Ethics of a Short Sale (Part 3)

Ethics of Short Sales (Part 3 of 3): A Home Buyer’s Ethical Decisions

by Karina Gafford
MilitaryByOwner staff write

In our previous two articles, we looked at the ethical decisions involved in the short sale process for a seller and for a real estate professional; here, we will address the ethical decisions involved in the buyer’s part of the short sale transaction. 

The Buyer

The buyer, just like the seller and the real estate professional, has his own set of ethical considerations in the event of a prospective short sale purchase. In short sale situations, cash is king according to Florida distressed property expert Joan Byrd.  This philosophy makes investors much more likely purchasers of a property than those who are seeking a primary residence. An investor is likely seeking the opportunity to either turn the property into a rental unit or "flip" the house by investing a further sum into improvements in order to sell the house at a profit later. 

Though it would be nice to think that younger families who otherwise could not afford to enter the housing market would have the opportunity to enter by purchasing an undervalued home through a short sale, there is nothing unethical about buying up homes as an investor, providing that the buyer—just like the seller and the real estate agent—does not act in a way that involves lying, cheating, or stealing. In order to act according to a good ethical standard, the buyer must do the following:

1)    Make an offer in good faith

2)    Disclose his financial situation to include any outside loans required for approval

3)    Must not be a close relation to the seller so as to avoid situations of nepotism. 

The latter, however, would also involve collusion on the part of the seller, as the seller would benefit directly from a short sale situation that involved kin. To better explain what this means, take the example where a seller only chose to accept a low offer from an uncle, despite many higher offers that would return a higher sum to the lender. In this case, then both the buyer and seller would clearly be cheating the system with the intent to deceive and steal. The buyer and seller could rationalize their actions, determining that others are engaging in such actions in order for the buyer to then either let the seller remain in the home or sell the property back to its original owner at the lesser price. Even if others were engaged in such actions, though, it is clearly ethically wrong. 

One particular instance in a short sale situation that involves an ethical dilemma involves the ability for a buyer to shop around, offering multiple earnest deposits in the hopes of receiving an approval for one of the offers. It is incumbent upon the real estate agent to hold the buyer’s offer in good faith and not continue to shop around for higher offers for the seller in the event that the lender does not accept the submitted offer, but it is also incumbent upon the buyer to act ethically, too, by not making an offer he does not necessarily intend to uphold. 

In many short sale situations, according to Byrd, a buyer will submit a good faith offer for a property with an associated earnest money deposit and then await a response from the seller’s agent who has submitted the offer to the lender. While awaiting the negotiation process—a process that can take multiple months—the buyer may grow antsy, believing that the lender will not accept the offer. In such an event, it is increasingly not uncommon for the buyer to make an offer on an additional property with the intention of only purchasing one single property, and not both properties. If the offer on the second property is accepted quickly, then the buyer may proceed with that purchase rather than with the offer on the initial property. In most states, the prospective buyer can simply send a written statement requesting to rescind his offer because he no longer believes it a good investment, and unlike in the case of a conventional real estate sale, the seller must refund his earnest deposit. The buyer now has a property; the seller has prospectively lost several months, and potentially made additional mortgage payments, while his home has been tied up in the negotiating process for the purpose of a sale with which the buyer did not, in good faith, proceed. 

Unlike in a conventional sale, earnest money held in the case of a short sale offer is, in many cases, more of a formality than an obligation. In some instances, the short sale contract will require that earnest money be held for a certain period, for instance, 60-days. However, given the plethora of houses on the market, and the respective scarcity of investors in the current economic situation, most investors will shy away from signing any contract that does not permit the refund of earnest money. In the event that the investor does sign a contract where the earnest money cannot be refunded with simply a written request, many additional opt-outs remain for the investor. Such opt-outs include determining that the property is a poor investment during the 10-day inspection period after an offer has been approved by the lender, or in the event that the offer is contingent upon an approval by the buyer’s lender, the latter can simply submit a statement that the property is no longer a good investment, too, even if there has been no change in the tangible value of the property. It’s very hard for the sellers, Byrd said. She explained that had a short sale situation last year that went through five offers that each required a return of earnest money. Another situation, she also explained, went through three offers before the fourth buyer finally came to the closing table. A short sale is anything but short!   


As we have learned from this series on the ethics of short sales, not only is it imperative that the seller, real estate agent, and buyer each make their own good ethical decisions, but it is also vital that no member of the party assists in aiding the unethical behavior of any other member of the party. However, as long as each individual takes effort to make sure that he is not lying, cheating, or stealing, then they are acting in good conscience, making good ethical decisions when conducting a short sale transaction.  

Related Articles:

Article 1 of 3: A Seller’s Ethical Decisions 
Article 2 of 3: A Real Estate Agent’s Ethical Decisions