SHORT SALES: HOW TO HANDLE
By William L. Jansen
October, 2011 Corte Madera, California ÂŠ Copyright Broker Risk Management 2011
SHORT SALES – HOW TO HANDLE Table of Contents Page (s) SECTION I. SHORT SALES – AN OVERVIEW
4 - 13
Practice Tips for Listing Agents Prepayment Penalties Cash to Close Seller Alternatives Reality Check Listing Form Working with Lenders (and Sellers) Commissions Submitting Offers to Lender
5 5 5 5 5 6 6 7 7
Mortgage Assistance Relief Services (“MARS”) What is “MARS”? Requirements Forms Compliance Practice Tips for Listing Agents
8 8 8 8 8 9
Practice Tips for Buyer Agents Check for Short Sale Discuss with Buyer Purchase Agreement Clause Review Preliminary Title Report Other Offers Commissions
10 10 10 10 10 10 11
Short Sale Information Advisory Things Not to Do
SECTION II. ISSUES FOR LISTING AGENTS Listing Property with a Recorded Notice of Default Selling Broker Compensation Handling Offers Practice Tips for Listing Agents Is Seller Still Liable 5+ Unit Properties
14 – 17 14 14 15 16 16 17
SECTION III. ISSUES FOR LISTING /SELLING AGENTS 18 – 29 Short Sale Negotiators: Practice Tips for Listing Agents Experience Documentation Fees and Compensation Advance Fees
18 18 18 18 19
Buyer to Pay for the Short Sale Negotiator (“SSN”)? Charging the SSN Fee to Buyer’s Agent Charging the SSN Fee to Buyer Practice Tips for Buyer Agents
19 19 19 20
Practice Tips for Brokers/Managers
Short Sales with More Than One Lender Payments Outside of Escrow Adequate Notice to 1st Lender of Payment to Second Practice Tips
22 22 22 23
Short Sale Flippers Handling Home Equity Sales Act Transactions Tenant Deposits in Short Sales
24 27 29
SECTION IV. ISSUES FOR BUYER AGENTS Writing the Offer Practice Tips for Buyer Agents Buyer Wants to Cancel – Found Other Property Practice Tips SELLER SHORT SALE ADVISORY FORM
30 – 32 30 30 30 32 33 3
SHORT SALES – HOW TO HANDLE This Short Sale “White Paper” incorporates all individual Weekly Practice Tips as of October, 2011. This document is attorney-client privileged and for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices. Copyright© Broker Risk Management 2011 I. SHORT SALES – AN OVERVIEW A. BACKGROUND A “Short Sale” is a sale where a lender agrees to take less than the full amount due on the loan on the property. If there is more than one lender, it is the junior lender (as measured by time of filing of the deed of trust) who is in the greatest danger and should be willing to take less than the full amount due. The reason for this is that, if there was a foreclosure by the holder of the most junior lien, they would not get the full payment. If there was a foreclosure by a senior lender, such as the holder of the first, the junior lienholder(s) could get foreclosed out, potentially getting nothing. Institutional lenders understand this, and usually do not want to take a property back as a foreclosure into their Real Estate Owned (“REO”) department, since this is an expensive process and looks bad on their record with the regulators. They will usually work with you, but you have to find the right person to talk to, usually a vice president or department head. If the junior lienholder is a hard money lender, friend or family member, you may find it difficult or impossible to negotiate with them. You may not have a saleable listing. One phone call to that junior lienholder may make that clear. Listing and selling agents should be aware that:
Lenders are under no obligation to agree to a short sale; although most institutional lenders will actively try to avoid a foreclosure by working with the seller/borrower on a short sale.
Lenders are under no obligation to process a request for a short payoff within any particular timeframe. So, sellers, buyers and agents must be prepared for a process that may take weeks, or even months, regardless of the time frames in a Purchase Agreement.
With the exception of certain conforming loan lenders who are required to follow commission guidelines, lenders are under no obligation to agree to a short payoff demand that will allow brokers to be paid a commission. However, most institutional lenders will agree to a payoff demand that will allow brokers to receive a commission, if not necessarily the full commission agreed to by seller.
PRACTICE TIPS FOR LISTING AGENTS: 1. To avoid the problem of a short sale, or at least anticipate it, at the time of taking a listing, go over the existing financing and indebtedness on the property with every seller. Begin the preparation of a Net Sheet. Be careful to be as accurate as possible with the Net Sheet as this will be a key document used by the seller’s lender in determining the short payoff amount. Ask about any liens, judgments or attachments. Get the Preliminary Title Report (“PTR”), or a Property Profile, from escrow early and review it to see if there will be enough proceeds from the sale to pay off all recorded liens, judgments and attachments – as well as your commission. If not, discuss with the seller before you proceed. Ask if seller is current on loan payments and, if not, determine how many months seller is behind. These missed payments plus penalties will be accrued to the payoff amount due to the lenders. Start early to resolve the problem. 2. PREPAYMENT PENALTIES: Be sure to include any prepayment penalties into your calculation, since this can take a significant amount out of seller‟s proceeds. 3. CASH TO CLOSE: Do a detailed “net sheet” showing all closing expenses to determine how “short” the projected sales price may be. If the amount is not too great, discuss with your sellers whether they have the ability, and whether it might make sense, to bring cash to close the escrow to avoid having to do a short sale. If your sellers state that they are willing to do so, document that in writing since: (a) technically, this will not be a Short Sale; and (b) there will be enough cash to close the sale and cover all closing expenses. Advise your sellers that, based on their representation, they will be bringing sufficient cash to close the escrow so you will not advertise their property as a short sale. A good idea would be to actually put this in the “Additional Terms of”, or in an Addendum to, the Residential Listing Agreement. 4. SELLER ALTERNATIVES: A seller has other options to a short sale, such as: (a) the seller/borrower may be able to negotiate a “Short Payoff” without a sale of the property; essentially a restructuring of the debt; (b) the seller/borrower may ask the lender to accept a “Deed in Lieu” wherein the lender agrees to accept a conveyance of the property in satisfaction of the loan; (c) a seller/borrower may even prefer to allow a foreclosure under some circumstances; OR (d) bankruptcy. Do not advise sellers regarding these alternatives: sellers must be sent to their legal and tax advisors in making these decisions BEFORE SIGNING A LISTING AGREEMENT ON A SHORT SALE. 5. REALITY CHECK: Before proceeding with taking a short sale and expending your time and expense, assess the likelihood of actually being able to accomplish a short sale given
the amount of indebtedness, who the lenders/creditors are, and the market for this property at the projected list and sales price. 6. LISTING FORM: Give your seller a copy of the “Short Sale Information Advisory” (ZipForms form SSIA) and have seller sign it prior to signing a listing agreement. 7. If you choose to help your seller negotiate a short sale with a lender (you have no obligation to do so but most sellers don‟t know what to do), some lenders will not talk to you without written authorization. FORM: You can get that authorization using CAR form “Authorization to Receive and Convey Information” (ZipForms ARC).
