What Happens When The Equity Isn't There, But The Contract Is?

Responsibility on the listing side…

Last week’s Rain City Guide discussion on Short sales got me thinking about some of the other things that are occurring in this market as well. Many homeowners have taken out a ton of equity and are either maxed out or upside down at this point, but some may not be aware of exactly how much they owe. When it comes to listing these properties – or any property, the listing agent should pull title, but also talk to the title rep and find out how much the property is monetarily encumbered by liens. Merely relying on the seller’s information is not enough to be truly diligent.

Take a seller who thought he owed X amount of dollars on his home. After being on the market for a while, the seller’s agent relied on that information to help when it came to reducing the price. A buyer came along and a contract was executed for the purchase of the property. One week before closing the listing agent calls the buyer’s agent and drops the bombshell: The seller actually owes quite a bit more than they thought. Instead of getting a nice chunk of change from their seller net proceeds, the seller will be short X amount of money to close.

Does this really happen?

You bet! Twice I have seen this happen personally and both times the listing agent had not bothered to check the actual amounts owed on the properties. Yes, a listing agent should be able to rely on the seller’s information, but as a matter of diligence shouldn’t they go ahead and take the extra step to get the full accurate information? Title has already been pulled in most cases anyway.

Sellers, you still have signed a contract:

It is helpful to know what you actually owe on your property before you sign a purchase and sale agreement to sell it. In order to stay within contract, a seller will have to come up with the short fall dollar amount to bring to the closing table.The NWMLS Form 21 Residential Purchase & Sale Agreement clearly states: “ Monetary encumbrances or liens not assumed by Buyer, shall be paid or discharged by Seller on or before Closing.

24 thoughts on “What Happens When The Equity Isn't There, But The Contract Is?

  1. You bring up such a good point.

    I had a very similar transaction awhile back – when we got to closing it turned out that the seller had to bring in about $5,000 when she felt she would be getting a nice profit out of her home.

    As it turns out, there was a 2nd on the property that the listing agent never asked about and the seller ‘was not aware that it had to be paid off at closing’.

    The seller ended up having to put the $5,000 on a credit card and for the life of me I don’t understand how the listing agent had the audacity to collect a full commission knowing it was her responsibility to have checked and advised.

    The unfortunate part is that the careless listing agents are probably not the ones reading this!

    Marcy Spieker

  2. Courtney,

    Good post and a good reminder. Since most buyers don’t want to be disappointed and go through a lawsuit, it might even make sense for the buyer to do some due diligence and check on this information as well. It might help manage expectations so they know they might run into issues with the sale — even if it is not listed as a short sale.


  3. Courtney,

    Here’s one I ran into years ago. The seller had originally bought the condo with his girlfriend. She took off when they didn’t have enough money to pay the condo fees. He went five years without paying his condo fees, and eventually couldn’t pay the mortgage payment or his car payment, which became another judgment on the condo. So she was LONG gone by the time I sold the condo as a short sale.

    I never met the girlfriend and he was “getting her signature”. Turned out he didn’t think it mattered if she signed (he was signing her name without my knowing it) because there was no equity.

    He thought, why call her to sign everything? She’s not making any money. In fact I think he thought maybe if he did manage to get a few bucks to move somehow, he didn’t want to split it with her.

    He shows up at closing with his girlfriend…but guess what? It was his NEW girlfriend posing as his old girlfriend. LOL! He didn’t know they were going to check her driver’s license. By that time I had gotten wind of it and found his old girlfriend, and I showed up at closing with his old girlfriend to everyone’s surprise.

    Fun times!

  4. Gene – As I am a numbers girl, I do try to pull this info for my buyer clients, but sometimes we have to wait for the title report until after mutual acceptance and the tax records are not always accurate. As a buyer’s agent it isn’t really part of the job, but I can see where it might need to become more the norm as more and more properties creep up to the top of their equity in liens.

  5. Ardell,

    That’s pretty hilarious (well, as hilarious as fraud can be)!

    How quickly will a condo association put a lien on a property for past due fees in WA? I assume the association needs to approve the sale in some way (to make sure fees are up to date)? I know when a friend of mine out east purchased a condo there was all sorts of fun at closing because the seller “didn’t realize” they were quite so far behind on payments.


  6. I can’t believe that in this day and age listing agents don’t ask all the hard questions they need to ask to acertain the pertinent financial information.

    How can you do a seller’s net sheet if you don’t know this information?

    And preliminary to going out to any listing appointment don’t you get a copy of the tax roll and the deed. If there is someone on title that isn’t present at the listing appointment, it’s time to start asking questions.

    Has there been a death? A divorce? Someone moved ahead or serving their country? Any of these circumstances give rise to many more questions that the listing agent should be asking.

    Kind of a funny story…I had a listing agent who had just received her copy of the preliminary title report after having listed a home which had been on the market for a few months and finally sold. The report clearly showed a Notice of Default with a sale date quite close and her question was…..”Why didn’t you tell me this?”

    My reply was….”We just did.”

    Most of the issues which derail closings can be detected well before a sale has been made, provided the listing agent is proactive.

  7. Pingback: Are you making your client homeless? | Rain City Guide

  8. Courtney-
    You are so right with your comment about people being unaware. It is also my 1st conversation with my seller clients. However, let’s remember, it’s not the general public that SHOULD be aware, that’s why they hire us. It’s THE AGENTS that should be aware and WHY AAREN’T THEY? Because of the total lack of education which brings up a whole new topic.

    I personally am so glad the education requirements will be incrasing, however, I don’t think that even goes far enough. I think it’s time we stop with the ‘tape’ed’ and force agents to take a few hours out of their ‘busy schedules’ to attend good quality educational classes.

    Some of the classes approved for clock hours in this state are a joke!

    How do we expect the publics impression of us to improve unless we self improve our industry?

    Thank you for this blog. I will certainly continue to monitor it.

    Marcy Spieker

  9. You are right, Marcy – * THAT * is a whole other topic:) Loving the new Twitter app here – just followed you today! Thank you for your input! It would be nice if brokers did do more hand holding when it comes to the “accounting” of a transaction.

  10. The fact that you are writing this just illustrates how many horrible agents there are still out there damaging clients. I could list a whole bunch of issues I have run into in just the last week, but my favorite is the listing agent that told me that he couldn’t tell me anything about the bank owned listing he has because he has never seen it.


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