Sad Facts about Attorney Misconduct in a Short Sale

Being an attorney carries a heavy burden when representing a client.  Watch any case for attorney misconduct that goes to a criminal trial and you will see the attorney usually get the most severe penalty.  This is because the attorney is held to a certain reverence of trust amongst the public.  An abuse of this trust is a serious offense to the sanctity of the concept of having an attorney represent his client's interest to the best of his ability and without being guided by any personal agenda.

A case this week concerning a short sale came across my desk and it was a prime example of the public trust being raped by the attorney.  The story goes like this:

The client has 3 properties and is hurting financially.  He went to a local attorney that was promoting itself as a foreclosure rescue specialist.  The attorney recommended that two upside down the properties (the third was the client's home in another state and is not upside down) be sold by a short sale.

The attorney said they would find a broker and the broker would find a buyer.  The charge to the client was only $750 per property up front.  The client paid the fee.  There was no written agreement as to what the attorney would do for the client.  The attorney had the client sign up with the real estate broker.

The attorney told the client that he was going to put tenants into the properties because with tenants there the properties would show better to potential buyers and the lender was more likely to short sell the houses if they were not vacant.  No mention of rent or income was made.  Next, the broker quickly found a buyer but it seems that the buyer was going to buy at a price much higher than the price given to the lender.  The client found out (by an errant email between the broker and the attorney) that the attorney was getting one-third of the profit on the sale - almost $10,000.  The client then cancelled the deal with the attorney and told the attorney what he had found out.  The attorney refunded the money (the $750 on each property) and cancelled the listing with the broker.  This part is interesting, since the broker listing was between the client and the broker - not the attorney and the broker.  So you can see the broker was in on the deal too.

The problem here should hit the reader squarely between the eyes.       

            1.  The attorney did not disclose to his client the additional compensation the attorney would be receiving.

            2.  The attorney, by participating in the "flip", was hurting the client with the lower price, causing the client additional income and tax liability or possibly greater liability remaining to the lender that can later be enforce by a suit on the promissory note balance.        

            3.  The attorney simultaneously represented interests adverse to the interests of his client (a conflict of interest).

            4.  The attorney created relationship of the broker with the client was a sham, as the attorney controlled the relationship, not the client.

The worst part of all this is that the situation is not unique!  It does not always include the attorney that is supposed to represent the client that is selling.  More often it is a "foreclosure consultant" that is supposed to "help" the seller but in fact is a representative of an investor or investors seeking to take advantage of the seller's financial plight. 

The usual common thread is that the culprit is getting paid on the differential between the price going to the lender that he price ultimately being received from the final purchaser.

I have written about various "White Knight" schemes, as well as predatory "Land Trust", "Power of Attorney", and "Quit Claim Deed" scams.  Several title underwriting companies have published articles on these issues (see the Fund article and First American article).

Be vigilant and if it sounds too good to be true, you can bet it isn't!!!!  Short sales are a process that will likely be painful to the seller who is in trouble.  It is just that he short sale process is the lesser of all of the alternatives.

Don't make a process that should hurt a little - hurt a lot!

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660  RPZ99@FLORIDA-COUNSEL.COM - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Consult with Brokers and Sellers Nationwide!  Shortsales@Florida-Counsel.com

 
Post is included in group: Short Sales and Forclosures ONLY
Post is included in group: Short Sale Specialists & Pre-Foreclosure Education
Post is included in group: Short Sale REALTORS®
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Post is included in group: PALM BEACH COUNTY SHORT SALES

19 Comments on A-T-T-O-R-N-E-Y Spells T-R-O-U-B-L-E in Short Sale

MAY
03
2008
164,632 Points
It seems short sales in general spells toruble.  I avoid them at all costs.  I will refer it out to another agent.  Too much trouble for too little money.
10:12pm • #1

It's amazing how many forms deceit can come in!

 As an agent I've had little luck with short sales from a profitability aspect. And...been threatened to be sued by the sellers just because they need someone to be the scape goat. I can't tell you how many times I've heard 'I don't know why I'm doing this...the agents are the only ones getting anything out of this"! The banks want to cut our fees...the seller want us to do it for nothing...why bother...I'm looking for more motivated sellers that respect my job!