8. Advise your sellers that the lender will want documentation, which may include: a “hardship” letter, tax returns, W-2‟s, pay stubs, a list of other assets, etc. Remind your seller that this information must match the information on the loan application. If the loan application was wrong, the lender might charge that there was lender fraud when the loan was taken out. 9. Lenders will usually report the short sale to credit reporting agencies, which will reflect negatively on the seller/borrower‟s credit report for seven years. If the lender is agreeing to a short sale, ask them if they are willing to show the file as the more favorable “paid in full.” Most will not, so discuss this with your seller and get their approval before proceeding with the lender. 10. You may be able to negotiate even with senior lenders for removal of penalties and other added fees to help get the total of the demands into escrow reduced. It‟s worth a try. 11. If sellers have any questions about the above, they should be sent to their tax advisor or attorney. Be careful not to refer your seller-clients to mortgage foreclosure consultants who charge a fee (NOTE: It is illegal for mortgage foreclosure consultants to charge a fee in advance of providing services); many of these people are less than honest and you could incur liability if these consultants damage your clients. 12. The fact that this is a short sale must be disclosed to a buyer. This must be done, in the purchase agreement; however, good practice would be to alert a prospective buyer and the buyer‟s agent prior to the writing of an offer so they are not taken by surprise at the time of the contract ratification. 13. Since the purchase contract must state that this will be a short sale, and that close of escrow by seller is conditioned upon the successful negotiation with the lender(s) to demand not more collectively than the sale proceeds, net of closing expenses including commissions, ALWAYS use the CAR “Short Sale Addendum” (or in the PRDS region, use the PRDS Short Sale Addendum.) 14. Sellers should be advised that there can be adverse tax consequences to seller as a result of a short sale to the extent that seller receives relief from mortgage debt by the lender in a short sale unless the property loan qualifies for the federal and California exclusion from 6
this tax as a “Qualified Principal Residence Indebtedness,” which is defined as debt incurred in acquiring, constructing, or substantially improving the residence (up to $2 million) plus other criteria. All such relief from mortgage indebtedness is taxed by the State of California. Send your sellers to their tax advisors for advice on this subject. FORM: CAR form Short Sale Addendum (ZipForms Form SSA) covers items 14 and 15, above and should be incorporated into every short sale purchase agreement. FOR FURTHER INFORMATION: See the CAR Legal Memorandum entitled “Taxation of Foreclosures, Deeds in Lieu of Foreclosure, and Short Sales” at http://www.car.org/legal/tax-folder/taxation-foreclosuresshortsales/ 15. COMMISSIONS: If you anticipate that the sale will or might be a short sale, place a conditional offer of compensation in the MLS broker comments, such as: “Short sale – subject to lender approval. Any reduction in total commission received will be split evenly between Listing and Selling Brokers.” If you are taking a listing which might, or might not, be a short sale depending on the final sales price, you still want to protect your commission in the event you are ratifying at a price which will make the transaction a short sale by putting the following in the MLS confidential remarks: “If this is a short sale – subject to lender approval, any reduction in total commission received will be split evenly between Listing and Selling Brokers.” Or, alternatively, you can propose some other arrangement as to who absorbs any shortfall in total commission received. It would appear, however, that an even split between listing and selling brokers would be most equitable. FOR FURTHER INFORMATION: CAR has good information online entitled “Short Sale Advertising” at: http://www.car.org/legal/advertisingfolder/short-sale-advertising/ 16. SUBMITTING OFFERS TO LENDER: Once you have submitted an offer to the lender for consideration of a short payoff by them (and the contract is contingent on lender‟s approval of a short payoff as it should be), continue to market the property. With your seller‟s permission, if you receive another offer, or offers, you should ratify those in backup position and submit those offers to the lender for their consideration as well. The lender has the right, for example, to choose to reject the first offer on their desk and accept a later, better offer. In such a case, the first offeror‟s contract is effectively cancelled (and should be mutually cancelled in writing) based on the Short Payoff contingency, and the second offer accepted by the lender for a short payoff proceeds forward. A higher offering price may benefit your seller by making the lender more willing to participate in the short sale and/or reduce. NOTE: The ZipForms form Short Sale Addendum requires seller to notify buyer if any accepted backup offers or other subsequent offers are submitted to seller’s lender.
17. MORTGAGE ASSISTANCE RELIEF SERVICES (“MARS”) A. WHAT IS “MARS?” The Federal Trade Commission enacted rules called Mortgage Assistance Relief Services (MARS) for real estate agents and others who negotiate short sales (and loan modifications, deeds-in-lieu, etc.) on behalf of borrowers/sellers. These rules became effective January 31, 2011. B. REQUIREMENTS: Under the MARS regulations, real estate agents who provide, arrange for, or advertise short sale negotiation services for short sale sellers must comply with the MARS rules, including, but not limited to, certain disclosure, advertising and record keeping requirements. Further, MARS states that licensees subject to these rules may not do any of the following: 1. Request or receive any payment until the seller enters into a written agreement with the lender. (Note that California law further restricts advance fees.) 2. Represent that a seller should not contact the lender; 3. Misrepresent the likelihood of obtaining a short sale; 4. Misrepresent the amount of time it will take to complete a short sale; 5. Misrepresent the seller‟s obligation to make loan payments; or 6. Represent the benefits of any MARS service unless such representation is based upon reliable evidence. C. FORMS: CAR has created two forms for complying with the MARS regulations. They are: 1. MARS Short Sale Negotiating Notice (ZipForms form MARSSN) 2. MARS Offer of Mortgage Relief Notice (ZipForms form MARSMRN)
D. COMPLIANCE: The Federal Trade Commission (which created the MARS regulations), and now the newly-created federal Consumer Financial Protection Bureau (“CFPB”), which has taken over the MARS regulations from the FTC, have made clear that the MARS regulations do not apply to real estate listing agents who take short sale listings so long as the agents meet three criteria: 1. The agents are licensed and maintain good standing under state law; 2. They are acting in compliance with state law governing the practices of brokers and agents; and, 8
3. They are assisting or attempting to assist a consumer in negotiating, obtaining or arranging a short sale of a dwelling in the course of securing the sale of the consumer‟s home. 4. So, if listing agents and brokers satisfy the above three requirements, they no longer need to: a. Provide CAR form MARSSN when taking the listing. b. Provide form MARSMRN at the time they obtain the lender approval letter. c. Include the MARS disclaimer notice in advertisements when marketing properties. d. Comply with MARS‟ other record keeping and monitoring requirements. However, because there remains some concern amongst attorneys surrounding the MARS disclosures at the time that the lender‟s Term Sheet is delivered to the seller, and at the time that the seller then delivers that Term Sheet to the buyer per the requirements of the Short Sale Addendum to the Purchase Agreement, a disclosure that addresses these issues should be given to sellers at the time that the Term Sheets are delivered to your seller on each of your short sale transactions. (SEE TIP 2 BELOW.) PRACTICE TIPS FOR LISTING AGENTS: 1. As a short sale listing agent you no longer have to give sellers the MARSSN or the MARSMRN forms, nor do you have to include the MARS advertising disclaimer in your advertisements regarding short sale listings. 2. As a short sale listing agent, each time that you deliver a Term Sheet from a lender to your seller, give your seller a copy of the “Seller Advisory Regarding Lender’s Term Sheet and Seller’s Instructions to Listing Agent.” This Advisory appears at the end of this document. 3. Review the paragraph entitled “Instructions to Listing Agent” which contains a default instruction that seller must give you, the listing agent, a written instruction before you deliver the Term Sheet to the buyer’s agent. If you wish to have a different instruction, there are check boxes for that purpose. Have your seller check one of those boxes ONLY if you want to change the default instruction. 4. Have the seller sign this document, giving seller a copy for their files. 5. Only deliver the Term Sheet to buyer’s agent per the instruction from seller.
