Auction.Com Forced-Placement Policy; Know Your Sellers’ Rights

NationStar Policy Synopsis           
After a ratified contract has been submitted to NationStar Mortgage for short sale approval, NationStar will send a message to the contact on the short sale discussion to require that the property be resold by auction using Auction.com as “market validation” of the price. The current ratified contract will be considered the opening bid. 
Seller’s Rights      
It is imperative that all parties involved in the settlement of a short sale understand that NationStar may only place a short sale file into a queue on the Auction.com website to be resold on the open market if the Seller consents to this forced placement. 

Realtors® representing clients who have property subject to a short sale should be aware of a policy adopted by NationStar Mortgage. Once a ratified contract has been submitted for short sale approval, NationStar requires that the property be resold by auction using Auction.com, using the current ratified contract as the opening bid. 

The use of the Auction.com portal to sell a property, which is already subject to a ratified contract, will open up the Seller and Listing broker to a beehive of liability. When a real estate contract is ratified subject to a short sale approval, the purchaser on that contract receives “equitable title” to the subject Property. This equitable title acts as an encumbrance on the property, giving that purchaser the right to force the seller to convey the title to the purchaser by the terms of that contract. 

The purchaser has rights. If a purchaser was put on notice that Auction.com was being used in a short sale to ostensibly sell the property subject to the purchaser’s equitable title, then that purchaser could file suit for “specific performance.” That purchaser could hire an attorney, place a lis pendens on the property (blocking it from any further sale until the litigation was concluded) and sue the seller for breach of contract, the listing broker for breach of duties owed to the purchaser, and all parties involved (seller, listing broker, NationStar, and Auction.com) for tortious interference.

While the contract may be subject to short sale approval through a short sale contingency, there are mechanics through which the contingency’s ability to terminate the contract must be triggered. When those mechanics are not followed, then the seller’s right to unilaterally terminate the contract is not inherent. Ultimately, the purchaser has a viable claim against the seller and listing broker for violating the terms of their agreement, as well as the listing broker’s common law duties to the prospective buyer (explained below). 

When a listing broker authorizes and participates in the Auction.com process on property that is already subject to a ratified contract, then that licensee can be found liable for violation of Virginia statutory law governing candor toward buyers. Under Virginia Code § 54.1-2131, a licensee engaged by a seller has the duty to treat buyers “honestly” and not give them false information. If the licensee for the seller participates in what amounts to a double-sale of the property, then that listing broker could not only be found liable under this Code provision, but the liability could amount to tortious interference. 

This is because the listing broker has knowledge that this purchaser’s contract is ratified and has taken the affirmative step to disclose this purchaser’s contract and related information to NationStar for approval. If the listing broker then begins offering the property for sale to new buyers with the goal of obtaining a higher offer, then that listing broker has intentionally put the purchaser’s rights to the property in jeopardy. If the purchaser did not consent to this resale of the property, then the listing broker’s actions breach that duty of “honesty” noted in § 54.1-2131. While the listing broker does not owe fiduciary responsibilities to the purchaser, the listing broker may not undertake intentional actions with another party (i.e., the prospective buyers through Auction.com) to conspire to usurp the original purchaser’s offer.  

If a property is sold through Auction.com to a purchaser, then that purchaser will have a problem with the property’s title. As previously mentioned, a ratified contract grants the purchaser “equitable title” to the subject Property. A sale through Auction.com to a second purchaser would mean that this second purchaser could only take title subject to the original purchaser’s contract and equitable title. If a settlement agent were put on notice that the original purchaser planned to assert rights to the property, then neither marketable nor insurable title to the property could be conveyed at settlement.

The title would be subject to a claim by a third-party (the original purchaser) with a possible superior claim over the second purchaser. Many would argue that NationStar could simply void the original contract if a better one came along. However, NationStar is not a party to the contract. The seller would need to take the steps required by the short sale contingency to properly void the contract. However, since there would be proof that the seller took steps to begin negotiations with a second purchaser before the original purchaser’s contract was voided, this could expose the seller and the listing broker to liability. The property itself could also have serious title deficiencies. 

If a listing broker/seller turns over control of the sale of a property to Auction.com on a short sale, there is a heightened possibility that the property would be lost to foreclosure.  Lenders enjoy the benefits of liquidating defaulted property through a “dual-track” process, in which a foreclosure can be pursued while a short sale is simultaneously being processed. In many instances, the short sale department and the foreclosure department of the same company are not aware of what the other is doing. 

So, while a seller waits for NationStar’s short sale department and Auction.com to properly commence, process and negotiate the resale of the property,  NationStar’s foreclosure department can be preparing concurrently to foreclose on the property. By turning over the authority of sale of the property to NationStar and Auction.com, the listing broker/seller will lose control over the transaction.

There are recorded instances of lenders foreclosing on properties after short sale approvals have been issued, and even after a short sale has been approved and closed. The dual track process is a dangerous reality. And, by turning over control of the sale to NationStar and Auction.com, the listing agent and seller increase the possibility that the property could be lost to foreclosure. (NationStar and Auction.com representatives have stated that all foreclosure activity will be halted while the property is resold through Auction.com.) 

If a listing broker participates in a resale of a property through NationStar’s Auction.com process, then that listing broker could become liable to two selling brokers for two commissions. The listing broker is bound to pay a selling broker the commission amount listed in the property’s MLS listing. A second purchaser through Auction.com’s website portal could also be represented by a selling broker.

The Auction.com website allows prospective buyers to register a selling broker on their behalf. If the property is subsequently resold through Auction.com to a new purchaser, then the listing broker will owe that second purchaser’s selling broker the offered commission. Additionally, the first purchaser’s selling broker could make a claim that because a ready, willing, and able purchaser was procured, and because the listing broker resold the property while the first contract was still viable, then the listing broker owed a commission to the first selling broker as well.

The listing broker could be found liable to pay two separate commissions to two separate brokers, or at the very least, could be involved in a lawsuit over payment of the commission on the original purchaser’s contract.    

What are the seller’s options? The Seller can simply say “No” to NationStar, and refuse to authorize the use of Auction.com to resell the property during the workout of a short sale. The seller should issue a written statement along the lines of:  “Seller does not consent to the use of Auction.com to resell the property on this short sale. Seller asks that NationStar make a decision on the contract as submitted.”  If the seller does not consent, then NationStar has no authority to use Auction.com. 

Todd Condron is an attorney with Leggett, Simon, Freemyers & Lyon, PLC