Pending Foreclosures Can Put Agents in a Tough Spot

By Patricia Kime
Special to the Washington Post
Saturday, December 6, 2008

Real estate agent Marion Cloud received numerous calls on a three-bedroom ranch he listed in May in Arlington for $695,000. It sits in a family-oriented neighborhood, has a large yard and is less than two miles from the Key Bridge. After failing to receive any offers, he dropped the price to $650,000 in July.

Cloud could have drummed up interest by marketing the home as a pending foreclosure, which it eventually became when the owner fell behind on his mortgage payments. But he didn't tell callers about the mortgage woes, nor did he mention to potential buyers that an auction had been scheduled. Under Virginia law, he didn't have to. In the Old Dominion, real estate agents are required to protect their clients' personal and financial information, and they can't discuss pending foreclosure or "short-sale" situations unless their clients let them.

Across the Potomac, it's a different story: Agents in Maryland and the District also must safeguard their clients' confidential information, but once they know of a pending foreclosure or short sale, they are bound to tell potential buyers -- although the question of when is debatable.

With nearly 11,000 homes in default or facing the auction block in the Washington region, according to listing service RealtyTrac, the issue of what financial details can be disclosed is of growing importance -- to homeowners trying to protect their privacy, to buyers seeking all available information and to agents who must strike a balance between the two.

"From a disclosure standpoint, agents are between a rock and a hard place," said Tony Arko, an agent with Market Advantage in Sterling. "Certain information is confidential but at the same time, there's a lot of information the buyer is going to need, and usually they are wanting a response in a couple of days. If you don't tell them up front that it's in pre-foreclosure or a short-sale, an agent and the buyer might get ticked off. They feel like the wool has been pulled over their eyes."

The differences among the states' laws stem from their approaches to property and consumer rights. Virginia laws strongly favor property owners, while Maryland and D.C. laws offer wider consumer protection, explained Ann-Lewise Shaw, a lawyer with the Northern Virginia Association of Realtors, and Chris Darby, a lawyer with Counselors Title in Washington.

Virginia law requires that an agent "maintain confidentiality of all personal and financial information received from the client during the brokerage relationship . . . unless . . . the seller consents in writing to the release of such information."

In Maryland and the District, agents are required to disclose all material defects that are "known" or "should be known." Whether pre-foreclosure or pending auction status counts as a "defect" isn't exactly clear, Darby said.

Pre-foreclosure status, in which the owner is in default on his mortgage, isn't necessarily something that should be revealed during an initial inquiry, Darby said. "The information may not be accurate or up to date. The owner could redeem the mortgage, bringing it current, before going to sale. Lots of things can happen. It's not necessarily something that would delay a transaction."

Timing also is an issue, Darby said. In Maryland, as in Virginia, agents are bound to "treat others the way they'd like to be treated." If a homeowner faces auction and needs to ask the bank for a delay or approval on an offer -- two factors that could delay prompt settlement -- then agents must disclose, he said.

"Generally, it's preferred that material defects be disclosed, and by 'material defects,' this means anything that might affect how a buyer approaches negotiations," he said.

Although Virginia homeowners don't have to disclose this information, many do anyway because they're likely to seek an extension from the bank if a contract is at hand. Such a request could delay the overall transaction. Not telling the buyer could blow the sale, Shaw said.

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