In 2009, California Dept of Real Estate has posted an alert called “Consumer and Industry Alert(s) Regarding Short Sales Fraud, and Related Issues.” This document provided clear guidelines for realtors and consumers how to avoid and attacked unlawful practices while engaging in real estate short sales.

Recently DRE posted a new update which concentrates on four major areas of possible legal liability in short sales transactions. They are: 1. Breach of Fiduciary Duty, 2. Lender Fraud, 3. Violation of Agency Law and 4. Violation of RESPA act.

The document doesn’t clearly specify where such legal liabilities may occur but rather implies of a “potential liability” and mostly uses phrases such as “appears problematic, could be, raises questions” and similar expressions which may make you wonder but one thing is quite evident – any attempt to charge a buyer fees to short sale negotiators may put you in a hot water.

As a realtor you are very well aware that short sale negotiation is not something that is done over a cup of coffee. Usually, it takes time and effort to come to an agreement and it is a unique in each and every case. Because of the complexity a short sale transaction requires skills of an experienced professional and goes beyond traditional realtor training and service. Even expert agents have difficulty in mediating short sale process.

Let’s take a look at some of the updates from DRE:

Breach Of Fiduciary Duty:

Case A

If a listing agent mentions in MLS agent-to-agent remarks that offers will not be presented unless the buyer signs the Addendum which stipulates that the buyer will pay Short Sale Negotiator (SSN) specified fees. If offer is not presented for this particular reason (or it could be any other reason but how can you prove it was?) to the Seller, it could fall in the category of the breach of fiduciary duty. So, what should a listing agent do? It seems that the best course of action is to get in writing from the Seller that he/she requires Buyer to cover SSN’s fees.

Case B

If a listing agent specifies that Buyer has to request a specified credit for closing costs as a part of their offer. This is, of course, with a full understanding that Short Sale Negotiator will be paid from that credit. Seems pretty straightforward but California’s Department of Real Estate suggests that “then the SSNs may be involved in a ‘shell’ game. If that occurs, the Buyers’ interests might not be properly protected…”. What is this “shell game” DRE is referring to? It could be perhaps that SSN is not needed and the fees will be split with a listing agent. That certainly would be a ground for legal liability but does this really happen?

Lender Fraud:

1. If the Seller’s lender is not notified of the Buyer’s responsibility to pay Short Sale Negotiator. It can happened due to failure to include the Addendum to the submitted paperwork. It is required to be included in the package.

2. Buyer is willing to pay Short Sale Negotiator fees because the sale price is less than Fair Market Value. Therefore it can be viewed that lender pays for the SSN service, not the Buyer.

3. Payment doesn’t show in HUD-1.

4. Property mortgage holder (Seller’s lender) is not aware that Short Sale Negotiator payment is made to the listing office and that may violate lender’s allowable commission terms.

Violation of Agency Law:

Short Sale Negotiation Agency involvement must be properly defined and disclosed. SSN can not represent both parties, just like an attorney cannot represent both parties.

RESPA Violation:

This raises the question of whether SSN provides a service which is truly needed or provides with any value. In some instances this could be a legitimate concern but in our perspective it certainly has to be substantiated. Same logic could be applied to the value of the real estate agent services. Because of DRE’s unclear language this statement instead of being a helpful consumer protection tool could easily end up being a loophole for aggressive unscrupulous litigators.

Due to the demand for short sale option there has been an increase in numbers of professionals who specialize in this type of transaction, and that is a real help to both realtors and consumers. Can you find a non-paid volunteer who will lead a short sale transaction negotiation? Highly unlikely. So who will pay them for their valuable service? A seller who is almost broke and forced to enter short sale market? A listing agent who is already making reduced commissions? And according to DRE the buyer shouldn’t pay for it either.

This type of undefined Real Estate regulation doesn’t help anyone, especially consumers because a short sale is a time sensitive transaction where everyone wants to see it done fast and go on with their lives. It certainly doesn’t help current California’s real estate market which desperately needs every prop not to collapse even further. One thing we can agree with DRE is that there should be a full disclosure upfront, but that’s not new in real estate.

It seems as alert was published to warn both real estate professionals and consumers of impending liabilities and possible pitfalls but the situations in which these liabilities can be applied were not defined clearly enough and we hope that a new set of more defined guidelines will be presented in the near future.