When to Divulge a Pending Foreclosure?
Disclosure Laws Vary and Aren't Clear-Cut

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.

"Given the realities of this market, it's actually not that much of an issue," Shaw said. "Sellers know that if they don't disclose and the deals become drawn out, buyers are going to move on."

Still, many Virginia agents won't discuss pending foreclosure actions with all who ask about them. Last May, an agent listed a home in north Arlington for more than $1 million. When the house showed up in The Washington Post's classified advertisements as a trustee sale, the agent received numerous calls about the pending auction. Because the reason for the property's default was a personal issue -- one of the owners was attempting to force the sale by refusing to pay the mortgage -- the agent deflected callers' questions.

The house sold as a normal transaction and the buyers never knew their purchase once was listed as a foreclosure. In this case, one of the owners gave permission for the agent to disclose the information, but she decided against it because she was confident the home wouldn't enter foreclosure. The agent declined to be named because she still represents the sellers.

"Knowing when to encourage your client to disclose and when not to is a matter of experience," said Arko, who was not involved in that Arlington sale.

The market pushes sellers to disclose would-be short sales -- that is, the sale of a property for less than the outstanding loan balance, which requires the lender's approval. That's because Metropolitan Regional Information Systems, which manages the area's multiple listing service, requires its members to reveal the situation to list such houses.

Because Virginia agents must ask their clients' permission to disclose that information, if they don't get the go-ahead, they can't market the properties via the MRIS service, drastically reducing visibility.

"If a client says 'I don't want anyone to know this information, you can't disclose,' that's fine, but I'm not going to be able to sell your house," Arko said. "Buyers usually are wanting a response in a couple of days. If you don't tell them up front that it could take weeks or months, they are going to get ticked off."

Gregory Bennett, owner of Exit Bennett Realty in Greenbelt, said he likes the short-sale disclosure requirement. "Right now we are getting a lot of calls on these deals from first-time home buyers and investors, and buyers know they need to be patient," Bennett said.

Until last year, many homeowners were reluctant to advertise their properties as short sales, mainly because they were embarrassed to be in debt, Arko said. But with the growing number of foreclosures and upside-down mortgage situations, the stigma is gone.

"A lot of people are underwater in their financial obligations. They are not just looking at this as a bad situation that they are trying to fix," Arko said.

Also, more short sales are receiving bank approval because banks don't want to be in the business of owning property, he said.

Sometimes, agents don't reveal a short sale, default status or pending auction because they simply don't know about it. Listing agents often require their clients to sign statements regarding their mortgage status, but clients can deceive their agents or can slip into default and not say anything. In addition, lenders can initiate trustee sale proceedings without informing the real estate agent.

Cloud, for one, was unaware that his Arlington listing was marked for the auction block until he learned of it from a reporter. The Keller Williams agent said he then tried daily to contact the bank, but his calls weren't returned.

"You get no response from these banks," he said.

In late November, Cloud received an offer on the house and said he spent days on the phone with lenders and trustees trying to halt the auction sale.

"You have to call first thing in the morning or right before the end of the day, and then when you do get through to the banks, it's odd because you almost feel like you are inconveniencing them," he said. "They give the impression that they don't care."

The lack of communication between lenders and agents is a common complaint. Agent William Shields of Re/Max Colonial Homes said he tried to show a listing in the District on Nov. 11 that was scheduled to go to auction on Nov. 12. But when he arrived at the property, he found that the trustee had removed the lock box and he couldn't get into the house.

"I've called and called. We have people wanting to buy. The market is slow, but it's not that slow," Shields said. "If the banks moved more quickly, the market wouldn't be that bad."

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