The idea of getting to the last best offer applies equally to all offers in short sale situations, not just those with escalator clauses. The big question in short sales is how much “better” does an offer need to be before it should be accepted by the seller and forwarded to the lender. Notice first, there are two steps: (1) accepted by the seller and (2) forwarded to the lender. If an offer is not accepted by the seller, there is nothing to forward to the lender. This is where the two-contract nature of short sales becomes important.

Short sales, we have already said, are about sellers reaching agreements with lenders about mortgages or notes. To get that agreement (the seller/lender agreement), the seller needs to show the lender a particular offer the seller has accepted and negotiate with the lender based on that accepted offer. There is nothing that says a seller must accept and forward every offer they receive. The seller does not lose control of their property just because they are seeking an accommodation on their mortgage or note. What happens instead when a seller seeks an accommodation agreement from a lender is that the seller takes on the duties of honesty, good faith and fair dealing with respect to the accommodation agreement. The intentional lack of honesty is called fraud.

Fraud is about deceit. It is about the intentional concealment of material fact. The material fact we are talking about in a short sale is the fact of another offer. That fact is material to the lender because the seller is asking the lender to reduce the payoff on the mortgage or note based on the price of an accepted offer. If I negotiate for the lender to take a $50,000 loss by hiding the existence of an offer that would substantially reduce their loss, I am not being honest, dealing fairly or performing the mortgage reduction agreement in good faith once I get it. Stated plainly, once a seller asks the lender to take a loss based on a specific offer, they cannot simply ignore subsequent better offers.

That the seller cannot ignore subsequent better offers does not mean they have to continue to market the property or take all subsequent offers. They may very well want to do those things, but we are talking about whether they have to do them. The seller’s obligation is honesty, good faith and fair dealing. Good faith, and fair dealing are, setting aside for the moment intent, basically the same thing as honesty. The simplest way to be honest is to make full timely disclosures of material facts.

In real estate, disclosures are often thought of as forms to be signed. Disclosure is actually just the act of imparting what is secret or not fully understood. The legal definition, when it comes to contracts and agreements, is: “obligation of parties to reveal fact which is material if its revelation is necessary because of the position of the parties to each other.” As soon as the seller starts negotiating with the lender to reduce the payoff on their note, a subsequent better offer becomes material because of the position of the parties to each other. Other than as the triggering event for the lender/seller negotiations on the mortgage or note, the underlying sale agreement has nothing to do with it.
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