Real Estate Blog - Should Short Sale Sellers Sue a Buyer Whose Breach of Good Faith Leads to Foreclosure?

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Should Short Sale Sellers Sue a Buyer Whose Breach of Good Faith Leads to Foreclosure?

Sometime around mid-October, I received an offer on one of my Sacramento short sales. The buyer's agent swore that the buyers loved the home. On top of that, the agent promised in writing not to write any more offers for those buyers as everyone waited for short sale approval. We received approval from one lender and were working on gaining cooperation from the second lender when a cancellation of purchase agreement appeared in my email inbox.

The explanation was the buyers decided they could not afford the improvements they wanted to make. They had not gone back to the home since the day they wrote the offer. This epiphany seemed to have come to them right after they received the approval letter, when reality sunk in. The agent didn't have the guts to pick up the phone and call me. For all I know, that agent had been out showing these buyers other homes and writing other offers.

If that was the case, this agent could possibly be held liable for breaking the REALTOR Code of Ethics. Article 1 says agents must be honest with each other. On top of that, though, buyers who walk away from a short sale after signing a contract could be held liable for breaching the good faith covenant inherent in contracts. A lawyer could argue in court that those types of buyers probably had no intention of following through on the purchase should a better opportunity present itself along the way.

Moreover, what if the seller was already in foreclosure, facing a trustee's sale, and relying on this particular buyer to perform? Is it possible that the seller could hold the buyer personally liable if the seller lost the home to foreclosure as a result of the cancellation? I'm not a lawyer, and I can't give legal advice, but it seems to me that it's possible a seller in that situation might have legal recourse against such a buyer.

After all, by ratifying the contract, the buyers prevented the seller from selling to a serious buyer -- a buyer who may have been able to perform during the allotted time frame. Buyers who are writing multiple purchase offers on Sacramento short sales may want to rethink that kind of strategy. What do you think? Do short sale sellers have a legal right to sue a buyer for damages if that buyer's failure to perform and breach of good faith leads to foreclosure?

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Elizabeth Weintraub is an author, home buying columnist for The New York Times-owned About.com, a Land Park resident, and a Land Park real estate agent who specializes in older, classic homes in Land Park, Curtis Park, Midtown and East Sacramento. Weintraub is also a Sacramento Short Sale agent who lists and successfully sells short sales throughout Sacramento. Call Elizabeth Weintraub at 916.233.6759. Put 35 years of real estate experience to work for you. DRE License # 00697006.

The Short Sale Savior, by Elizabeth Weintraub, available through bookstores everywhere and at Amazon.com.

Photo: Unless otherwise noted in this blog, the photo is copyrighted by Big Stock Photo and used with permission.

Posted by Elizabeth Weintraub, Sacramento Short Sale Agent, 916.233.6759, Lyon RE on 11/06/2009 08:37 AM

Comments (16)

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Originally posted at: Elizabeth Weintraub • Sacramento Short Sale Agent • Land Park: Should Short Sale Sellers Sue a Buyer Whose Breach of Good Faith Leads to Foreclosure?

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16 Comments on Should Short Sale Sellers Sue a Buyer Whose Breach of Good Faith Leads to Foreclosure?

NOV

This happens alot in our area too. It can be a very scary process and I you hit the nail on the head...All we can promise to do is to be honest with each other, we cannot control what our buyers decide to do in the end. Hopefully you were able to get another offer in it's place and help the home owners in the end!

Elizabeth: Reading this makes my blood boil. Our top lawyer at VAR (Virginia Association of Realtors) is actually beginning to side with crazy Realtors like the buyers agent you describe above. And since this man has a HUGE impact on our rules and regulations, I am terrified as to what the landscape will look like when these half-a**ed agents realize that the world has given them free license to screw over short sale sellers. As it stands now, no one is getting held with their feet to the fire for any wrong doing in the short sale arena.

Good Post! I just did a post/rant on people who shouldn't do short sales - "Short Sales - Have you considered the other side?" One of my pet peeves are investors who make a "cash" offer then walk away fromthe closing because they didn't get an end buyer. I have had them pretend to be ready to close and then just not show up. Now you have the fees from the title company to deal with as well. This particular deal did end up with the property going to trustee sale.

The Realtor I worked with told the title company to bill the Investor. It will be interesting to see how that goes.

Hi Bruce & Sandy: If agents were to counsel their buyers, advise them of the pros and cons of short sales, and make sure those buyers were educated, fewer deals would blow up.

