Agents Need to Be on Guard When Handling Short Sales

When CAR met in Long Beach in October, issues related to short sales dominated those discussions. One problem, or incipient problem, had to do with paperwork supplied by lenders to the homeowners during the course of the short sale. The point at issue relates to whether or not a cancellation of debt has been effected. There needs to be some document or piece of paperwork that explicitly states that the debt has been cancelled. Otherwise, the homeowner may find that the sale has been approved, the lender accepted less than was owed, but the borrower still owes the balance of the debt. Unless the lender accepts the lower amount as payment in full, or clearly cancels the debt in some other way, the seller will have a continuing problem. And the seller will not be happy with his agent.

Worse, perhaps, is that some lenders are including in their packages documents that explicitly obligate the borrower for payment of the balance of the loan. Now, many -- certainly not all -- of these borrowers got themselves into their present position because they weren't careful about what they were signing. They are liable to make the same kind of mistake in the short sale situation. Real estate agents -- many of whom have portrayed themselves as "experts" in handling the short sale process -- need to be especially attentive to the paper work that affects their clients in short sale situations.

Another growing area of concern is the use, by agents, of third-party short sale companies and "consultants." The appeal of such entities is that they have, or claim to have, extensive experience and expertise in negotiating short sales. Most agents have neither. Hence, it can be an attractive proposition for an agent to outsource the nitty-gritty work of completing a short sale in return for a fixed fee or for some negotiated portion of the agent's commission.

What can be the problem with such arrangements? More than a few of the short sale companies have been found not to have a real estate license for the state(s) where they are doing business.

In California, a real estate license is required of anyone who solicits prospective sellers or purchasers, and/or who negotiates a purchase or sale of real property, in the expectation of compensation. (Business & Professions Code 10131) Other states have similar laws. Moreover, a real estate licensee is not permitted to compensate an unlicensed person for performing acts for which a license is required. (B&P 10137) Also, it is illegal for non-licensees to compensate such persons as well.

It is all well and good for an agent to employ a third party -- with the knowledge and consent of the principal -- to help with a short sale. But it's a good idea to check and make sure that third party has a real estate license.


Written by Bob Hunt
December 1, 2008