Great post...I appreciate your position...people need the help but only a few unfortuantely respect the help!
10:25pm • #2

GARY- You can refer the short sales to me. I'm in Broward but my team handles Short Sales from West Palm Beach to Homestead. My contact is 954-665-9449 or my email is Info@SidneyJimenez.com

RICHARD- It just takes a few to ruin it for the others. Great post! Thanks for showing us what to look for.

I had a short sale that was almost derailed by a lawyer "representing" my client with the lis pendens. She was actually negotiating a Deed-In-Lieu and the lender would not return our calls. After some heavy lifting we found out what was going on. We immediately notified our client and it turns out that he didn't know what she was doing. We were able to get her to write a letter stating that she was no longer representing the seller and all negotiations were going to be handle by me. Three weeks later we had our approval letter. I wonder how many times a day this happens. Thanks again Richard.
10:26pm • #3
Short sales in CA are not trouble. The trouble I have had is bidding war again on short sales along with the lender taking too much time to respond. I also get frustrated hearing agents and attorneys committing unethical behavor. In CA we have 2 types of licenses, salesperson and broker's license. An attorney can by pass the salesperson license and obtain a broker's license. They must take the test and belong to the CA State BAR. If a property is purchased with a Federal loan, bank etc;, a person must have a real estate license to get a referral fee or commission otherwise it is a RESPA violation. It is really a shame to hear that these people took advantage of a seller who is in need of help!
10:59pm • #4
MAY
04
2008
432,448 Points 27 Featured Posts Outside Blog

Richard,

Interesting and informative, as usual. I am a little bit confused by the not that rare comments, that the problem for the Buyer in Short Sales is multiple offers. I spent a day in your backyard yesterday, accompanying my client. On the first property we called the agent, and she said they had 4 submitted offers and 3 or more back-up contracts (which I completely do not understand, as I thought that the Lender makes a decision, so why the agent keeps back-up contracts and where is the criteria, on which she had submitted 4 offers to the Lender, and holds 3).

My understanding is that when we get a property on Short sale, we price it based on what it can fetch on the market. Then, if it sits, we reduce until we get someone. I get a feeling that the reason agent get multiple offers is that they deeply discount the price.

Is that a good strategy? Isn't that a sign for a lender that this is not the best price offer?
12:28am • #5

JON- You asked the question of Richard, but I hope you can indulge my thoughts.

The pricing of the property is the single most important act in a short sale. It needs to be priced at a level where you can convince the lender that you received the best offer possible. The agents that are submitting multiple offer are doing more harm, in many different ways, than good. By submitting multiple offers the agents are creating a situation where the lender has not immediate need to approva the short sale. We must remember that the lenders motivation to agree to the loss is due to the fact that they are trying to mitigate their losses. What are those agents telling the lenders? I priced this property at a good price and we're getting many offers, so here pick one. The lender will sit and wait for an offer they want. They will set that file aside because there is no immediate need for an approval. They will pay more attention to the properties that are closer to their bank sale date. I can understand the reasoning some agents use to defend this, but that reasoning is severly flawed.

The side affect that most don't speak about is that the agents themselves are contributing to the over abundance of properties, which causes the prices to fall, which causes the lenders to take more time to process their files as they try to establish market prices. How is it in everyone's interest to have, as in your example, 7 buyers tied to one property for two or three months. Those are 6 other buyers that can be purchasing other homes. That will help more sellers, will help the market bring down the massive inventory and help stabalize the pricing.

In reading these blogs I've noticed that many of the agents that complain about the long time they need to wait for an approval are the ones that agree with the theory of submitting several offers. It doesn't make sense to do that and sooner or later there will be plenty of lawsuits going around.

Jon, anytime you see chaos and a lack of leadership or guidance--that should tell you that the powers that be are at a crossroads and will let the judicial system decide the course of action for everyone instead of taking that burden onto themselves. This is one man's opinion, but these sales and contracts need to be handled as any other contract that include contingencies. It is still an agreement between the seller and the buyer, the lender being a third party. You duties are to primary participants and you should act on their behalf and not the lenders.
12:54am • #6
5 Featured Posts

This is an interesting question - the giving of multiple offers to the bank - and my experience is inconclusive.

Last week we were discussing a short sale with a lender and we told them that we had 4 offers and we wanted to send them all of them.  The lender instructed us to only send one offer.

