Attorney Bruce Aydt, ABR, CRB, SRS, is a national real estate educator, a Missouri real estate broker, and past chair of the NAR Professional Standards Committee.
You can send him your ethics questions at firstname.lastname@example.org.
Question: I just learned that the seller of a house I recently listed might have to go the short-sale route. I don’t feel comfortable continuing with the listing without saying anything about it in the MLS. Does the NATIONAL ASSOCIATION OF REALTORS®’ Code of Ethics require that I disclose this possibility?
Answer: The Code doesn’t have a provision that addresses disclosure of a potential short sale, but Article 2 states that "REALTORS® shall avoid exaggeration, misrepresentation, or concealment of pertinent facts relating to the property or the transaction."
In addition, the Code of Ethics and Arbitration Manual provides guidance on the disclosure of "pertinent facts," saying that "any material fact that could affect a reasonable purchaser’s decision to purchase, or the price that a purchaser might pay, should be disclosed as required by Standard of Practice 2-1 if known by the REALTOR® unless, again, otherwise prohibited by law or regulation."
Is the potential short sale a "pertinent fact"? In a short sale, the seller cannot convey clear title because the amount of debt, along with the sale costs, exceed the anticipated sale price and the seller lacks the assets to make up the shortfall. Thus, the lender must reduce the balance due on the loan in order for the seller to convey title. The seller’s inability to perform the terms of a sale contract without the lender’s action could affect a buyer’s decision to purchase the property, and therefore would be pertinent.
Even though there’s nothing explicit in the Code about disclosure of potential short sales, your MLS might have rules in place. Several states have license law standards that require a licensee to disclose any "adverse material fact," which includes a party’s ability to perform the terms of a sale contract.
The buyer will learn of the short sale eventually. Your MLS and state rules, along with guidance from the Code, will help you determine if you should make the disclosure up front.
Send your ethics questions to ethics@REALTORS.org.