Short Sale Legal Issues – Part #1

Short Sale Legal Issues  - Part #1

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

This series of posts 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 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 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 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 for both agents and sellers.  Rather than just post it once as a blog and hope everyone on sees it here, I came up with the idea of making it a series to increase the odds of more people 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.  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? 

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?

NOTE: if you'd like a copy of my whitepaper Short Sale Legal Issues Affecting Real Estate Agents post a comment on my Facebook Fanpage www.facebook.com/TheLendingEdge and once the series is complete, I'll do my best to send it to you.

If you're a real estate agent, send me an email request for the whitepaper and then I'll then send you a request to join the ActiveRain network for real estate professionals.  Once you use my invite to join, I'll immediately send you the whitepaper as a thank you. 

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