BiggerPockets

Short Sale Legal Issues Affecting Real Estate Agents - Part #1

Sunday, May 23

This series of posts is meant to assist real estate agents in recognizing: 

1. Legal & Tax Issues their clients are exposed to through a short sale.
2. The legal liabilities agents may expose themselves to when representing short sale sellers.

MORTGAGE, EXPERT, MICHIGAN, BIRMINGHAM, BLOOMFIELD, DETROIT, ROCHESTER, ROYAL OAK, TROY

How did I come up with this series 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.  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 whitepaper 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 post it.  Rather than just post it once as a blog and hope everyone on ActiveRain sees it, I came up with the idea of making it a series to increase the odds of more members getting exposed to it. 

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.  So, agents will be dealing with them whether they want to or not. 

To set the stage, so to speak, for the legal & tax challenges agents face on short sales, let's cover some general challenges. 

General Short Sale Challenges

Working with short sales presents many challenges to real estate agents that they don't deal with on normal listings. 

• Sellers may be more interested in staying in the property as long as possible without making payments.  This will affect their motivation in getting you what you need to get the property sold.  To make sure sellers are serious about selling, many agents are charging sellers a nonrefundable, upfront fee.  Make sure to get your broker's approval though, if you choose to do 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.
   
• 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 are often pushed 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.
   
• 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 up a significant amount of an agent's time? 

Please comment on other issues that you've encountered that are NOT legal or tax issues. 

By the way, here's a teaser or cliff hanger, for the next post of the series: 

                      •-  What are the tax ramifications of 1099's for forgiven debt?
 

SHORTCUT NOTE: if you're the impatient type and don't want to wait to read the series as it's published, I'll send you the complete whitepaper for the series when you do all of the following: 

1. Post a constructive comment on one of the posts in the series
2. Reblog one of the posts in the series
3. Make me an associate of yours on ActiveRain: www.ActiveRain.com/dsygit
4. Join my Facebook Fanpage @ www.facebook.com/TheLendingEdge and send me a message requesting the whitepaper. 

If you're a Michigan agent, I'd also very much appreciate you joining a new AR group specifically for Michigan real estate professionals willing to share marketing and social media ideas with each other. 

http://activerain.com/groups/michiganmarketingideas

Thanks for reading and I hope you'll spread the word.

Added - the next post in the series can be accessed here.

Short Sale Legal Issues Affecting Real Estate Agents Part #1

Monday, May 17

Obama’s $1.5 Billion Housing Crisis Hush Money Plan

Sunday, February 28

President Obama’s recently announced allocation won’t do much for the Housing Crisis, something he’s well aware of.  He’s just trying to quiet his critics.

On February 19th in Nevada, Obama announced the $1.5 billion allocation to help the 5 states hit hardest by the Housing Crisis and with the highest percentage of upside down homes – Nevada (70%), Arizona (51%), Florida (48%), Michigan (39%) & California (35%).  Not only have these states suffered the sharpest drop in real estate values, all but Arizona are well above the nation’s unemployment average.

The $1.5 billion is coming from the infamous TARP bank bailout funds and will be distributed to housing agencies in the targeted states.  They’re being directed to use the money to assist jobless homeowners avoid foreclosure and those who are upside down in their homes.  Additionally, the money can be used to assist homeowners stymied on loan modification approval due to second mortgages.

The White House is pretty much leaving it up to each individual state on how they will use the money.  Florida, Arizona & Michigan weren’t even aware the money was coming and have no plans on how to use it yet.

What effect will this money really have on the Housing Crisis?

According to First American CoreLogic’s most recent report (for 3rd quarter 2009), released February 23rd, close to 25% of the nation’s mortgaged properties are upside down.  That’s an estimated 10.7 million homes.  What’s more, these upside down homeowners are in the negative by an average of $70,000.

So, Obama’s $1.5 billion would only help 21, 428 of the 10.7 million homeowners upside down.  That works out to be a whopping 0.2%.

Michigan alone has 513,278 upside down homeowners, so even if the full $1.5 billion came to Michigan, it would only help 4.2% of them.

Do you understand why this is just “hush money” and Obama’s just trying to pacify his critics?

This problem needs to be thrown back into the laps of the banks and Wall Street firms that created it in the first place through their greed.  The federal government basically bailed out the rich and stuck the middle class with the bill.

Make sure to tell your government what you think of this arrangement the next time you vote.