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House for sale...but seller is applying for loan modification. Is this material fact?

By Pacita Dimacali

Real Estate Agent with Alain Pinel BRE 01367196

March 22, 2009 08:31 AM

Yesterday, I showed a truly adorable cottage to my client.

The seller is not (yet) underwater on her mortgage, but could be if she receives an offer less than what she owes at which point, it could be a short sale. The property's current market value isn't worth what the seller is asking for. It's already gone through two agents, has had the price adjusted more than once. And it's still over-priced.

I talked with the listing agent to get the full story.

And she told me the seller is applying for a loan modification, and that she should get an answer by April.
So...what if her loan is modified? The agent said the seller will keep the house.
But what if there's an offer and it's accepted before the seller gets an answer to her loan modification aplication? The agent said it will have to be at the listed price for the seller to accept the offer.
What if the buyer spends the money for the appraisal, after which the modification is approved? The seller will back out of the agreement (and the buyer is out of luck and won't recover the cost of the appraisal unless the seller reimburses the buyer)
But what if there isn't an offer forthcoming? Will they reduce the price then? If they do, it will become a short sale.

Seems to me they should first try to get an answer to the loan modification. And if it's turned down, then that's the time they should list the property for sale.

I think the fact that the seller is applying for loan modification while listing her house for sale is material fact and must be disclosed up front. It may turn off some buyers and agents, but this is critically important information that will determine whether a buyer would want to write an offer.

The only thing agent shares in the confidential remarks is that it's not an REO, not a short sale, and to call the agent for more info.

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C Tann-Starr

Tann Starr & Associates, Inc. - Palm Bay, FL

Featured @ Club Chaos

Mar 22, 2009 11:50 AM

Jim Frimmer

HomeSmart Realty West - San Diego, CA

Realtor & CDPE, Mission Valley specialist

Looks like you've got an interesting one there. I've only been a Realtor since May 2005, so I'm sure learning a lot about all the interesting ways to buy and sell real estate. Nothing like learning on the job, but I figure if Obama can do it, I can, too.

Mar 22, 2009 12:17 PM

Antonio M. Cardenas Broker Associate

RE eBroker Group - San Leandro, CA. - San Leandro, CA

"The Realtors In Motion"

Hi Pacita, I believe the seller does have the right to try any and all options, the sale of the house, (what if an all cash buyer falls in love with that cottage and pays the asking price? within the realm of possibilities it does exist) At the same time, try and get a loan modification, why not? if nobody makes an offer and she gets the loan modified, she achieves her goal. She does not have a short sale at this time, so the lack of disclosure about that is fine. Intentions are there, but would they happen? And as time goes and as the process goes and changes then is the correct time to make those disclosures. I believe that if the seller gets the loan modification and an acceptable offer, she then will have an option to either stay of sell... both are her prerogatives... that is my 24-year experience... $0.02 thought.

Antonio

PS: have you been practicing your Cha-cha steps? C U Thursday

Mar 22, 2009 12:56 PM

Gary McNinch

Better Properties Real Estate - Renton, WA

Broker, Renton WA Real Estate

Hi Pacita,

In the wonderful State of Washington our mantra is "disclose, disclose, disclose". That being said, not everything should be disclosed, but in this instance my non legal advice would be to disclose this. Seller has to do everything to make her best financial decision, but should let potential buyers know what the situation is. It would not be good to get a mutually accepted offer, then have the seller back out due to a loan mod. Seller could be held to have damaged the buyer if this isn't disclosed. Best advice of course, ask a good real estate attorney.

List and Sell (and disclose) Gary @ RentonHomeFinder.com

Mar 22, 2009 02:32 PM

Richard Weisser

Richard Weisser Realty - Newnan, GA

Richard Weisser Retired Real Estate Professional

Pacita...

Hmmm ... a material fact is any fact which would affect whether or not a buyer will buy a home or how much they would pay for it ... so this could be material.

Mar 22, 2009 03:10 PM

Carol Lee

Dilbeck Real Estate - Oak Park, CA

Realtor - Agoura, Oak Park, Westlake CA Homes

I can see both side of this one. The agent is saying basically it is only for sale at the list price. For now. And on what grounds can the seller back out of an accepted offer, especially once buyer contingencies are lifted? What if the seller accepts an offer contingent upon NOT getting the loan modified? On the other hand, if it is over priced, and your buyer wants to make an offer on it under asking, would the seller accept? Hmmm... this could go on for awhile. Maybe it would be best to tell the buyer what is going on, and let them decide if they really want to see it or not.

Good luck, and let us know!

Mar 22, 2009 03:39 PM

John Novak

Keller Williams Realty The Marketplace - Las Vegas, NV

Henderson, Las Vegas and Summerlin Real Estate

I think it would be relevant info to potential buyers that the seller is applying for loan modification, but not required. Thinking of this from the other side, is a buyer required to tell a seller that they've written offers on multiple properties? Again, it's nice to know, but not required.

Mar 22, 2009 03:51 PM

Pacita Dimacali

Alain Pinel - Oakland, CA

Alameda/Contra Costa Counties CA

Carolyn -- thanks for the feature. I am curious to know how others will view this dilemma.

Jim -- it seems that there is always a new challenge, depending on the current market conditions.

Antonio -- I believe everyone has a right to try every possible means for his own benefit. But what truly needs to be disclosed? For example, if someone were trying to get a line of equity on a house, the owner is cautioned not to put that house up for sale. Otherwise, the lender will not approve that LOE.

