I appreciate all of the comments and clarifications. You raise many valid issues.
I wrote the blog primarily from the point of view of a North Carolina attorney as that is where my practice is, but many of the issues are valid in all states. I certainly understand that the state attorney bar association and/or the real estate commission of most states have not come out with the determination that negotiating a short sale is the practice of law and should be avoided by real estate agents. However, let me address some points that you might want to consider.
Practice of Law: The Practice of Law constitutes many things, but what we are dealing with here is giving legal advise and negotiating the Seller’s debt with a third party who is not party to the Offer to Purchase contract. The agent is licensed to negotiate between the Buyer and the Seller. In a short sale you are advocating and negotiating on behalf of the Seller with a third party bank which will result in a binding legal obligation to the Seller. If there is a foreclosure filed, you are now negotiating with the bank in a lawsuit with the suing party.
Who determines these issues? The state’s bar association as a policy decision, the judge/jury will, if there is a lawsuit, or the State Legislative body. State laws are made by statute passed by the state legislative body or by case law through lawsuits in the form of precedents.
Liabilities: As stated in the original blog, every short sale has deficiency issues and/or tax consequences. With these go liabilities, so whoever is negotiating these issues carries the responsibility and possibly the liability associated with them. In other words, if you take on the job - you take on the whole job- and you may be held responsible for a certain level of competence. Let me give you an example:
I know of many situations where the agent has negotiated the short sale with the bank and has either not dealt with deficiencies at all, did not fully inform the Seller what the bank agreed to do with the deficiencies and/or inform the Seller of the tax consequences. The bank comes back in three months and says “so what are we going to do with the $200,000 deficiency?” or the Seller receives a 1099 at the end of the year requiring them to pay taxes on $200,000 (the amount of the deficiency that the bank released…also assuming they don’t qualify for the Forgiveness Mortgage Debt Relief Act of 2007).
Either scenario is going to understandably upset the Seller, who thought that it was all previously handled and settled. This unhappy situation can easily turn into a complaint to the real estate commission or a lawsuit. I imagine that both the commission or judge/jury will decide that the agent took on the job of negotiating the short sale and is therefore required to understand the subject matter, handle every aspect of the short sale and fully inform the Seller of the results and consequences. The fact that the agent did not get paid extra for the service is not a defense.
When we negotiate a short sale we make sure that there is a separate closing attorney for the Seller. This attorney usually has a background in tax law, asset protection, foreclosure law and understands deficiencies, bankruptcy and collections. This way the Seller is well informed of everything prior to signing anything. If deficiencies have not been waived, they have a deficiency plan in place. Well handled and well informed clients mean far less trouble down the road. Additionally, there are two sets of attorneys with two separate malpractice insurance policies standing between an agent and trouble. I am not sure that the agents E & O insurance even covers a mishandled short sale.
I don’t say this to scare anyone or because I watch too much TV. I have already heard that in at least two states there are ads on television with a concerned looking attorney standing in front of a bank of law books saying “Did you get a short sale? Did your real estate agent get a commission?” You know from your courtroom TV dramas that, in court, the attorney will be pounding the table and saying things like “Fiduciary Duty” and “Conflict of Interest.”
Negotiating: I teach CE classes and workshops on the The Eight Steps to a Successful Short Sale. When I address this particular issue, I invariably have an agent or two inform me that they are not “negotiating” with the bank. Instead, they say that they are just submitting information to the bank and relaying information to the Seller. I have two points here: 1. That may be true but, as discussed above, they have probably crossed the line as soon as they submitted the authorization and are now the responsible party….so you should probably be handling every aspect of the short sale, including negotiation, communication and disclosure….or getting an attorney involved. 2. If you are not “negotiating”, you really have no business handling a short sale as you are not serving your client at the highest level. The bank is often going to counter your original offer, ask for a cash contribution or a promissory note. So many short sales are lost when the agent takes the often-ridiculous counter offer from the bank to the Buyer and Seller, and the Buyer does not want to make a higher offer or the Seller can"t bring the requested cash contribution. It often takes hard-nosed “horse trading” type negotiating to reach an agreement with the bank and the investor. We too have had easy files but more and more they are falling in the “difficult” range. You would think that these short sales would be going through easier but we are seeing more banks requiring higher cash contributions and being harder-nosed about it than they were just three months ago.
Attorneys: As in every field, there are good attorneys and not-so-good attorneys. I did not write this to get more work for attorneys. I wrote it to inform and help protect agents. I know there are frustrations from clients that have paid money up front to attorneys, don’t get calls returned and don’t see immediate results. This is a relatively new area for most attorneys. Some are going to be good and some are not. I have seen three models for how attorneys collect their fee to negotiate short sales. 1. Up front fees from the Seller. 2. Part of the real estate agent’s commission. (Usually 1%) 3. Approved attorney’s fees on the HUD at closing….contingent on closing. We operate under a version of #3. We are paid on the HUD at closing from proceeds and do not receive a fee unless we close. There is no out-of-pocket cost to the agents or the buyer, and usually not to the seller when we handle a short sale. I cannot, therefore, speak directly to the frustrations of the first two methods of payment other than to say “I get it.”