Archive for October 2011
Short Sale Legal Issues Affecting Realtors
October 11, 2011 | 
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This article is meant to assist real estate agents & sellers in recognizing:
1. Legal & Tax Issues sellers are exposed to through a short sale.
2. The legal liabilities agents may expose themselves to when representing short sale sellers.
How did I come up with this idea?
I do a lot of networking which leads me to meet quite a few attorneys. Many of them seem to be getting into loan modifications and short sales and approach me for referrals. Besides direct referrals to homeowners, they all want introductions to real estate agents. When I ask why, almost all tell me how agents doing short sales are practicing law without a license and doing a disservice to sellers. Since I’m very inquisitive, I’ve been asking these attorneys to give me specific examples. A surprising percentage of attorneys can’t come up with specifics. Those that do, only have a small frame of reference. So, I started compiling a list and doing my own research, both by tracking down local legal experts and online.
This led me to create a white paper on Short Sale Legal Issues Affecting Real Estate Agents to distribute to my real estate partners. I got such great feedback that I decided to go into more detail with an article for both agents and sellers.
So, please read on and if you like it share it with others that you know. Also, definitely share your thoughts and experiences with constructive comments for the benefit of all!
Many real estate agents recognize the market is changing and short sales are becoming too numerous to ignore. Agents are jumping into the short sale market in a big way and several have really focused their business models on short sales.
Short sales will continue to increase due to the Obama administration’s stated goal, through its HAFA Program, of increasing short sales to decrease foreclosures. The government is giving upside down homeowners an incentive to short sale rather than foreclosure, so more sellers will be interested in short sales.
To set the stage, so to speak, for the legal & tax challenges on short sales, let’s cover some general challenges.
General Short Sale Challenges
There are several challenges for sellers and their agents when it comes to achieving a successful short sale:
• Sellers may be more interested in staying in the property as long as possible without making payments. This will affect their motivation in getting their agent what is needed to get the property sold. To make sure sellers are serious about selling, many agents are charging sellers a nonrefundable, upfront fee. Agents should make sure to get their broker’s approval if they choose to do this. Sellers need to understand why agents are doing this.
• Getting all the proper paperwork together can be time consuming. There is so much to putting together a short sale package and it all takes time. Time is money and if an agent’s not careful, they can spend too much time on a single short sale listing to the detriment of the rest of their business. Sellers should be aware of this and make sure they get their agent what they ask for ASAP.
• Lenders on the property seem to misplace paperwork at an alarming rate. Often this is probably used as an excuse due to personnel being overwhelmed with volume. An agent isn’t going to win against the lenders with this. A better strategy might be to scan the entire package and use a fax server type of program that allows the sending of a PDF via computer.
• Agents & sellers are often pushed by the lender to list a property at a price to cover what’s owed versus a realistic market price. The standard position of many lenders is that a property should be initially listed at a price equal to the mortgage balance. This can put an agent in a legal quandary as they have a fiduciary responsibility to their client seller not the lender. If a high starting list price leads to the property going to foreclosure sale before a buyer can be found, an agent could potentially be held liable if they didn’t take proper measures to protect themselves. An agent should check with an attorney about a waiver to use to address this situation. Sellers need to be aware of this and if they choose to follow the lender’s advice, it could make the short sale process that much more complicated and take longer.
• Getting price reductions approved can be tedious. Again if the seller is not serious or getting bad advice from their lender, the listing can turn into a waste of time. Agents may be able to have a seller sign a pre-agreed upon price reduction timeline to avoid this. An agent should check with their broker or an attorney to be sure this is legal in their state.
• Once an agent secures an offer from a buyer, it can take months for the lender(s) to approve it. See number 3 above about “lost” faxes. It also seems to take lenders quite some time to get Broker Price Opinions scheduled and to run their Net Present Value analysis.
• Second mortgages usually complicate matters greatly. The two (or more) lenders compete for the dollars available through a short sale. Even though the junior lienholders are aware they’ll probably recover nothing if the property goes to foreclosure, they’re also aware that the first lender will receive less in a foreclosure. They use this to leverage what they can recover on a short sale. The HAFA Program addresses this issue and it’s hoped it will reduce the frequency of this delay.
• Agents have to work with title companies to prepare mock HUD-1 settlement statements to accompany every offer submitted to the lender(s). This task is best left to a title company as they have the software to execute this and account for transfer taxes, pro-rated taxes and the like.
Need I go on?
Can you see how a short sale can take a significant amount of time to close?
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Will Traditional Real Estate Agents Push Short Sales?
Although both involved in the same market, the estate agent and short sale realtor are two very different beasts.
The estate agent works on a commission basis, meaning that it is in his best interest to sell the home for as high a price as possible. The actual price that the home is ultimately sold at is something that is agreed between the buyer and the seller and considering it is in the best interests of the seller to sell for as much as possible, this coincides with the wishes of the estate agent. Because of this, both the agent and the seller are likely to hold out for the higher price possible to maximize their profits.
Short sales are somewhat different however as the property has to be sold as a matter of urgency because the seller either cannot meet the payments, or they no longer wish to pay a loan that is worth more than their property. Anytime a home is sold for less than the loan value, the lender must agree to this because they are the ones taking the hit. The final decision on the price that the home is sold for is now determined by the lender and not the seller. In fact, the seller has no decision in the matter and often has no choice but sell to avoid foreclosure.
One thing that will turn a lot of traditional real estate agents away from the short sale is that it can take a great deal of negotiating to come to a deal with the lender. They must be able to strike a compromise between selling as high as they can, whilst encouraging the quick sale, to avoid the property from going into foreclosure and losing the deal altogether.
One of the main issues that a traditional real estate agent will have with a short sale is the commission received. With standard sales, the commission is agreed beforehand at a fixed percentage regardless of the price. Because however the lender is already agreeing to take a hit, they will be willing to pay considerably less in commission as they look to limit their losses further. The commissions in the instance of a short sale are paid by the lender and must be agreed upon when the short sale realtor submits his proposal.
Many estate agents might shy away from the short sale because they pay lower commissions and it takes some considerable skill to reach a negotiation with the lender. It might also at times be a harder sell for the agent because houses that are being short sold are likely to be in need of repair and maintenance due to the previous tenants not having the finances to maintain the property.
In addition, a short sale realtor must be licensed to do so which requires additional training and education, so many might simply not be legally qualified to do so. There are still a number of estate agents however who are qualified and experienced in the short sale and those who can short sell are able to take advantage of a market niche.
Real Estate Success From Agents on Top
Over the years I have had many people contribute to my success. I have had many companies tribute to my success, and I have paid money to many companies for leads. Last year I told my self… Enough! No more paying out money for leads. I have been in the business long enough I should be ok.
The fear sets in and what do I do? I pay more money to hire a coach to teach me how to grow my business without paying for leads. Ironic huh. Either way I am paying money. Well to make a long story short I hired a coach at the Mike Ferry Organization which suggested a few very inexpensive lead companies to keep me rolling so to speak. Agents on Top was one of them, and Arch Communications was another. Either way I have had a more enjoyable life lately and I have even made more money that before.
As time continues to pass and the market continues to stay slow what do we all do? What do we all think? Do we work short sales? Do we work REO Sales? or do we only work traditional sales? I have to admin I am guilty of working foreclosure sales. Yes I do subscribe to a few REO companies and yes I do get a lot of my business from them (in this market) but what should I do to continue to grow? How hard do I work? I guess the answer lies on me in the morning when I get up. Every day is a great day to sell real estate right?