6. Any DRE licensee engaging in the following activities must still comply with MARS: a. Pure short sale negotiations. b. Promoting their services as a way to help property owners avoid foreclosure. c. Loan modification negotiations. d. Deed-in-lieu negotiations. PRACTICE TIPS FOR BUYERS’ AGENTS: 1. CHECK FOR SHORT SALE: Prior to writing an offer, review the MLS remarks to see if the listing agent has indicated that this property is, or may be, a short sale. 2. DISCUSS WITH BUYER: Upon learning that this is a short sale, discuss the situation with your buyer. Your buyer is taking a bit of a risk since your buyer could spend hundreds or thousands on inspections and loan applications, only to have the deal cancel because the seller could not negotiate a short sale with their lender, or the lender chooses to approve another contract from a different buyer. Make sure your buyer understands the risks and is making a conscious decision to proceed. Document your transaction log and/or confirm the decision in an e-mail or other correspondence with your buyer. It is not a good idea to have a buyer who is coming out of a 1031 Exchange enter into a contract to buy a property which will be subject to a short sale. The short sale may take months, which could force a close of escrow on this “up-leg property” past the time required to complete the exchange, resulting in severe tax consequences to the buyer/exchanger. 3. PURCHASE AGREEMENT CLAUSE: Be sure that the Short Sale Addendum is a part of the purchase agreement (CAR form SSA). This form can protect your buyer in the event the lender does not respond to a request for a short payoff in a timely manner by allowing your buyer to cancel the purchase agreement and get the buyer‟s deposit returned if the lender does not approve the short payoff within the time specified. It does allow the seller to cancel as well in that situation, so buyer should be aware of that possibility. It also allows for the parties to agree as to whether the time for contract performance and contingency removal will commence upon the approval by the seller‟s lender of the short payoff (the default mode), or at the time of ratification of the contract. 4. REVIEW PRELIMINARY TITLE REPORT: Immediately upon getting the PTR, review the liens on the property. If the total liens and encumbrances start to approach the purchase price, and listing agent has not advised you that this may be a short sale, discuss the situation with the listing agent. 5. OTHER OFFERS: Your buyer should also be advised that the lender may entertain other offers from other buyers, agree to work with another buyer, and reject your buyer‟s offer. Even if your buyer‟s offer has been accepted by seller subject to the existing 10
lender‟s approval, the lender may accept another, better offer even though your contract has been submitted for quite some time. Your buyer should be advised that if they expend funds on inspections and on obtaining a loan, they could lose these funds if buyer‟s contract is rejected by the lender. 6. COMMISSIONS: Check MLS comments re broker compensation. If you are a buyer‟s agent concerned about getting paid on a short sale, you can enter into a Buyer-Broker Agreement with your Buyer. (CAR form BRE or BRNE) Please also read the comprehensive CAR Legal Memorandum “Short Sales” at: http://www.car.org/legal/foreclosure-short-sale-folder/short-sales/ 18. SHORT SALE INFORMATION ADVISORY As any agent who has handled short sales knows, these transactions are different animals from regular sales. There are many legal, tax, contractual, strategic and tactical considerations which must be taken into consideration by a seller or a buyer before deciding to proceed with a short sale transaction. It is important that agents not only be aware of these issues, but also to advise their seller and buyer clients regarding those matters, and document their files as to having given such advice. For these reasons, always give your seller a Short Sale Information Advisory (ZipForms form SSIA) as soon as you have listed a short sale property.
19. THINGS NOT TO DO Here are some troubling Short Sale trends to watch out for: A. Straw buyers to get the bank to commit to a price. Some listing agents create dummy contracts or have a straw buyer write a short sale contract to send to the seller‟s lender to get the lender to commit to a price. DON’T DO THAT. B. Not informing the bank that the short sale buyer cancelled -- to try to get the bank to commit to a price. Some listing agents do not inform the seller‟s lender that the first buyer has cancelled in order keep the lengthy process going, or to get the bank to commit to a price, and then advertise that price. DON’T DO THAT. You and your seller owe a duty of honesty and fair dealing. See comments below. C. Advertising that a lender has approved a short payoff price. Some listing agents advertise that the lender has already approved a short sales price. DON’T DO THAT. The seller‟s lender may change their mind and require a higher contract price, and the buyer has relied on the listing agent‟s representation that the short sale will be easily approved by the lender. D. Also, remember, the lender is entitled to know the whole truth. The seller has a contract with the lender (the Promissory Note secured by the Deed of Trust) and thus has an obligation to the lender of honesty and fair dealing. The listing agent has a fiduciary duty to 11
inform the seller of pertinent information so that the seller does not take steps to deprive the lender of the benefits of that contract by concealing facts detrimental to the bank. If the lender gives an approval on a sales price that is then advertised, the listing agent may have deprived the lender of the opportunity to achieve a higher sales price. Also, there is no guarantee that the lender will approve that price on a subsequent contract with a different buyer. E. Not accepting back-up contracts, or not sending back-up contracts, to the lender. When taking a listing, ask the lender‟s negotiator what they want to see. Most want to see all offers. In fact, many lenders have guidelines that state that they want to see all offers. And the Term Sheet accepting the short payoff often has a representation that the lender has seen all offers. If the negotiator for the lender tells you that they do not want to see any more contracts, document that statement in your file. Unless instructed otherwise by seller‟s lender, if you receive other offers, recommend to your seller that he/she ratify the best offer or offers in back-up and send them to the lender. F. The second lienholder says it is OKAY to pay them outside of escrow. In many cases where there are two lienholders (banks) on the property, the second lienholder (who is usually totally under water) wants to be paid more money than the first lienholder (who is only partially under water) is willing to allow. So, if the listing agent, the short sale facilitator, or even the negotiator for the second lienholder suggests a method to get money to the second outside of escrow, DON’T DO THAT. That is a violation of the specific escrow instructions of the first lienholder in their Term Sheet. G. The second lienholder wants the agents to pay them a part of their commission. In a variation on that, the second lienholder wants a payment from the agents from their commission through escrow which will be shown on the HUD-1. The problem is that the first lienholder has authorized a certain amount to be paid to the second. This should not be done unless you have evidence that the first lienholder has approved such a payment in a timely manner in advance of close of escrow. The HUD-1 comes late and is often overlooked and cannot be counted on as providing adequate notice to the first of the payment to the second. H. Schemes to get money to the seller, or for the benefit of the seller. Virtually every Term Sheet from seller‟s lenders in short sales states that no money shall be paid to the seller. This means directly or indirectly, such as to pay indebtedness of the seller. There are various approaches to get around this prohibition – and they are getting more creative. I. For example, Sellers come up with last-minute seller debts that must be paid outside of escrow. In a recent trend, after the buyer is in escrow and wants to close, and perhaps after the lender has approved the short payoff, then listing agent announces that there is a seller debt that must be paid by the buyer outside of escrow. In some versions, the listing agent says that the lender must not know. In other versions, the listing agent will represent that the lender has approved the payment outside of escrow. Unless you have written approval from someone in authority from the lender or lenders (which you won‟t get, because lenders don‟t approve such payments), DON’T DO THAT.
In yet a more cynical approach, the listing agent will announce that there is a person or entity (usually a recently-formed LLC) who has a judgment against the seller, or mechanic‟s liens which will be filed against the property (thus stopping the sale) unless the payment is made by buyer. In these schemes, usually the seller and listing agent are in on the scam. They may even have a person with a contractor‟s license file bogus mechanic‟s liens for a portion of the kickback. Don‟t fall for these scams. Also, if your buyer thinks that they want to participate in such a payment, advise your buyer to talk to an attorney. BOTTOM LINE: The longer short sales are around the more “creative” the sellers and unscrupulous agents are becoming. This short sale phenomenon will end someday, and you want to keep your license, your money and your reputation. If the scheme doesn‟t pass the “smell test” or even the “giggle test” (you have to laugh as they are explaining it to you), look deeper, and you would be wise to pass.
