Who Can Negotiate a Short Sale?

Completing a short sale involves much more than just sending in an offer that the bank accepts. By definition the Seller’s mortgage and judgment lien debts must be negotiated.  There are three issues of liability that face the real estate agent and/or a third party facilitator who takes on the job of negotiating a short sale with a bank in North Carolina.  First there is the Unauthorized Practice of Law.  Second, and just as important, is the liability that goes with every short sale.  Third is the statute concerning Debt Adjusting.

 1.  The Unauthorized Practice of Law Without a License.  A real estate agent is licensed to negotiate between the buyer and seller.  An attorney is licensed to advocate/negotiate between the client and a third party.  The unauthorized practice of law is illegal because a person who is not trained and licensed as an attorney may seriously harm the interest of a member of the public by providing incompetent legal services.

The North Carolina Bar Association has stated, “Generally, a real estate agent can negotiate strictly financial terms on behalf of the client.  Once questions arise about the legal rights of the client, such as whether a deficiency judgment may be entered or if there will be a complete release of liability or if there is a pending foreclosure, the agent is no longer negotiating financial terms, but is negotiating a legal settlement.  That would be the practice of law.” 

There are, however, deficiency issues and tax consequences associated with every short sale.  These liabilities could easily be $100,000 or more. and are discussed in detail at my Realtor Workshops.  The “Catch 22” is that the real estate agent is not allowed to represent the seller in negotiations or settlement discussion regarding the deficiencies and tax issues. If these are not discussed and properly handled, though, the real estate agent and the agency they work for may be held responsible for such neglect.  This is where law suits are born.

To take it one step further, if a foreclosure has been filed the real estate agent cannot even negotiate financial terms because that would be advocating on behalf of the Seller in a lawsuit.   This is specifically the practice of law and the agent should be even more careful as to what, if anything, they do for their client in this situation. 

The Unauthorized Practice of Law is a Class 1 misdemeanor criminal offense that may be prosecuted by the local district attorney.

 2.  Liabilities Inherent in a Short Sale.  As stated above, if a real estate agent does take on this advocacy role on behalf of a Seller, the agent may also be taking on all of the responsibility and liability that would normally be associated with an Attorney.

 3. Debt Adjuster – Class 2 misdemeanor.  The North Carolina State Statute §14-423 states: “If any person shall engage in, or offer to or attempt to engage in, the business or practice of debt adjusting, or if any person shall hereafter act, offer to act, or attempt to act as a debt adjuster, he shall be guilty of a Class 2 misdemeanor.”

 The bottom line is that if a real estate agent or a third party short sale company negotiates the Seller’s debt with the third party bank for a fee, they would be considered a Debt Adjuster under the statute and would therefore be guilty of a Class 2 misdemeanor.

So who can negotiate a short sale?  A) The Seller, because it is their debt and their short sale.  B) An Attorney.

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