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The article below describes the seven mosy common reasons short sale agents are getting sued. At my law firm, we see this every day.
Brokers Foresee an Increasing Number of Lawsuits Related to Short
Sales
Almost 55 percent of survey respondents indicated that short sales were the basis of a
significant number of current disputes. Moreover, 76 percent of those who ranked this
issue placed it among the top three of their expected future issues. This was just one of the
significant findings reported in the recently-released 2011 Legal Scan: Legal Issues Facing
Real-Estate Professional, published by the National Association of Realtors® (NAR)
The Legal Scan was initiated by the Legal Affairs Department of NAR in 1996 and first came
out in 1997. Since then it has been updated every two years. "For the 2011 Scan, a survey
was e-mailed to 2055 selected individuals in the real estate industry ... ." Recipients of the
survey included selected (not random) agents, brokers, real estate attorneys, real estate
educators, and members of NAR's Risk Management Committee. There was a 19 percent
response rate to the survey.
Agency retained the top ranking among the groups of issues that caused disputes. Within
that general category, fully 83 percent of respondents placed dual agency among their top
three current issues. Typical of respondents' comments was this: "Licensees are not well-
enough schooled on what they can and cannot do as dual agents! They don't know well
enough what they can say, or must not say between the parties." Breach of Fiduciary Duty
also ranked high within the Agency category, with 71 percent indicating it was among their
top three issues. A typical respondent comment was "Too many agents forget who they
work for and the full bundle of responsibility we owe to the client."
Another traditionally high-ranking category of problem areas is Property Condition
Disclosure. This includes both physical and non-physical conditions, so short sales were
included here. Of the 55 percent of respondents who indicated that short sales were the
basis of a significant number of disputes, 76 percent placed them as among their top three.
With respect to the "traditional" problem of failing to disclose physical defects, it was noted
that short sale sellers tended to see no benefit in disclosing problems. Moreover, the typical
insistence on as-is sales in these situations "has resulted in a decline of quality of seller
disclosures."
Disclosure problems also arise from the failure to disclose that a property is, or is soon likely
to be, in a short sale situation. Additionally, problems arise in the short sale arena because,
as one respondent put it: “Too many agents are dabbling in short sales without training and
are not properly advising sellers of options and recommending legal counsel.” There seems
to be broad consensus that future lawsuits will be the result of such situations.
REO sales are also leading to problems. Nearly 60 percent of respondents indicated that
they believe that REO-related disputes will increase over the next two years, and 76
percent said they believe it will be among the top three issues they will face. Again, lack
of disclosure is the big problem; although with REOs that is more likely to be related to
physical than transactional issues. Survey respondents blame not just the banks, but also
REO listing brokers for frequently failing to disclose material defects of which they had
knowledge.
An interesting aspect of the survey results is that many participants indicated a strong need
for training in various areas, even though these may not have among the most frequent
causes of disputes. Primary among these were RESPA, Fair Housing, and Anti-trust.
The survey also queried about cases leading to damages. New York was the winner here,
reporting 11.39 percent of the total. Pennsylvania and California followed with 8.86 percent
and 8.23 percent respectively.
What categories of suits cost the most? The leading damages award was a Breach
of Fiduciary Duty and Fraud case. The award was $2,709,587. A Fair Housing (Race
Discrimination) case came in second with an award amount of $2,416,000.
Be careful out there.
Short Sales: 7 Legal Pitfalls
In many areas, short sales are the biggest game in town. But you don't want to jump into this
niche willy-nilly.
April 2009 | By Robert Freedman
In addition to educating yourself on the ins and outs of these complex deals, you also need a
good picture of the legal risks that exist for you.
1. Misrepresenting tax consequences.
Although it's true that the federal government passed a law in 2007 directing the IRS not to
count mortgage debt forgiven by a lender as income, the provision is limited. It applies only to
purchase money; it doesn't apply to debt on a cash-out refinancing, and it doesn't apply to second
homes. There's also a dollar limitation, albeit a generous one ($1 million for married couples
filing separately, twice that for joint filers). "A lot of associates are telling people there are no tax
consequences," says Lance Churchill, a short sales specialist and trainer who operates in Boise,
Idaho, and San Diego. "But it's a limited law and you just need to be accurate about it."
2. Misrepresenting how secondary debt is treated.
Practitioners might mistakenly tell sellers that all the house debt is forgiven once the primary
lender approves a short sale. But that might not be the case, Churchill says. Holders of second
deeds of trust don't typically forgive the debt. More commonly, they accept a partial payment,
like $2,000; and rather than write off the balance, they sell the balance to a collection agency for
another few thousand dollars. In many states, these second loans are recourse, so sellers can be
caught by surprise when the collection agency contacts them a year later seeking payment of the
debt.
3. Acting on inappropriate lender requests for seller contributions.
It's not uncommon for lenders to go after money that the sellers have in the bank or in a
retirement account before they approve a short sale request. They'll sometimes seek to put the
onus on the real estate practitioner to get sellers to sign over a note for the amount they have in
the bank as a condition of sale. But in states where mortgage debt is nonrecourse, lenders have
no right to the money, and associates that suggest otherwise to the sellers might be later sued for
negligence.
4. Breaching fiduciary duty.
Investors are increasingly executing what's known as a "double close and flip," a type of short-
sale transaction that can leave practitioners exposed to irate sellers who say they got a raw deal.
Here's what typically happens: Investors insist on handling short-sale negotiations with the
lender, freeing up their real estate practitioner to concentrate on finding a buyer. During the
negotiations, the investors — often without the practitioner's knowledge — talk the sellers into
turning over the deed. Once the practitioner finds a buyer, the investors do a double closing,
buying it themselves at a deep discount and then flipping it to the buyer at the listed price,
making money on the spread. "The seller might feel he got less than he would have had the
associate done his job and not handed over negotiations to the investor," says Churchill.
5. Providing poor oversight of a loss mitigation company.
Companies that specialize in managing short sales promise to focus on the complicated details of
the short sale, freeing up practitioners' time to find buyers. But if you take a hands-off approach,
you can be charged with negligence if a deal falls apart. "A lot of these companies are fly-by-
night or have one person who's overworked," Churchill says. "Practitioners are coming back a
month later to find no one's even opened the file."
6. Lacking the required license to undertake loss mitigation.
It often makes sense for practitioners to take a two-pronged approach with clients facing a
difficult time paying their mortgage — first trying to help them accomplish a loan modification
(for a fee), and then finding a buyer if a modification doesn't work. But watch out. Depending on
your state, you could need a specific license, sometimes called a credit repair license, to earn a
fee for helping owners modify mortgage terms. Without having the right credentials, taking a fee
for loan modification assistance could be a criminal offense.
7. Facilitating transactions not listed on the HUD-1 form.
It's not uncommon for investors to offer incentives to sellers to move a deal forward, but lenders
typically frown upon sellers who walk away with money when they're supposedly taking a loss.
Investors sometimes work around this limitation by offering to buy something from the sellers
at an attractive price, such as a couch for $5,000. Associates who communicate these offers to
sellers can get tied into charges of lender fraud because the deals may be deceptive.
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