II. LISTING AGENTS A. LISTING PROPERTY WITH A RECORDED NOTICE OF DEFAULT There is no reason that a property with a Notice of Default (“NOD”) recorded against it can‟t be listed. However the buyer‟s agent and/or buyer should be advised that there is a NOD on the property; they are going to find out anyway when the preliminary title report comes in. PRACTICE TIPS: 1. If you list, or are about to list, a property with a recorded NOD against it, note the date when the NOD was recorded. The lender can then publish, post and mail a Notice of Sale (“NOS”) three months after the NOD was recorded. The sale by the trustee under the Deed of Trust “on the courthouse steps” cannot be sooner than twenty days after the publishing, posting and mailing of the NOS. So, you have about 111 days from the recordation of the NOD until the sale of the property on the courthouse steps. It can be longer depending on how fast the foreclosing creditor wants to move. 2. You should advise prospective buyers‟ agents of the recorded NOD since it may impact the buyer adversely if the escrow cannot close prior to the date scheduled for the foreclosure sale. 3. If you have a sale of the property with the recorded NOD, and the close of escrow may not occur until after the date scheduled for the foreclosure sale, try negotiating with the foreclosing creditor (lender) for a delay in the foreclosure sale to allow the escrow to close, since most lenders do not want to take over foreclosed properties into their REO (Real Estate Owned) portfolio. 4. NOTE: If the property is a 1-4 unit residence and has a recorded NOD, the property is seller‟s primary residence and the buyer is an investor, then this is a Home Equity Sales Act transaction and you must use the CAR Notice of Default Purchase Agreement, the Home Equity Notice of Cancellation and the Declaration and Proof of License forms (CAR forms NODPA, HEND and DPL). For more information see: CAR Legal Memo entitled “NOD & Investor Transactions: Home Equity Sales Contracts” at http://www.car.org/legal/foreclosure-short-sale-folder/home-equity-salescontracts/ Weekly Practice Tip entitled “Handling Home Equity Sales Act Transactions” B. SELLING BROKER COMPENSATION Unfortunately, if a listing broker offers an unqualified 3% or 2-½% commission, for example, to the coop broker, and a short sale lender reduces the total commission (to, say,
4%) then, unless there is a “conditional offer of compensation,” the listing broker will owe the amount offered to the co-op broker in the MLS. While it is usually not permissible to make conditional offers of compensation to cooperating brokers in the MLS, there are two exceptions where, under the CAR model MLS rules, you can make the co-op broker‟s compensation conditional upon the approval of a third party: (1) probates (conditioned on court approval), and (2) short sales (conditioned on the lender‟s demand). PRACTICE TIPS: 1. If you anticipate that the sale will or might be a short sale, place the following condition in the MLS broker comments: “Short sale commission subject to lender approval. Any reduction in commission will be split evenly between Listing and Selling Brokers.” 2. Or, alternatively, you can propose some other arrangement as to who absorbs any shortfall in total commission received. It would appear, however, that an even split would be most equitable. 3. If you are a buyer‟s agent concerned about getting paid on a short sale, you can enter into a Buyer-Broker Agreement with your Buyer. (CAR form BRE or BRNE) C. HANDLING OFFERS Some listing agents are confused as to how to handle offers on short sales. Should all “offers” be presented to the bank? Should the offers be presented to the seller to ratify the best offer and send that to the bank? Initially, you should contact the seller‟s lender(s) and ask them what they want you to do. Virtually all lenders will want you to send them a ratified contract; though there have been a small number of smaller lenders who have asked to see all offers. When is a contract “accepted” or “ratified”? Remember, the ratification of the contract in a short sale is between the seller and the buyer, and the seller’s lender is not involved in the contract. Some agents are under the misconception that the contract is not “ratified” until the lender “accepts” it. However, the lender does not “accept” anything; the lender merely agrees to accept a short payoff in order to allow the transaction to close. Short sale contracts are just like all other contracts, except that there is one (large) contingency – the lender‟s willingness to accept less than what they are owed. In fact, it is not good practice to send the lenders one or more unratified offers. This is because the people at the banks who are handling the short sales are very busy and a large number of offers just confuse them. Also, it takes weeks for a lender to get around to reviewing and approving the file and, by this time, the offers have all expired and, in many cases, the buyer has moved on to other properties.
PRACTICE TIPS LISTING AGENTS: 1. If the lender wants to see only a ratified offer, then handle the offer(s) as you would handle any other transaction. If there are multiple offers, then handle that as you normally would handle multiple offers, ratify the best purchase agreement (with the Short Sale Addendum a part of the contract), and forward it to the lender(s) for their approval. 2. Continue marketing the property. The Short Sale Addendum (“SSA”) provides that the seller will continue to market the property. This is a good idea because, as a listing agent, you want to secure the highest price to the lender for your seller. The higher the sale price, the better chance that the lender will accept the contract. 3. Back-Up Contracts: if, after you have ratified a contract and have sent it to the lender, other offers come in, then handle those as you would any other back-up offer; with your seller‟s permission, ratify a contract in back-up (for this purpose use a special pre-printed clause, such as the ZipForms Purchase Agreement Addendum – form PAA, paragraph 1 on Back-Up Offers) with the SSA attached, and send it on to the lender. 4. Of course, it would usually make sense to do so if this back-up offer were better than the existing contract (in price and/or terms) because the lender is going to choose the best (usually highest) contract and reject the other; or if the buyer in first position is weak or in danger of canceling. But, check with the lender anyway. A quick close, all cash, few contingencies from a qualified buyer may be attractive to the lender even if the price is the same or even lower. D. IS SELLER STILL LIABLE? 1. RESIDENTIAL 1-4 UNITS: A new law, SB 458, went into effect July 15, 2011, and basically provides that all lenders who approve a short sale on a residential 1-4 unit property have no right to pursue the borrower/seller for any deficiency or loss as a result of consenting to and accepting the short payoff. Background: It is common practice for most lenders when accepting a short payoff in a “Term Sheet” to: (a) require that the Seller sign a new note, and possibly even record a deed of trust against other property owned by seller; (b) state that the seller remains liable for any amount forgiven by the lender(s) as a result of the short sale; (c) state that the lender(s) reserve(s) their right to hold the seller liable for that amount in the future; or (d) be silent as to future seller liability for that amount. In the absence of a clear statement by a lender in their Term Sheet that the seller/borrower has no further liability on the note, while prior law has not been entirely clear on this point, the seller likely will have an ongoing liability to that lender after the short sale – whether or not the loan in question is a first loan or junior loan, or even whether it is a recourse or a nonrecourse loan.
Some details: (a) The consent a lender to a short payoff obligates that lender to accept the short sale proceeds as full payment, and to fully discharge the remaining amount of the indebtedness on the note secured by a deed of trust. (b) This new law applies to ALL deed of trust holders on residential 1-4 units, whether purchase money, refinance, investor, etc. (c) However, if the borrower/seller commits either fraud or waste with respect to the property, then the lender may pursue that borrower/seller, and other third parties who are involved, for any deficiency suffered by the lender as a result of the short sale. (“Waste” is the legal concept of either committing or allowing damage or destruction to the property so as to reduce the value of the property. NOTE: If a seller of a property moves out and abandons the property, some lenders consider that to be “waste” because the property can then begin to deteriorate. Some lenders will take steps to take over the property at this point.) (d) The law does not apply if the borrower/seller is a corporation or political subdivision of the state. 2. 5+ UNIT PROPERTIES Because this new law does not apply to 5+ unit properties, in some situations banks may require the seller to pay cash or sign a promissory note as a condition to the short sale approval on these properties. In other situations, lenders are “reserving their rights” to recover after the sale from the seller the amount they lost in the short sale. Still other lenders do not address the subject of ongoing liability of the seller/borrower to the lender on the amounts that the lender is losing on the short sale. PRACTICE TIPS: a. When a lender in a short sale issues its Term Sheet, READ IT. b. In every short sale, you MUST advise your seller to take the Term Sheet to an attorney for review and advice
III. ISSUES FOR BOTH LISTING AND SELLING AGENTS A.
SHORT SALE NEGOTIATORS 1. PRACTICE TIPS: LISTING AGENTS
(a) First, be aware that it is the responsibility of the seller and the listing agent to negotiate with the seller‟s lender to obtain approval of the short sale amount. Further, it is the responsibility of the listing agent, not the buyer or buyer‟s agent, to pay for such a service. (b) The listing agent must have the SELLER sign an agreement to allow this person to act on their behalf in the transaction. Remember, you are bringing in another licensee into the transaction to represent your seller. (c) Short sale negotiators (“SSN‟s”) must be DRE-licensed brokers. Listing agents should verify that the SSN under consideration has a DRE broker license. DO NOT HIRE A SSN WHO IS NOT A DRE-LICENSED BROKER. (Note: Attorneys may act as SSN’s also if they are doing so in the course of providing legal advice to clients. However, there are not a great number of attorneys engaging in this activity. The California Bar Association is warning attorneys to be careful in this activity as they are seeing abuses by some attorneys. Finally, not-for-profit consumer credit consulting agencies may also negotiate with lenders.) (d) In addition, all persons working for a DRE licensed broker who are engaging in negotiations with the seller‟s lender must be licensed because this is considered to be licensed activity by the DRE. NOTE: The penalty for acting as a DRE licensee without a license is $20,000 for an individual and $60,000 for corporations. The DRE will turn over any such complaints to the local District Attorney for prosecution under a new law effective as of 1/1/09. (e) If the SSN is a DRE licensee, the listing agent should first thoroughly investigate the SSN to assure that the facilitator is competent. If the SSN is not competent, the listing agent could have a claim against them for allowing such a person to work on behalf of their seller. Some things to consider when hiring a facilitator: (i) Experience: There are an increasing number of persons holding themselves out as SSN‟s. Some have little actual experience in negotiating with lenders. Verify the experience of the short sale facilitator by requesting and talking to referrals. (ii) Documentation: Before you recommend a SSN to your seller, read all of their documentation to clearly understand what they will do and what the costs will be. Look for any of the issues raised above. Discuss with your broker or manager if you have any questions prior to hiring them. (iii) Fees and Compensation: How is the SSN being compensated? Many charge a percentage of the sales price to be paid by the seller. Others charge a flat fee.
