I have to believe that a good agent can figure out from the public record information whether or not it will be a short sale when setting the asking price or even when accepting your offer. The amount owed on all mortgages is typically listed there for all agents to see, If the asking price is less than that, it will wind up being a short sale. UNLESS the owner has the funds to cover the difference. If the seller does not reveal their financial situation in that regard to the agent, they may not know for sure that it is or will be a short sale.

But the seller had to have known. I'd try to put pressure on the seller to get that money back pointing out that they misled you when accepting your offer and drop hints about hiring a lawyer. That may be enough to get the money for inspections from them before you have to spend the money on a lawyer.

If this deal does not work out, in the future you can ask your buyer's agent to look up the public record information for the house so that you know what you are up against.

Good Luck!

Short sale disclosure is a tricky area. An agent is required to disclose any information that he or she knows to be true about a particular property. Here's the rub. Did the agent "know" it was or might be a short sale? If the agent didn't ask the Seller about this possibility, than the agent might not have known it might be a short sale. Most Sellers are too embarrassed to bring it up themselves. They sometimes think 'if I can get the right price, I'll be Ok'. Sellers sit in denial until it's too late. It's not until the offers come in, that the agent finds out it will be a short sale. BUT, once the offer is received, someone should have had an idea that this was going to be a short sale. This information should have been given to you before you had a home inspection, never mind before getting to the P&S. As a listing agent it is important to have this conversation with the Seller. I am a Certified Distressed Properties Expert. As part of my standard interview process with any Seller, I raise the question of a possible short sale situation just to make sure I know where I stand. As a buyer's agent, I never assume anything, again, I always ask the listing agent if this is a short sale or has the potential to be. I also do a little research on the registry website and research the current mortgage owed on a particular property. It doesn't always give you the answers you want, but if I see a mortgage was given in the last 8 months or so, I figure the Seller might have refinanced. When I run my comps and see the amount owed is close or more than market value, this tells me this might be a short sale situation. So when I sit with the Seller, I can gently bring up this possibility and explain to them they have options that can save them from foreclosure. Its been a week since your post, what's happens since then?

Pertaining to short sales and foreclosures, currently there are two required fields on the MLS listing sheet: Lender Owned and Short Sale (with Lender approval required). Both questions have 3 possible answers, yes, no, or unknown. All contingencies required for the sale of a home must be disclosed according to MLS regulations. Give yourself the representation you deserve with a Buyer's Agent who will counsel you through future transactions.

If the listing agent and seller knew the property was going to be a short sale they should have disclosed this in advance and so you might have recourse in that situation. Your agent could also have done some due diligence on the property prior to you making the offer which might have given you a small heads up that the offer price was in short sale territory. You simply look at the assessors data and find out what their most recent loan was for and if it is near or higher than their loan amount that is short sale territory - just a little trick that gives an indication.
Not to mention you are not obligated to give the seller your inspection report - you own those.

There is nothing illegal or unusual about the situation! Oftentimes, a sale becomes a short sale while on the market simply because the offer submitted is less that the asking amount and less than the amount owed by the Seller to his/her lender. If the seller can no longer afford to keep the property on the market he may agree/ask the lender to approve the sale as a short sale. You may be lucky to be the 1st discovering such a deal. If you walk away, yes you would have wasted what you spend on the inspection, but that has nothing to do with the Short sale.

Well, the seller when they list their property for sale knows based on seller's estimate net proceeds, out of the transaction, if it is a short sale or not. If it is based on the asking price and subtracting all the expenses, then the seller's agent must disclose that and I believe they must list it as such on MLS. However if your offered price make it a short sale, then they must disclose to you but not on the MLS based on the asking price, since they might be getting a higher offered price and then possibly not be a short sale. Also maybe it was a deduction after the inspection that made it a short sale. The info that you provided in your question, is definitely not enough for me to give you a clear answer. Do not know all the details. Did you use a buyer's agent?
Hope my answer was helpful to you.
Yannis Tsitsas, CBR, Realtor

You should probably consult with your buyers agent and/or attorney. The non-disclosure of the short sale situation is a material fact that is important. What options are available to you & your situation is best evaluated by an attorney. Sellers & listing brokers are supposed to disclose material facts that are of importance to a buyer in deciding whether or not to make an offer.

I'm not sure about the legality, but the MLS does now require that this information be disclosed. I do believe that ethically speaking, it should have been disclosed. I would also follow-up with the real estate board. Here's the catch ... it may have only become a short sale after the price negotiation. Good luck, Mike