Short sale question

Let's say a seller wants to sell their house and they owe more than what it is worth (so technically a short sale). However, they lie to their listing agent and tell them it is NOT a short sale. As a result,any potential buyers are also unaware that this is a short sale.

At what point would the truth come out? When they try to go into contract? When they do a title search?

Re: Short sale question

Well, first, a seller can owe more than the home is worth, and still sell without doing a short sale, IF they have the money to bring to closing to pay off their lender. In that scenario, the bank will be made whole, so it's like a traditional sale.

But if the seller doesn't have the money to bring to closing and will need to do a short sale (meaning, the bank will need to agree to take less than what is owed), there'd be no reason for the seller to lie. They simply won't be able to close the sale, so pretending that it's not a short sale would just be wasting the realtors' time, the attorneys' time, the buyer's time and the seller's own time. The truth will come out somewhere in the process before the sale closes.

As far as when this would come out... If the seller lied to the real estate agent about what they owe on the mortgage, the truth would come out in the title report. The buyer's attorney is responsible for running title after the deal is in contract. If the amount owed is more than the amount of the sale, hopefully the attorneys would confer and the seller's attorney would learn that the seller can't pay off the difference, at which time (i) the buyer could walk (seller can't deliver clear title), or (ii) the seller could try to do a short sale, assuming he/she qualified (because it's more than just owing more than the home is worth) . But it's possible that the seller could lie to his attorney and say he is going to be able to pay it off at closing, only to not be able to do so at the closing table. Why someone would do that doesn't make sense to me.

I did have a sale earlier this year, where I was working with the buyer, and the seller wasn't honest about his financial situation. The house wasn't listed as a short sale. At closing, it came out that he owed a lot more in terms of liens/judgments that cropped up on the title report, and somehow his attorney wasn't aware of the full amount of what he'd owe at closing. We almost didn't close, after months of being in contract, and it was a horrible, emotionally fraught situation. Luckily, the shortfall was small enough that we were able to close the deal for the buyers by the realtors and attorneys kicking in a big chunk of our fees. It was just a ridiculous situation.

But if it was a sliightly bigger shortfall, there's no way the deal would have closed, and everyone's efforts for months of working on the sale would have been wasted. And there would have been zero benefit to the seller for lying.