Listing agents should shop for the best fee amongst the qualified SSN contenders. Look out for those SSN‟s who charge the buyer or buyer‟s agent. (See below for a detailed discussion.) (iv) Advance Fees: Some SSN‟s charge a fee to the seller upfront for the service. However, because this is DRE-licensed activity, no DRE licensee can take a fee from a principal prior to performing a licensed service unless they have had that “Advance Fee” arrangement approved beforehand by the DRE. There are penalties for violating this Advance Fee arrangement. However, there are no prohibitions for SSN‟s charging fees upfront to the listing agent or broker. See Weekly Practice Tip: “Advance Fees” (f) Finally, do not sign a document hiring a SSN without the prior review and written approval of your manager or broker. 2. BUYER TO PAY FOR THE SSN? (a) Charging the SSN Fee to the Buyer’s Agent: A number of SSN‟s are attempting to charge all or a part of their fee to the buyer‟s agent by putting comments such as the following in the Confidential Remarks section of the MLS: “Short sale commissions subject to lender approval. Any reduction to be split 50-50 between listing office and selling office AFTER DEDUCTION __% FOR PAYMENT OF THE SHORT SALE NEGOTIATOR‟S FEE.” This is considered to be a “Conditional Offer of Compensation” and a violation of MLS rules if your MLS has adopted the CAR/NAR Model MLS Rules, which most MLS‟s have done. If you see such an attempt to use the MLS to get the buyer‟s agent to pay the SSN fee, check to see that this MLS has adopted the Model Rules, and then contact the listing broker and point out the MLS violation, and if they insist file a complaint with the MLS. (b) Charging the SSN Fee To The Buyer: A great number of SSN „s are starting to insist that the buyers pay a part of their fee, either directly, or by way of a rebate of a seller credit to buyer, which credit the SSN insists that buyer put into the purchase agreement. In some instances, the SSN states that the offer will not be ratified unless these terms are agreed to. In one scenario, the SSN often presents the buyer with a document for the buyer to sign stating that the SSN, who has been hired by the seller or the listing broker, is working on behalf of the buyer to obtain a low purchase price and, therefore, buyer agrees to request a credit from seller for closing costs (say 3%) which buyer then agrees to rebate to the facilitator as a fee for their negotiating and facilitating services. Some of these SSN‟s documents also contain indemnities and hold harmless language whereby the buyer holds the facilitator harmless for their actions in the transaction. This scenario raises a number of troubling legal issues:
(i) Undisclosed Dual Agency: The SSN, hired by the seller or listing broker, is now stating that he/she represents the buyer in the transaction. The SSN has become a dual agent which, under the California Business and Professions Code, requires the knowledge and informed consent of both parties. Both parties would have to be given an Agency Disclosure by the facilitator, and the dual agency would have to be confirmed in writing. In most cases, this is not being done by the SSN‟s. NOTE: The penalties for undisclosed dual agency can include that either party can cancel the contract, they can refuse to pay a commission, they can sue for damages, they can file an ethics complaint, and they can file a complaint with the California Department of Real Estate. (ii) Full Disclosure of Payments to the Parties: If the buyer is being required to sign a document that requires them to request a credit for closing costs and then agrees to rebate that amount to the SSN, or just to simply be responsible to pay the SSN for their services, this then constitutes a payment to a DRE licensee and, regardless of what it is called, must be disclosed to all parties. It is illegal under the Business and Professions Code for a DRE-licensed broker to receive a secret payment or compensation. (iii) Full Disclosure to the Seller’s Lenders: Further, such a payment from the buyer to the SSN, and the requirement that the buyer request the credit for closing costs, must be fully disclosed in writing to the seller‟s lender prior to the time that the seller’s lender agrees to accept a short payoff. The reason for this is that the seller‟s lender typically will give the short sale approval under certain conditions including that only a certain amount is paid to the licensees in the transaction (say 4%). If the buyer then rebates the closing costs received as a credit from seller (say 3%) to the SSN, then the DRE licensees in the transaction have received 7%, which is more than the lender allowed as a condition of the closing. This violates the lender‟s closing instructions. IT IS NOT A SUFFICIENT DISCLOSURE TO THE LENDER THAT THIS PAYMENT TO THE SSN APPEARS ON THE HUD-1 AFTER CLOSING. (iv) Indemnities and Hold Harmless Language: If a SSN is asking upfront to be held harmless and indemnified for their actions in the transaction, this should be a red flag to alert your buyer that they should have this document reviewed by their attorney prior to signing. These troubling practices have the full attention of the California Department of Real Estate Enforcement Division. For a full discussion of the DRE‟s view of this practice, read: ”Update regarding short sales fraud and related issues” in the Fall 2010 DRE Bulletin located at: http://www.dre.ca.gov/pdf_docs/rebfall_10.pdf 3. PRACTICE TIPS: BUYER AGENTS (a) If you are presented with a contract, or an addendum to the purchase agreement, in which your buyer would be obligated to pay all, or a portion, of the seller‟s SSN‟s fee,
discuss that document with your buyer. The SSN may call this fee by a number of names (e.g., “loss mitigation fee” or a “discount fee”), but whatever the name, it is seller‟s responsibility to negotiate with the seller‟s lender to obtain a short sale payoff so that the transaction can close. (b) Discuss with your buyer whether buyer wishes to participate by agreeing to pay this fee. They have a right to say “No”, but some buyers may fear jeopardizing the purchase if they refuse. Discuss these issues with your buyer and document your client‟s decision. (c) Review the document(s) presented to you by the SSN, or the listing agent on behalf of the SSN. Does it create any indemnities or hold harmless language in favor of the facilitator, seller or listing agent? If so, recommend in writing that your buyer have this document reviewed by their legal advisor before signing. (d) Also, check whether the SSN, by asking your buyer to pay all or a part of the SSN ‟s fee, is creating a dual agency with your buyer. Consider whether you want this unknown, new person representing your buyer, and discuss this with your buyer. Is there a full disclosure of dual agency and informed consent by both parties? (e) If a SSN refuses to present your buyer‟s offer if you do not sign their documentation, contact the listing agent‟s manager or broker to apprise them of the situation. Remember, all offers must be presented to sellers in a timely manner. In the absence of an informed decision by a seller to agree to this (why would the seller do so in light of all the facts?), your offer must be presented whether or not your buyer signs the SSN‟s documents. (f) If all else fails and your buyer wishes to go ahead with the transaction and pay the fee, then ratify the contract and immediately send a communication to the listing agent and the SSN which could read substantially as follows, (with changes for your particular situation): “You have required the buyer to pay your Short Sale Negotiator fee in the amount of __% of the purchase price (or $____), and to ask for a credit for non-recurring closing costs in the amount of __% of the purchase price (or $____). You also stated that you were working also on my buyer’s behalf to get the best price from seller’s lender. We do not know what agreement you have with seller or what has been disclosed to the seller regarding this arrangement; and we do not know what you have or will disclose to seller’s lender(s). We trust, unless informed otherwise, that you have fully and timely disclosed this full arrangement to both seller and seller’s lender(s).”
4. PRACTICE TIPS: BROKER/MANAGERS (a) It is a good idea to prepare a list of approved SSN‟s after having properly vetted them, so that each agent is not forced to make the decision.
(b) Decide whether it is even a good idea to have SSN‟s who engage in the above practices to make presentations to your agents. Do your due diligence before allowing SSN‟s to present their program to your agents. (c) Insist that all agents who are planning on hiring a SSN (who is not on a companyapproved list) get prior management approval. (d) It may also be a good idea to identify agents in your office who are experienced at negotiating with lenders. This approach allows for more control by the broker over the quality of the process, and a fair allocation of the fees for the services. The fees for this inhouse SSN should be paid out of the listing portion of the commission. Attempts to charge seller extra for this fee could be considered to be an unearned fee under RESPA, and should not be passed on to the buyer‟s agent or buyer, as discussed above.
