes a pass or fail situation for the bank. Although it’s difficult to assess the banks bottom line number, I’m sure the higher the offer to the amount owed will likely be accepted by the seller and the bank.
The second issue is a lack of knowledge or an unwillingness of agents to openly discuss the effects of a short sale with the seller. In talking with other agents, its evident many agents are unfamiliar with the results of the short sale, namely the 1099 issue when the sale is completed. In simple terms, if the bank incurs a loss due to the short sale, the banks pass the loss amount onto the seller in the form of a 1099. After receiving the 1099 form, the seller is obligated to pay taxes of the stated amount on the 1099 form. For example, the seller owes the bank $400,000; the home sells for $350,000. The seller could be sent a 1099 form for $50,000 reflecting the loss. The seller then has a tax liability based on the $50,000. Many agents just seem to be uneducated and are failing to notify homeowners of 1099 results of a property short sale. Real Estate agents are also forcing the market price down by failing to negotiate with the buyer over the price of the property and leaving the home seller holding the bag with limited options to reduce the 1099 debt.
I took the opportunity to speak with legal council for the Eastern Middlesex County Association of Realtors (EMAR) last week to bring to his attention the legal issues concerning 1099 issue with short sale property. After my discussion, agents can be held liable for failing to notify the seller of the tax liability. If the agent is aware of the 1099 issue, the agent has an obligation to notify the seller. The agent needs to remember he/she is working in a fiduciary capacity for the seller. The seller needs to be advised of the consequences so they may be able to make an informed decision concerning the tax liability and should be negotiating for the highest and best offer available.
Although this new territory for many, buyers, sellers and agents, there will be a law suit one day against an agent for not working in sellers best interest and not disclosing the true nature of the 1099 tax liability to the home seller.