Hi Chris Ann: Does your contract law in Virginia not contain a covenant of good faith?

Hi Dawn: I don't deal with investors who are looking for an end buyer because many short sale banks will not allow flipping. Solves that problem.

Hi Elizabeth, I'm not an attorney either - our contracts have 2 ways a buyer can enter into a contract, either specific performance - where the buyer must perform, or liquidated damages - where all the defaulting buyer will lose is their earnest money. I guess it would depend on the structure of the agreement. I agree, buyers who do this to sellers might want to rethink this.

Good question. Georgia GAR contracts actually have a clause in which the buyer must disclose if they have any other contracts or will make any other contracts for the purchase of real property during the term of the agreement. Will have to ask my attorney if a breach of that clause would make it easier for the sellers to sue?

Selling short sales must be a very tedious nerve-wracking business. I think I prefer waiting til they are foreclosed.

NOV

Elizabeth wrote: "The buyer's agent swore that the buyers loved the home. On top of that, the agent promised in writing not to write any more offers for those buyers as everyone waited for short sale approval."

The agent submitting the offer signs a document saying they won't write more offers for the buyer? Unless as the listing agent you also made sure the buyers agent had an exclusive buyers agency agreement with the buyer would that necessarily keep the buyer from not looking with other agents?

Hi Barbara: I don't blame you, actually, as short sales require an extreme amount of patience.

Hi Maureen: You are correct that without an exclusive buyer's broker agreement the buyer could seek out another agent but very few of them do, at least not in Sacramento. Buyers here tend to be pretty loyal to their agents. And if the buyer's agent got wind that their buyer was out with another agent, they'd most likely find a way to put a stop to that. Having said that, I put all my buyers on exclusive buyer's broker agreements.

I do my best to pre-screen the investors I work with. The one I mentioned swore that they had their own funding (I always ask) and I was floored when they told the Realtor (didn't even inform me) that they couldn't close because they had no end buyer. I am getting to the point where I will be saying "show me the money" before I submit the offer.

The thing is Dawn, the short sale bank will want to see the investor's proof of funds before issuing approval, so that's why I always get the proof of funds upfront. But even when they give you the documentation, that's no assurance they won't, along the way, find another investment they like better and cancel anyway.

NOV

Elizabeth, I'm about to enter into my first short sale. In your short sales experience, have you ever countered an offer with an addendum drawn up by a real estate lawyer that would force a jilting buyer to compensate for walking at the NTH minute? I paid very careful attention to your comment that you always get the proof of funds upfront. Seems like there needs to be another incentive in the contract to hold their feet to the fire after contingencies have been satisfied, especially if it pushes the short sale in a foreclosure.

I would think it could easily be argued that the buyers breached the good faith covenant... Regardless, it's pretty childish (I actually have another word, but will be nice) of the agent not to at least call you and explain.

Hi Sherry: I am now advising my short sale sellers to issue counter offers that say the buyer's deposit will be forfeited if the buyer cancels prior to a paid-for professional home inspection. Because they won't do a home inspection until we get short sale approval. And buyers who are just shopping around aren't going to pay for a home inspection, so I think this will hit them from both ends.

Hi Jesse: Of course, to sue for a breach of good faith, a seller would need to pay a lawyer, and some who are doing short sales can't afford to hire a lawyer.

And there's the fly in the ointment in a good many instances. One party or the other may have a legitimate cause, but litigating it will eat up more time and money than it's potentially worth. I've seen more than a few push the envelope betting the other party won't sue for that very reason. Sad stuff!

DEC

Hi Elizabeth, This is a sore subject for us here in the Los Angeles area as well. Agents just don't get it if they are a custom to only working with buyer's. They don't understand that our job is to help the seller avoid foreclosure not to mention all the man hours put into these transactions. We have had agents swear that their buyers were committed as well. My husband Gary and I specialize in short sale listings, when we get an offer we grill the buyers agent to see what their true intentions are of course we can only hope they are being honest. We even go so far as to make the buyers put a $1000.00 earnest money deposit into pre escrow then they have skin in the game, this makes it a fully executed contract. We also require them now to get their home inspection within the first 17 days of the seller accepting the buyers offer not when the lender approves the sale. This gives the buyer a complete scope of the properties situation, which helps weed out the lookie-lou's vs. the serious buyers. If they are not willing to agree to the earnest money deposit and the upfront inspection we don't have a deal Period! I think more agents should implement this practice.

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