B. SHORT SALES WITH MORE THAN ONE LENDER When there is more than one lender on a property, it is not unusual for the first lender to allow only a limited payment to the second lender (for example, $3,000). It is also not unusual for the second to demand a payment in an amount greater than the first lender will allow. When this happens, occasionally the listing agent, the SSN, or even the second lender will suggest that a payment be made to the second either outside of escrow, or through escrow and further suggests that since this payment will appear on the HUD-1, it is okay to do so. The money to the second may be requested from the buyer, or from the agent or agents. Such practice is NOT acceptable. There are two issues here: 1. Payments Outside of Escrow: Rule of Thumb: If you hear the words “lender” and “outside of escrow” in the same sentence, RUN!!! Lenders are entitled to know the whole transaction. If the holder of the first were to find out about the payment to the holder of the second outside of escrow, that first lender could allege that they were entitled to that money, and that their escrow instructions were violated. This can result in civil damages in favor of the lender, and also be a violation of federal law. 2. Adequate Notice to the First Lender of the Payment to the Second: HUD-1 IS NOT ENOUGH. Many agents, SSN‟s and some escrow officers believe that if the payment to the second is greater than allowed by the first lender and is identified as such in a HUD-1 which the first lender sees prior to COE, then that is sufficient notice to the first lender of that payment from the buyer (or from agents‟ commissions) to the second lender.
That practice is not allowed by lenders, who view such payments to the second as violations of their escrow instructions as set forth in the Term Sheet authorizing the allowable payoffs in escrow. More than one escrow company has found this out the hard way by having to reimburse the first lenders for such payments. Worse, that liability can splash back on the agents involved as well. Listing agents have a duty to tell the seller of such arrangements. And, sellers have the duty of honesty and fair dealing to their lender (because of their contract – the promissory note – with the lender) to inform the lender of the transaction in its entirety. PRACTICE TIPS: (a) All dealings with lenders in short sales must be done honestly, above board and with the full knowledge of all parties. (b) Don‟t allow yourself to be drawn into a scheme to make payments outside of escrow, just to make a short sale work. It‟s not worth it. The deal may die. But, that‟s better than the alternative. (c) Do not engage in such practices even if the negotiator for the junior lienholder tells you it is okay, and may even tell you how to get the money to them. (d) Work hard to try to get the lenders to compromise pointing out that they will almost certainly be worse off if there is a foreclosure. (e) ALL payments to all lenders MUST be disclosed to ALL lenders. This means that the first lender must approve, IN WRITING, any payments to junior lienholders. Placing such payments in a HUD-1 is not sufficient. (f) In one variation, the holder of the second will demand that the agents give up a portion of their commissions to the second. Again, this can only be done with the written permission of the first lender. (g) In yet another variation, the listing agent will tell the buyer‟s agent (usually late in the escrow) that the seller has other debts that must be paid or they will stop the transaction (such as a mechanic‟s lien or abstract of judgment which is about to be filed). Listing agent will demand that buyer pay some money, allegedly to pay off these seller‟s debts, outside of escrow. These ploys are usually scams to get some money to the seller – itself a violation of the Term Sheet/escrow instructions. For all of the above reasons do not participate in such a scheme. (h) When in doubt, talk to your manager or broker.
C. SHORT SALE FLIPPERS There has been an increase in the number of “Short Sale Flippers” fueled, partly, by the long timeframes for short sales to close, the desperation of sellers, and the chance for opportunists to make money. In this type of transaction, there is the current property owner/seller (“Seller”), the original listing agent (“Listing Agent”), the short sale flipper (“Flipper”), the buyer‟s agent representing the Flipper (“Flipper Buyer Agent”), the Flipper‟s listing agent (“Flipper Listing Agent”), the ultimate buyer (“Buyer”) and that buyer‟s agent (“Buyer Agent”). What is a Flipper? As discussed here, a Flipper is a person or entity who intends to enter into a contract to purchase the property and immediately sell it, perhaps in a double escrow, without any improvements to the property. If a buyer intends to buy a short sale property, close on the sale, improve the property, and then sell it, that buyer is not considered a “Flipper” for purposes of this discussion. 1. Listing Agent: If you are the listing agent on a short sale: (a) Do not interact with a Flipper in a way to solicit, promote or encourage a Flipper to write an offer on your short sale listing. (b) If the Flipper is represented by a Flipper Buyer Agent, advise that Buyer Agent to submit the offer for your Seller‟s consideration. Advise your Seller of the intent of this purchaser. This is important information for the Seller to know because the Flipper is seeking a low (perhaps artificially low) price so as to make a profit by re-selling the property. While the Seller may not seem to care at this time, Seller will care if the lender seeks to recover from Seller the money the lender lost on the short sale. (c) DO NOT also represent (or allow any agents in your office to represent) a Flipper on the purchase of your listing. This can compromise you and your company‟s fiduciary duty to the Seller to get the best price. This is because the Flipper is going to try to sell the property for a profit. If the Seller‟s lender reserves the right to hold Seller liable for the amounts they lost on the short sale, the Seller‟s potential obligation to that lender is arguably increased by the difference between the sale price to the Flipper and the final price to the ultimate Buyer. (d) If the Listing Agent is the one dealing with the seller‟s lender trying to convince that lender to accept a Flipper‟s offer as the “highest and best,” without telling the lender that there is another Buyer out there willing to pay more, that is fraud. (e) Even if the Listing Agent is not dealing directly with the bank, the Listing Agent owes the Seller a fiduciary duty, and the Listing Agent’s knowledge is imputed to the Seller. The Seller has a duty of honesty and fair dealing with the bank because of their contract with the bank (the Promissory Note). The Listing Agent can easily be pulled in on a conspiracy theory with the Seller, or a derivative action by the Seller, for not being truthful with Seller‟s lender.
(f) The Listing Agent has a fiduciary duty to tell his client that the Flipper has re-sold the property at a higher price. If the Listing Agent does not so inform the Seller and recommend to his Seller that the Seller inform the short sale lender of the Flipper‟s transaction, the Listing Agent could be liable to the bank on a conspiracy theory when the Seller does not make the disclosure. (g) A contract with a Flipper can also be dangerous because, if the Flipper is unsuccessful in finding a buyer to pay more, the Flipper may just cancel the contract with Seller. The Seller thus has lost considerable time within which a foreclosure could be filed, or an existing foreclosure action could proceed closer to a foreclosure sale. (h) The thrust of recent laws has been to protect the consumer. In dealing with short sales, we must always ask, “Is this the best deal for the client?” Did we fulfill our duty of the highest level of trust, care and confidence to the Seller, putting the Seller‟s interests ahead of the agent‟s interests? Will the Seller be happy when the lender tries to recover the amount they lost in the short sale and they find out that the agents made two commissions and the Flipper made a profit? The Seller may think he/she is happy just to get rid of the problem property, but that will be short lived when the bank knocks on the door seeking their money. 2. Flipper: Some real estate agents think it is a good idea to become a Flipper. Individual agents can, unless prohibited or limited by their broker‟s policy, purchase property for their own account. However, even if the broker’s policy allows agents to buy short sale properties, no agent who intends to be a Flipper should attempt to purchase a property that is listed by their own brokerage company. The problem is obvious: The Listing Agent, Flipper and Flipper‟s Agent are all the same company -- and that opens the claim that the brokerage conspired to sell Seller‟s property at a low price in order to make a profit and two commissions. But, again, if the Seller has a contingent liability to the lender for the shortfall, that Seller may be looking for someone to blame. Such a case would be hard to defend. And remember, if a DRE licensee is purchasing property for their own account, they are held to the same standards as an agent representing a client. 3. Flipper Buyer Agent: (a) There are a number of persons and organizations acting as Flippers soliciting agents to work with them (including listing agents) to secure many properties to purchase and flip. Many of these require the Seller to allow the Flipper to negotiate with the Seller‟s lender. It is dangerous to work with these Flippers because you, as the Buyer Agent for the Flipper, have no control over what the Flipper tells the Seller‟s lender in order to induce the lender to take the lower price sufficient for the Flipper to turn around and sell the property for a profit. And, you are, or become, aware of their practices making it hard to later claim you didn‟t know what they were doing.
