We strongly suggest that the Seller use his/her own closing attorney for a short sale. Our firm requires it if we are facilitating the short sale. Why? Well, if the Seller docs are prepared by the Buyer’s closing attorney, as is usually done in a real estate closing in North Carolina, the Seller ends up with no legal representation in the transaction. By its very nature, the short sale is fraught with legal issues and liability.
The Seller’s closing attorney in a short sale should have a consultation with the Seller and review the approval that the bank/servicer has agreed upon and discuss how it will affect the Seller. This attorney would, therefore, need to have experience and understanding in the following areas of the law:
1. Deficiencies
2. Taxes
3. The Mortgage Forgiveness Debt Relief Act of 2007
4. Asset Protection
5. Real Estate closings
This is beyond the desired area of practice and experience of many attorneys who limit their practice to real estate closings. The reason this is so important is that the Seller should be fully informed of all aspects of the short sale, including the negative consequences prior to signing any closing documents. A fully informed and professionally handled client is a happy client with few problems down the road.
Here are a couple of examples of the issues involved in a short sale that would need to be discussed with the Seller prior to closing:
Example #1. If the deficiencies have not been released they should have a “deficiency plan” in case the bank/servicer files a lawsuit in pursuit of a deficiency judgment. This would include an explanation of the judgment process, the different possible results, what attorney or firm would be recommended to represent the Seller in that instance, and what a judgment would mean to the Seller.
Example #2. If the deficiencies have been release or if the deficiencies might be released in the future, they should have a discussion regarding the possible tax consequences. This may also include a discussion on estate planning in order to protect other assets in the future.
How this helps to protect the real estate agent:
The Seller’s real estate agent and the real estate company are much more protected with this approach. First of all, the likelihood of a complaint or a lawsuit is substantially diminished. Secondly, if there were a complaint or a lawsuit down the road regarding the short sale, the Seller’s closing attorney or Wilde Law Firm would be the responsible parties and therefore the target of the lawsuit. We both have malpractice insurance with a stable of attorneys that will come to our aid in this instance.
What I see throughout North Carolina is a scenario where the listing agent negotiates the short sale and the parties close with the Buyer’s closing attorney. The listing agent could have done an admirable job in the handling of the short sale with complete disclosure and explanation to the Seller. More often than not, though, the short sale was not handled as well as it should have been, the deficiencies may or may not have been discussed and the tax issues were a surprise for everyone. In either scenario the issue of the Unauthorized Practice of Law (UPL), negligence and fiduciary duty is at issue.
The bottom line is that a complaint to the North Carolina Real Estate Commission or a lawsuit could be devastating for the agent and their company because they are absolutely the responsible party and the only one standing in case of trouble. Further, it is unlikely that the E&O insurance would cover an agent in a UPL situation.
See other FAQs about Short Sales on Wilde Law Firm's website.
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