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California Brokers Have Duty to Disclose that a Property Is Over-Encumbered And Cannot Sell for Listing Price

Some southern California brokers listed a home for $749,000 to $799,000. A buyer entered a contract to buy for $749,000, and proceeding to sell their own house so they could pay for the new house.

The Brokers knew, but did not tell potential buyers, that there were loans against the property for over one million dollars, and the sale would never close unless they solved a little $392,000 problem by getting a short sale approved or the buyers throwing more cash at the deal.

The court first noted that when a seller knows of facts materially affecting the value or desirability of the property which are known to only him and not easily discoverable by the buyer, the seller has a duty to disclose. Where the broker knows of these facts, he is under the same duty.

Even though a title search would have revealed the loans against the property, it would not have told the balance still due. Constructive notice of the deeds of trust did not preclude an action against the brokers. (Another blog discussing constructive notice can be found here.) The court concluded the brokers were obligated to disclose that there was a substantial risk that the seller could not transfer the property free and clear.

What were these brokers thinking? They knew they would never get paid unless a sale was completed. The opinion does not have any dates as to when this all happened; maybe it was the start of the downturn in the market, and it was the first time they saw an over encumbered property. They will pay for that mistake.
Phil Holmes v. Sieglinde Summer (4th Distr. 10/6/10) G041906;
2010 WL 3896726