(b) Even for Flippers who are not volume purchasers, and some who might simply be individuals doing the occasional transaction, no agent should represent a Flipper as a Buyer‟s Agent, and at the same time assist in negotiating with the Seller‟s lender, or provide comps for the sale price, as this may result in misleading the lender. (c) Some Flippers state that they are upfront with the Seller‟s lender because the purchase agreement will state that they are purchasing the property for resale. But, lenders are entitled to know “the deal.” So, it is not enough to state in the contract that the Flipper is buying the property for re-sale. If the lender were to be told the whole picture, including the second contract for a higher price, would they approve the price on the Flipper contract? Not likely. If one is concerned that disclosing this scenario to the seller‟s lender will “blow the deal,” that is reason enough not to do these deals. 4. Flipper Listing Agent: This is usually the same person as the Flipper Buyer Agent. The issue for this agent is that the Flipper is listing and marketing a property which he/she does not yet own. While this is not in and of itself illegal, it raises problems. (a) The Flipper and the Listing Agent must disclose to the Buyer that the Flipper does not own the property and the close of escrow is conditioned on the completion of the short sale purchase by the Flipper from the original Seller. (b) Any disclosures, reports or other information that the Flipper or Flipper‟s Buyer Agent, receives in the purchase escrow must be fully disclosed in the sale to the ultimate Buyer. 5. Buyer Agent: (a) If you see a property that you suspect is a short sale flip, check the PTR to see who the owner on title is. (b) If it is a short sale flip, the contract between the Flipper and your Buyer typically will contain language to the effect that the Flipper‟s obligation to close escrow is contingent upon the successful close of escrow of the first transaction with true owner/Seller. (c) There are great risks and possible benefits for a Buyer in this scenario. (i) One benefit for the Buyer in the scenario, who may want a short escrow, is that the Flipper may have been in escrow for quite a while and has worked out a short sale with the Seller‟s lender. Lenders sometimes take three months, or more, to approve a short sale. The Flipper may be well down the road, or even have a lender short payoff negotiated when your Buyer starts negotiation with the Flipper to buy the property. That could lead to a relatively short escrow for Buyer who does not want to wait months for a bank to approve a short payoff. (ii) However, there are great risks for the Buyer also. If the bank does not approve the sale to the Flipper, or a higher contract is ratified by Seller and sent to the lender, then Buyer‟s contract with the Flipper will fail because Flipper cannot deliver title, and the contingency stated above will let the Flipper cancel the contract with your Buyer. 26
(iii) You know nothing about the transaction between the Flipper and the Seller. Is the Flipper or Seller working timely to get the short payoff? Is there a new Notice of Default on the property? You and Buyer won‟t know unless you get an updated Preliminary Title Report regularly. (iv) Flipper will know little about the property and so the disclosures from Flipper to your Buyer may be minimal; although Flipper should give your buyer all inspection reports and other disclosures received by Flipper in the purchase from Owner. (v) Finally, your Buyer may be paying too much. Remember, this only works if Flipper is in contract at a price allowing for a profit on the flip. He has the seller, and ultimately the seller‟s lender, agreeing to a lower price. (vi) There is no guarantee, however, that your Buyer will have a shorter escrow. Discuss with your Buyer his/her ability or willingness to have a longer escrow. (vii) One option is to go directly to Seller, or Seller‟s Listing Agent, to see if you can submit an offer to Seller directly, which would be ratified in back-up and sent to the Seller‟s bank for consideration. Your offer may be for more than the Flipper‟s contract with Seller, but less than the Flipper is asking on the flip. (viii) As in all other situations, send your Buyers to their legal and tax advisors.
D. HANDLING HOME EQUITY SALES ACT TRANSACTIONS A Home Equity Sales Act (“HESA”) transaction is one where: 1. The property is a 1-4 unit residence, 2. The property is the principal residence of the seller, 3. The property has a Notice of Default recorded against it, and 4. The buyer is an investor (also known as an “equity buyer”). If all four of the above answers are “Yes,” then this is a HESA transaction and the seller must be given a notice that they have five business days to cancel this agreement, and the buyer’s agent must give seller a written statement that the agent holds a valid, current DRE license, and provide written proof of that license. NOTE: The previous requirement that a bond be obtained before a real estate licensee could represent an equity buyer/investor in a HESA transaction has been eliminated by the California courts as of April, 2008. If this is a HESA sale, you must do all of the following:
1. Access ZipForms and download the following forms: (a) The current version of the Notice of Default Purchase Agreement (NODPA). (b) The Home Equity Notice of Cancellation (HENC) which prints with the NODPA. (c) The “Declaration and Proof of Real Estate License.” (DPL) All three forms must be used when representing an equity buyer on a HESA sale. 2. Do NOT use an old version of the NODPA, nor do you need to use the old Home Equity Agency Addendum (HEAA) which has been eliminated. 3. Use CAR form DPL which asks for written proof of your real estate license, as well as your broker‟s real estate license if you hold a salesperson‟s license. This written proof can be: (a) A copy of your (and, if applicable, your broker‟s) actual license; or, (b) A copy of the print-out from the DRE website of your (and, if applicable, your broker‟s) license information.
4. PRACTICE TIPS: (a) Ask your escrow officer to keep you updated as to whether a Notice of Default has been recorded against the property being sold. If a Notice of Default is recorded on the property during escrow, immediately consult with your manager to determine the best approach to give the seller the notice of the right to cancel. (b) BUYER OCCUPANT: If you are representing a buyer who purports to be an owner-occupant buyer, then the HESA does not apply, and you may reasonably rely on your buyer‟s representation. In that case, you do not have to use the NODPA or the HENC, but can just use a regular purchase agreement. However, be aware of “red flags” that may arise which cause you to doubt your buyer‟s true intention to occupy, and discuss with your manager. (c) SELLER MOVES OUT: Many agents ask “But what if the seller has moved out? Do I still have to use the NODPA and give the seller the 5-day notice of the right to cancel?” That depends on the facts of the case. If the seller just moved out to a local hotel, then maybe not; because it is likely that the seller has not yet established a new principal residence. Also, if the seller moved out after being approached by the buyer or buyer‟s agent, that might look as though the buyer or agent convinced the unsuspecting seller to move out just so the buyer and his/her client could make the transaction work. When in doubt, just use the above procedures and be safe.
(d) CALCULATING THE FIVE BUSINESS DAYS TO CANCEL: The HENC form, and the Notice on the last page of the NODPA regarding seller‟s right to cancel in five business days, both require that the time for the termination of seller‟s right to rescind be in the contract. However, there is no way to know when the contract will actually ratify at the time the offer is written. So, one approach is to leave this blank and then calculate and fill in the last date for seller to cancel on the date that the contract actually ratifies. NOTE: In calculating the five business days, delete weekends and holidays. The day the contract is ratified is day “0” and the next business day is day “1.” (e) Until a seller‟s five-day right to cancel has expired, neither the investor-buyer nor buyer‟s agent should: (i) pay the seller any consideration; (ii) induce a seller to sign any document transferring any interest in the property, nor accept such a document; (iii) record any instrument signed by seller; or (iv) transfer or encumber any interest in the property to a third party. (f) Brokers in brokerage offices should make copies of their broker‟s licenses, or printouts of their license information from the DRE website, available to their sales agents to be attached to the new DPL form for HESA transactions. For further information, read the CAR Legal Memorandum entitled: “Notice of Default and Investor-Buyer Transactions: Home Equity Sales Contracts” at: http://www.car.org/legal/foreclosure-short-sale-folder/home-equity-sales-contracts/
E. TENANT DEPOSITS IN SHORT SALES In all residential sales, when the property sells, the landlord is obligated to turn over all of the tenants‟ security deposits either to the new buyer, or return them to the tenants. In short sales, the seller usually has spent the security deposits and cannot do so. Tenants can sue either the old landlord (seller) or the new landlord (buyer), or both, for the return of the deposits. But usually because the seller is gone, the new buyer is stuck with having to pay the security deposits to the tenants, even though they did not receive them from the seller. The buyer can sue the seller for those missing security deposits. The venue would most likely be small claims court if the total security deposit is less than $7,500 for non-corporate owners. If the buyer obtains a judgment against the seller, that judgment can be collected years later, even if the seller is broke now. PRACTICE TIP: If your short sale buyer is concerned about not receiving the security deposits for the tenants, recommend in writing that they discuss the matter with a landlordtenant attorney prior to removal of contingencies.