Haven't practiced...will try at least one night before next class :)

Gary -- I was told that when in doubt, disclose. The fact that it's even a question, or if the question is raised, then information that may factor in the decision to move forward should be disclosed.

Richard -- if you're the buyer's agent. What would you do, and how would you write your offer?

Carol -- we wrote an offer for less than list (but not by much). In the terms, we specified that "upon acceptance, seller will withdraw loan modificaiton application." I empathize with the seller, but in this case, I represent the buyer, and I will protect my buyer's interests.

John -- I am concerned that once we're in contract, and my client spends the money for the appraisal and the inspections, will the seller reimburse my client if the seller moves forward with a loan modification? My client can't afford to be in contract on more than one property. Writing offers is one thing; being in contract is another.

Mar 22, 2009 05:29 PM

Michael Cole

CPG Tours - Corona, CA

Hi Pacita,

Interesting situation, but I can certainly see the seller's reasons for not disclosing. Applying for a loan modification could easily mean they are having financial difficulties. And if that's known by a potential buyer, it could definitely affect how much they offer.

Also, an offer with a contingency that the seller withdraw the loan modification upon acceptance could be very detrimental to the seller. What if it falls out of escrow? That seller may not be able to apply for another loan modification for a year. At least that's what I've heard - that a person can only apply once a year.

Just a couple other considerations. Thanks for sharing.
: )

Mar 23, 2009 12:50 AM

Sandy Shores FL Realtor®, Melbourne Real Estate

M & M Realty of Brevard Inc. - Melbourne, FL

Brevard County Real Estate, Florida's Space Coast

Pacita, Now this is an interesting one. I haven't heard of a situation like this before. Sounds like this listing agent is potentially wasting people's (and there were 2 agents before this one). This sounds like an unrealistic situation to me. To disclose or not to disclose? I would have to say that she must disclose, as this a pertinent as to whether the seller can actually offer the property for sale to a ready, willing and able buyer. I would think that the seller must include this in the body of the offer to purchase, that there is a contingency on the contract that the seller is trying to modify the loan, and if she can, then she can withdraw from the contract.

I'm interested to hear additional points of view on this situation.

Mar 23, 2009 02:44 AM

Pacita Dimacali

Alain Pinel - Oakland, CA

Alameda/Contra Costa Counties CA

Michael --- I didn't know how else t handle my buyer's offer. The owner is having financial difficulties. Not only that, she is going on disability. Even if the loan is modified, she would still have a hefty monthly payment. According to the listing agent, she is motivated and wants to sell. But I guess she just wants to see how much her monthly payment would be reduced. She also didn't want to do a short sale because of the effect on her credit. Guess she didn't know that applying for a loan modification will also affect her credit.

Sandy --- this is why I wanted to pose this to this community and get different points of view. My first priority is my buyer, obviously. I also have a past client who is applying for a loan modification....but they haven't decided whether or not to sell the house as a short sale instead. They wanted to do all they can to keep the house.

Mar 23, 2009 03:48 AM

C Tann-Starr

Tann Starr & Associates, Inc. - Palm Bay, FL

I was in a situation where a seller did not disclose he was trying to modify a loan. I wrote 8 offers on his house and he refused each one, insisting on full asking price while in pre-foreclosure. I laid out over $2K in advertising on this listing, missed lunch and dinner with the fam to respond to every single show appointment and held open houses every weekend. Dude took his house off the market with a registered offer on the table (that the buyer kept open for 90 days because she really wanted the home) the moment he was notified his hardship package was approved. I am very interested in this conversation...

Consider me parked. :-)

Mar 23, 2009 07:08 AM

Pacita Dimacali

Alain Pinel - Oakland, CA

Alameda/Contra Costa Counties CA

Carolyn

I can't fault sellers for looking at every possible angle. They can apply for the loan modification and wait for an answer. Their credit will still be adversely affected in one way or another. If they're trying to sell, what will they do if a willing and able buyer comes up with a cash offer at list price? What excuse will the seller have in turning it down?

I have a client who is waiting for an answer on their loan modification....if that is not accepted, THEN they will try to do a short sale. But not at the same time.

Now that we have more short sales and loan modifications in the hopper, I really would like to know what others think is the right/ethical way to handle?

Mar 23, 2009 01:31 PM

Johnny Burke

Keller Williams Realty - Los Angeles, CA

I imagine this scenario is going to happen quite a lot- it will save us all loads of headaches for all parties to disclose all facts that have a possible influence on the outcome. One more very important question to ask when considering taking a listing.

"Always tell the truth- it's the easiest thing to remember"

Apr 08, 2009 02:41 PM

Pacita Dimacali

Alain Pinel - Oakland, CA

Alameda/Contra Costa Counties CA

Johnny,

As one real estate attorney said, remember the "Ds":

Discover
Disclose
Document

Apr 08, 2009 05:42 PM

Dave Halpern

Dave Halpern Real Estate Agent, Inc., Louisville, KY (502) 664-7827 - Louisville, KY

Louisville Short Sale Expert

Years later, after kicking the can down the road with loan modifications, many homeowners are finding that they are still woefully upside down on their mortgage. Many short sales today are loans that were modified in the past. Homeowners are regretting getting a loan modification because it delayed by years their fresh start on rebuilding their credit.

Sep 19, 2017 12:57 PM