It seems logical to send the lender ALL offers, even if the seller does not execute them, as the offers should be an indication to the lender of the market values or direction for this particular house.  Lots of offers means the property is salable.  Lots of offers but in the low range means the value may be lower than the lender bpo indicates.  Etc Etc.

Why the lender only wanted one offer does not make sense to me.  Last time I wanted a small selection was when my future wife and I went shopping for engagement rings.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660  RPZ99@FLORIDA-COUNSEL.COM - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Consult with Brokers and Sellers Nationwide!  Shortsales@Florida-Counsel.com

7:49am • #7

RICHARD- As logical as it might seem from here the reality is that is works against the final objective. The lenders are looking for the highest number they can get and submitting multiple offers puts the lender in a position of waiting for further offers to come in. That creates a snowball effect that swallows the entire industry trowing it into a deeper pit that it already exists. What happens when you send multiple offers and the highest offer decides they don't want to wait and walks away after two months--and prices has dropped further. The lender can now insist on, at least, getting the highest number that was available. To me, it just makes more sense to submit one contract and work to get that approved.

I also have noticed that usually the agents that submit multiple offer are not preparing themselves adequately to convince the lender of the value. They are typically the once that price it a the lowest level they can, I call it fishing, and then send in everything that comes.

That techniques confuses the ledner with all these papers and tells them that they have a property which will be difficult to pinpoint a reasonable number. They will tend to heavily depend on the BPO.

To me, it has been a more successful technique to market and price the property at a level where I can demonstrate to the lender and the person doing the BPO that we received maximum value. I find that if the marketplace, my pricing, and the BPO are within reasonable pricing the lender will tend to approve the sale quicker and most times without a counter offer
9:47am • #8
MAY
06
2008
100,039 Points 3 Featured Posts Outside Blog
Richard, there always has to be a few bad apples out there and this is exactly what I meant to reference in my recent post. Greed can be a very nasty thing and too bad that homeowners can get caught up in the mess when like you said they're already hurting enough.
8:48pm • #9
MAY
14
2008

Richard: I'm looking for clarification... in your blog you state that the attorney was getting one third of the profit... who was getting the other two thirds?  

As for mulitple offers, the way I see it is this.  If you have an executed contract between seller and buyer, the property is 'pending'.  All other offers would be considered backups.  Only the executed primary offer goes to the bank.  The seller, having accepted a particular offer is pretty much out of luck going forward with other offers behind the first, just as they would in a regular sale.  The bank has no standing in that.  The seller then needs to wait until the bank says yay or nay on the first before going to the next contract in line.    A short sale contract is no different than a straight forward sale, IMO. If the seller thinks they would be able to get more for the property then they shouldn't execute the contract. 
7:40am • #10

One of the biggest issues I run into in Short Sales around Northeast Florida is investor schemes.  I have had concernes about attorneys, but all these investor $10 option scams, quit claim deeds, and "subject to existing mortgage" deals.  I wish our States Attorney would crack down more on those types who give everyone a bad name.

Mike Linkenauger
8:46am • #11

oooooh...something new!  I haven't heard of the $10 option scheme.  :)

I keep running into these 'trusts' where you have no clue who actually has the right to sell the property. 
8:50am • #12
5 Featured Posts

Cyd -

The other part of the profit was going to the realtor and the investor.

This multiple contract issue is generating a lot of controversy with the Realtors. You need to carefully read the Short Sale Addendum you are using.  Some of them would, in my opinion, allow the Seller to sign multiple contracts because the ultimate determination of which contract will be binding is up to the lender per the Addendum terms.

Watch for an upcoming article on the Trust concept............
9:11am • #13

Well, I hope that he filed a complaint with the Realtor® association because we all KNOW that's against the rules. :)

I'm not an attorney, as we all know.  But, the way it's been interpreted by our association who got legal counsel from FAR, the FAR short sale addendum is something that protects the buyer and seller from having to go forward with a contract they have both executed much as an escape clause of financing terms or inspections would.  The contract has been executed.  It does not give the seller the right to be executing contracts all over the place.    That's the word that came down to us and why our association issued the ruling.  No more contingent it goes pending.  Back ups, sure.  Multiple offers thrown at the wall to see what will stick?  No.     It still hasn't stopped quite a few people from still taking offers in the background, leaving it active even though contracts are already submitted or just putting it pending and still taking contracts in.    Me, I try my hardest not to deal with them and are informing many who inquire to speak with the bank directly or I'll do it for them with their permission as many banks are now modifying the mortgages so the owner can keep it.   A lot of Realtors® are not passing along that information which, IMO, is also not the correct way to do business, but hey...I'm just some little blonde living in Paradise, lol.   :)

