Short Sale Legal Issues Affecting Real Estate Agents Part #4

Real Estate Agent with Virginia Capital Realty

Recently I had a Seller ask me if he should short sale a property.   My response was that this is not a "one size fits all" solution.  It depends on his overall financial situation, other legal issues he may be dealing with, his ability to deal with any conseqences of that decision vs other avenues (foreclosure, bankruptcy, borrow from family and pay the deficiency, or rent the house).  There are many options and agents cannot properly advise on legal and tax issues that may affect a client.  I have reblogged an interesting post for all to consider.  Also visit the other blogs of this series noted below. Thank you Drew for this article.


Short Sale Legal Issues Affecting Real Estate Agents Part #4  

The previous posts in this Short Sale Legal Issues Affecting Real Estate Agents series were on 04/23/10, 04/28/10 & 4/30/10.


This series of posts is meant to assist real estate agents in recognizing: 

  1. Legal & Tax Issues their clients are exposed to through a short sale.
  2. The legal liabilities agents may expose themselves to when representing short sale sellers.

Disclaimer:  This series is not intended to advocate the hiring of attorneys and CPA's for short sales, but rather that agents should fully research and be aware of the potential legal liabilities and tax issues for themselves and their clients. 


Most agents truly care about their clients and really go out of their way to help those clients - whether they're buying or selling.   This is especially true in short sale transactions where sellers are dealing with financial hardships and the stress of maybe losing their homes.  I've personally witnessed transactions where an agent sacrificed their time & commissions in the best interests of their clients.  I've done the same several times. 

I've also witnessed transactions though, where eager agents with good intentions, unknowingly put their clients in terrible situations.  Their ignorance cost their clients or exposed them to potential future liability and/or tax issues.  Often the agent's ignorance also left them selves exposed to liability issues.   

Many agents don't realize the legal quicksand that short sales present and how the "win" of a closed sale can actually be a loss.


Common Short Sale Activities Exposing Agents to Legal Issues & Lawsuits 

Here are some common activities that occur during a short sale transaction where real estate agents may be leaving themselves vulnerable to a lawsuit without being aware of it:

  • 1. An agent labeling themselves a "short sale expert".

Holding yourself out to the public as an expert allows that claim to be used against you in court.

  • 2. Representing that a short sale is better than a loan modification, foreclosure or deed-in-lieu.

An agent is not licensed as a legal or tax expert.  An agent should not give advice on these issues.

  • 3. Discussing a listing price or price adjustments with a seller's lender.

This may be a disservice to the seller and a violation of fiduciary responsibilities to a seller.

  • 4. Gathering and turning in a seller's information for short sale approval.

Much of what needs to be gathered is confidential information.  Agents doing so are likely to be subjecting themselves to the requirements of the Gramm-Leach Bliley Act.  If an agent loses this information or it is stolen from their possession, the repercussions are not pretty.  Many agents may also leave this info openly on their desks at work - GLB Act requires it be kept under lock & key.

  • 5. Telling a seller what to turn in to their lender for their short sale approval package.

Going over a list from a lender is one thing.  Telling a seller what to include or omit to manipulate the system is a slippery legal slope.

  • 6. Negotiating with a seller's lender to hold off on foreclosure activities.

This is a very dicey issue as it's usually necessary, but could be construed as practicing law.

  • 7. Encouraging a seller's lender to accept a short sales price negotiated between buyer and seller.

An agent's license typically only allows them to negotiate between buyers and sellers, not with lenders. That's a legal matter.

  • 8. Negotiating with the lender of a seller on the amount of agent sales commission.

Under an agent's fiduciary responsibilities they're actually required to close the transaction even if the lender cuts their commission to zero.  FNMA no longer allows this practice.

  • 9. Handling the negotiations with a lender to accept less than they're owed.

A required task to put a deal together, but again it exceeds the scope of a typical real estate license.

  • 10. Dealing with a lender on seller-paid contributions to a buyer.

Again, this exceeds the scope of a typical real estate license.

  • 11. Representing to a seller that an agent can/will handle 1099 or deficiency issues with their lender.

An agent is not licensed as a legal or tax expert.  An agent should not give advice on these issues.

  • 12. Discussing the waiver of deficiency judgments with a lender.

Definitely a legal issue that agents are not licensed for.

  • 13. Negotiating with a lender to not send the seller a 1099.

Another legal issue agents are not licensed to handle.

  • 14. Working with a real estate investor to create a profit by low-bidding a short sale listing while remarketing it for a higher price without full disclosure to the lender.

This is a very hot topic and banks are vigorously pursuing fraud cases against agents.  Anna McElaney, a Connecticut agent, recently pleaded guilty in a federal case on such a transaction.  Even if the investor actually purchases a property before flipping it for a higher price, the agent involved may be charged if the lender can demonstrate the agent withheld information about the 2nd transaction for the higher price.

  • 15. Any action an agent takes that is not 100% in the best interest of their client.

Agents have to be very careful that they do not pursue a commission at the expense of their seller client's best interests.  This can be a very difficult temptation to control short sale transactions because they require so much time and energy.  An agent deserves to be paid something, but often gets nothing.

Now some of these issues may be "splitting hairs" but hopefully this list causes agents to think a bit more about their actions and the repercussions.  It's up to each individual agent, with their broker's approval, to determine the liability issues they knowingly want to expose themselves to.

Stay tuned for the next post in this series... 

NOTE: if you're the impatient type and don't want to wait to read the series as it's published, I'll send you the complete whitepaper for the series when you do ALL of the following: 

  1. Post a constructive comment on one of the posts in the series
  2. Reblog one of the posts in the series
  3. Make me an associate of yours on ActiveRain (go here:
  4. Join my Fanpage @ and send me a message there requesting the whitepaper with your email address.

If you're a Michigan agent, I'd also very much appreciate you joining a new AR group specifically for Michigan real estate professionals willing to share marketing and social media ideas with each other.


Thanks for reading and I hope you spread the word.


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Drew Sygit: CMPS, CMC, CRMS, CMLO, CALO, MBA, NAMB/MAMP Instructor & Speaker
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Comments (2)

Elite Home Sales Team
Elite Home Sales Team OC - Corona del Mar, CA
A Tenacious and Skilled Real Estate Team

There can be a lot of difficulties for a person that does not understand the problem of their words.

Jun 09, 2010 06:28 PM
Billi Evans
Murney Associates - Springfield, MO

Thank you for the re-blog. I missed this the first time. Good info.

Jun 09, 2010 06:28 PM