Short Sale Games

Don't Sell Your House to Your Realtor

Selling your house to your Realtor is a bad idea for about 48 different reasons, beginning and ending with conflict of interest.

That's especially true if the sale is a "short sale" -- that is, the home is worth less than the mortgage against it. In such cases, the bank has to agree to take less than the amount it is owed.

So who's negotiating with the bank(s) on the Seller's behalf, making the case that the home is worth less than the mortgage? The Seller's Realtor, called the listing agent.

When the listing agent is also the Buyer, he suddenly has a big self-interest in how much the bank knocks off the loan -- not to mention what the home subsequently sells for.

While reducing loan balance also benefits the homeowner, who (presumably, but not always) is relieved of repaying the mortgage shortfall, the problem is that these two self-interests -- agent's and home owner's -- can be conflicting.

Guess whose interest can take precedence?

Bad Behavior -- Case Study #1

Here's one scenario that apparently has been popping up:

A Realtor takes a short sale listing where the home has a $100,000 mortgage against it. He persuades the lender(s) to reduce the mortgage to $50,000. The Realtor then enters into a Purchase Agreement with his client, the owner/Seller, for $50,000. Then, the Realtor re-sells the home to a third party for $75,000.

The sale to the third party is accomplished by contractually assigning the Realtor's Purchase Agreement, and is timed to close the same time as the Realtor's purchase. Result: the Realtor pockets an instant $25,000 -- at their client's expense -- most often without the client even knowing.

This game and other shenanigans are discussed in these two videos:

Chris Galler, Chief Operating Officer and Brad Boyd, Esq., Thomsen & Nybeck on Short Sales, Part 1
Chris Galler, Chief Operating Officer and Brad Boyd, Esq., Thomsen & Nybeck on Short Sales, Part 2

Prevention > Cure

To anticipate (at least some of) the inevitable questions (and avoid incredulous email's and angry blog posts):

Yes, a Realtor who did this "broke the rules," and could be pursued by their client, the bank(s), and the Department of Commerce -- or all three! And yes, it's possible that the client could even recover some of their money, and get the Realtor sanctioned if not thrown out of the business.

But you can't count on it.

You can count on spending 6 months to two years of your life pursuing the above cause(s) of action, paying a lot to your attorney, and getting progressively more steamed (and poorer) as the process inevitably drags on. (Remember, I'm a former attorney.)

At the end of the process, the odds are also quite high that you'll be encouraged to accept an insultingly low settlement offer (if you're offered anything at all), and to think of it as a "small cost to pay for getting on with your life" (Yup, that's what they always say.)

My advice?

Just avoid the whole potential mess by not selling to your Realtor.

If they want to buy it, fine, but then get another Realtor to represent you.

There. Simple.