IV. BUYER AGENTS A.
WRITING THE OFFER
When representing a buyer on a short sale, there are a number of factors that make the short sale different from a regular sale. First, these transactions will take longer, perhaps weeks or even months longer. Second, in a short sale, another offer may be received by the seller and forwarded to the seller‟s lender who may agree to the terms of that offer and, at least implicitly, reject your contract. In essence, the contingency in the Short Sale Addendum for seller to receive written approval of your short sale will not be received, and your contract therefore would need to be cancelled. PRACTICE TIPS: Buyer’s Agents: 1. As a buyer‟s agent, prepare your buyer for the fact that the short sale will take a long time. 2. Do not allow a buyer with a short timeframe, such as a buyer looking for an up-leg property on a 1031 Exchange, to enter into a contract on a short sale. 3. In recognition of the long time frame, you might want to recommend to your buyer that the contingency in Paragraph 1.A of the SSA (for the seller to receive the short sale payoff from the lender) be reduced from the default 45 days to a relatively short time, say two to three weeks. That way, if your buyer no longer wishes to wait for the lender‟s approval on this transaction, the buyer may terminate the purchase agreement pursuant to that contingency at the end of that timeframe. This timeframe can later be extended by agreement and Addendum. 4. Also, a buyer‟s agent may wish to keep the default position in Paragraph 3 of the SSA which allows buyer to deposit their initial deposit check 3 business days after seller delivers the acceptable lender Term Sheet(s); and also keep the default position in Paragraph 2 which provides that the timeframes for contract performance (contingencies, close of escrow, etc.) do not commence until the seller receives an acceptable Term Sheet(s) from the lender(s) and delivers copies to the buyer. B.
BUYER WANTS TO CANCEL – FOUND OTHER PROPERTY
Example: You represent buyers in a short sale. You ratified the purchase agreement with the seller three weeks ago, and are waiting to hear from the seller‟s bank that they will approve the contract and a short payoff. Now, the buyers have found another property that they like more – and the price is better. Can they just cancel the contract at this point? Answer: That depends on what the contract says.
(We are assuming here for this discussion that there has been a ratified contract between seller and buyer. Sometimes listing agents will just submit unratified offers to the seller’s lender; but this is not good practice for a variety of reasons. If buyers and seller have signed the purchase agreement, addenda, counter-offers, etc., in this short sale, just as in other types of transactions, then this is just like all other ratified contracts with one additional contingency – approval from the seller’s lender.) Remember, once a buyer has a ratified contract, that buyer is obligated to buy the property unless they have a contractual right (a contingency) or statutory right (the TDS, e.g.) to cancel; or unless the seller acts in bad faith or the property is substantially destroyed, etc. So, here it depends on how the contract is written. Hopefully, you used the ZipForms Short Sale Addendum (Form SSA). If, for example, you used the default 45 days in paragraph 1.A of the SSA, and you have now passed the 45th day since ratification, and seller has not received a written approval from seller‟s lender of your transaction per the terms of the SSA and delivered a copy to you, then your buyers can safely cancel because that contingency on the seller‟s part has not been met. Some buyers ask if they have to actually have a home inspection before they cancel by not removing the inspection contingency. The answer is that the seller may ask why they are cancelling and, even though the purchase agreement forms do not require the buyers to give a reason, if the buyers do not offer a reasonable explanation, the seller may be suspicious and refuse to sign cancellation papers and may seek to recover the deposit based on an allegation of bad faith. So, unless the buyers have actually had a home inspection, or have otherwise obtained other adverse material information affecting the value or desirability of the home, the buyers run the risk of a fight over the return of the deposit, or other actual damages (if liquidated damages has not been agreed to). Of course, they could also rely on the TDS, or other statutory disclosure, as grounds for cancelling if that reason is available to them by virtue of the timing of the giving of the TDS. In either event, buyers must act in good faith when cancelling a Purchase Agreement For more information on the buyer’s rights to cancel because of the TDS, see: CAR Legal Memo: “Transfer Disclosure Statement Law” at: http://www.car.org/legal/disclosure-folder/transfer-disclosure-statement/ Weekly Practice Tip entitled “Can Parties Cancel in their Sole Discretion?”
PRACTICE TIPS: 1. In a short sale, always use the Short Sale Addendum. 2. As buyer‟s agents, discuss with your buyer whether to shorten the time in paragraph 1.A of the SSA for seller to received lender approval of the short sale, so as to not lock your buyer into a contract for a long time. This date may later be extended by addendum. 3. If your buyers are changing their mind about the purchase, or have found another property they like better, remind them that they can‟t just change their minds without the potential risk of damages to the seller. See Weekly Practice Tip entitled “Buyer Remorse.”
(BROKER NAME) SELLER ADVISORY REGARDING LENDER’S TERM SHEET AND SELLER’S INSTRUCTIONS TO LISTING AGENT This Advisory and Instructions to Listing Agent is being provided to you with the Term Sheet from your lender approving a Short Sale payoff to that lender. The Term Sheet and this Advisory contain important information regarding your Short Sale. Read them carefully.
Property Address: _________________________________________________________ 1. A California law, effective as of July 15, 2011, requires that the holders of all loans secured by 1 to 4 unit residential properties must give up their rights to pursue the Sellers for any loss suffered by them as a result of a Short Sale after the short payoff is approved (in the “Term Sheet”) and the transaction closes. This protection is lost, however, if a Seller commits fraud with respect to the sale of the real property, or causes “waste” (damages the real property), in which case the lender(s) may seek damages against the Seller, and any participating third party. 2. You do not have to accept the terms offered by the lender(s) if the Short Sale is approved. See the Short Sale Addendum for details. If you accept the lender(s)’ offer, the commission to the brokers in the transaction will come from the sale proceeds in an amount approved by your lender(s) in the Term Sheet(s). Listing Broker will seek no other compensation from you unless agreed in writing by you and approved by the lender(s). 3. Seek Legal and Tax Advice. Real estate agents are not attorneys and are not qualified to give legal or tax advice regarding a lender’s Term Sheet or its legal or tax effects. Listing Agent urges you to contact a qualified California real estate attorney regarding the terms and conditions proposed by the lender in the Term Sheet, and also to discuss this transaction with your tax advisor, prior to making any determination as to whether to proceed with the Short Sale. 4. INSTRUCTIONS TO LISTING AGENT. The Short Sale Addendum to the Purchase Agreement provides that you, the Seller have a set time frame to deliver the Term Sheet(s) to the Buyer. During this time you should review the Term Sheet(s) with your attorney and/or tax advisor. Once the Term Sheet is delivered to the Buyer, your Short Sale Contingency is automatically removed and your ability to safely terminate the transaction because of the Term Sheet is limited. Upon receipt of the Term Sheet(s) by you, you instruct Listing Agent to deliver the lender(s)’ Term Sheet(s) to the Buyer and/or the Buyer’s Agent only after you notify the Listing Agent in writing that your attorney and/or tax advisor has reviewed and approved the lender(s)’ Term Sheet(s). Or, (if checked): □ Listing Agent is authorized to deliver the Lender(s)’ Term Sheet to the Buyer and/or the Buyer’s Agent on _________________, 201_ (date) without further instructions from Seller.
â–Ą Other Instructions __________________________________________________________ __________________________________________________________________________ 5. If you stop paying your monthly mortgage payments, you could lose your home and damage your credit. If you have ceased making mortgage payments, the lender(s) may file a Notice of Default and proceed with a foreclosure even though there are ongoing short sale negotiations. Negotiating a short sale does not stop the foreclosure process. You understand and acknowledge that Listing Agent cannot and does not guarantee that a short sale can be obtained from the Lender(s) or that the foreclosure process can or will be stopped. 6. No cash to Seller. You, as Seller, may not receive any cash, or other valuable consideration, from either agents or Buyer, paid directly to or for your benefit, either through or outside of escrow, without the written approval of all existing lenders. This includes any holding over or rent-back agreements. Disclosing such payment, or other consideration, solely on a HUD-1, without the lender(s) otherwise giving their written consent, is generally considered by lenders to constitute a violation of the Term Sheet(s), and may be a form of lender fraud.
BY SIGNING BELOW, I/WE ACKNOWLEDGE AND AGREE THAT I/WE HAVE RECEIVED, READ AND UNDERSTOOD THE ADVICE IN THIS ADVISORY.
Date: _________________, 201__
Date: _________________, 201__