Can seller sue after busted short sale?

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Dear Real Estate Adviser,
We’ve been under contract to buy a short sale home. The seller’s agent is the listing agent and — we assumed — our agent, too. But she never communicated with us and has even been rather rude. As we got into it, we needed to change the agreement from a cash offer to a finance contingency, but the bank didn’t approve us in the end. Now the broker is telling the sellers to sue us! We are clueless as to how this makes sense.
— Craig W.

Dear Craig,
Some of the grief coming from the seller’s camp may be bluster, though many selling and buying parties — particularly desperate ones — have been known to sue over the slightest things in real estate deals. The seller’s broker, I might add, has no doubt seen many, many short sales fall apart over financing woes in recent years, so it’s not like this type of occurrence is a surprise.

However, just how much latitude the sellers have depends on the contract you signed and its contingencies. Since this was to be a straightforward cash deal at first, you may not have thought to add that financing-approval contingency. While all bar-approved contracts contain financing contingencies, that still doesn’t mean you signed one, of course.

By not having a buyer’s agent representing you, you relinquished a key line of defense and left yourself open to bullying and the present liability. A listing agent, by the way, has no obligation to treat the buyer as a client. In fact, that would be a conflict of interest. Only a bona fide buyer’s agent is obligated to represent the buyer’s interests and protect folks such as you from signing unfavorable contracts with few exit clauses or other protective contingencies.

What’s not clear in this whole mess is whether the seller agreed to modify your contract when you discovered you needed conventional financing, or if you just up and changed course without requesting such a modification. While it’s hard to accurately say, the seller may well be legally entitled to keep any earnest money you proffered.

They could be entitled to recover expenses they incurred from removing their property from the market in anticipation of your cash deal. That’s called suing for “specific performance,” which is a bit of a misnomer because such disputes are actually over nonperformance. In some states, including California, such real estate disputes must be mediated before they can go to court.

It’s important to note that an offer made on a house becomes a binding obligation once the buyer and seller sign and deliver it. It pains me to say this, but you might have to consult with an attorney who specializes in real estate contracts. In the meantime, get a copy of that letter of denial from the bank. And next time, use a buyer’s agent to cut yourself some legal slack.

Good luck!

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