 
9:39am • #14

CYD--Well said! I still baffles how it has become so normal to take multiple offers and submit all of them to the lender without regard to all the consequences. The obvious disservice done to the many people involved, including the sellers who put themselves in harms way by getting involved in something that will eventually end up in the courts. It's just a matter of time for a jilted buyer to sue an agent, buyer and the real estate company for a breach of contract. It's coming, and personally I believe that most of the industry is just sitting by waiting for the court systems to get involved and setting the parameters of how to deal with this instead of doing it themselves. They are probably acting on trying to avoid legal actions against them instead of regulating the process. It's pretty sad.

The other side to this is all the other people involved in the multiple submission that are being hurt, no to mention the market itself. Here's an example: I recently came across an agent that has submitted 9 offers to the lender and he says he will keep submitting as long as they come. He is also perplexed why the lender hasn't assigned a negotiator to this file after SIXTY days. And why should they when they have a hot property on their hands and can afford to sit and wait for their number.

Anyway, that leaves 8 buyers in the cold, including 8 other sellers not getting sold, 8 Realtors not getting their commission, 8 mortgage brokers sitting around..ect, ect. How is that a good idea? Here's another tidbit--these homes are still on the market with prices falling and falling because everything is active and everyone is trying to get their property sold so the prices are coming down too fast. That hurts the ones that are negotiating because the comps aren't there and it usually comes back higher than the contract. And the cycle continues.
11:41am • #15
MAY
15
2008
280,382 Points 1 Featured Post Localism Sponsor Outside Blog Hit Router

Want to know why else they are trouble I have been steadily working with the lender to get a bpo ordered. They said they had it down to order and never did because the attorney called up and threatened them so they said screw you and stopped the bpo and said we will foreclose that is fine. So now I have to be sweet and get them to change their mind.
4:11pm • #16
MAY
17
2008
460,638 Points 3 Featured Posts Outside Blog

I just came across this group today. I have a lot of reading to do. I am surprised that an attorney misrepresented the clients. An attorney is one person you should trust .
8:01am • #17

Hey folks! It's starting to get crazy out there. I was going to show a home yesterday and I was going through my usual Q & A with the Realtor to see if they have a grasp of the short sale before I take my clients to see the property. She told me that there were several offer into the lender and she would send every offer she received. I asked why she would do that and she said--take a seat folks--she said because "it's the law." But wait, there's more! She is cooperating with 2.5% and naturally my curiousity was to ask about that. She told me that her buyer was only willing to go that high because she couldn't pay anymore than that. What? Apparently she's unaware that we negotiate with the lender on the commissions and not the seller. Of cours, she started to get angry and quicklycut me off saying that she has been in the business for years and has done many short sales. She hung up before I could ask her how many have closed, althought I think I can give it a ballpark figure. Needless to say I told my client that he shouldn't waste his time on that property and thankfully he agreed.

Here's another--I came across another agent's listing and he is charging the buyer a $950 "processing fee" His explantion for the fee is because the lender won't pay it and he needs to get it from someone where. Huh?

So many homeowners in need and it is arleady a diffiuclt process and these poor sellers are even more behind the eight ball.
9:49am • #18
NOV
06
2008
5 Featured Posts Localism Sponsor

As an attorney myself, I truly appreciate your candor in these posts... I have read several of them and will read more, as well as share them with other lawyers in my group...

We have seen similar "meanderings" from the rule on the part of several law firms in our areas of practice, including short sale facilitation, and have found much unethical conduct...

 

Please continue to share your experience with us.
11:53pm • #19

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Richard Zaretsky, Florida Real Estate Attorney

West Palm Beach, FL

More about me…

Richard P. Zaretsky P.A.

Address: 1655 Palm Beach Lakes Blvd, Suite 900, West Palm Beach, Fl, 33401

Office Phone: (561) 689-6660 x 107

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Legal true life experiences, general observations and commentaries for Realtors, Lawyers and Mortgage Brokers - also see our Palm Beach County Short Sales group blog.


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