How to avoid legal entanglements when working short sales and foreclosures

By Roger Cruzen

Lots can go wrong with a short sale or foreclosure transaction, even if you have some experience with them. Here are some common red flags that may signal you are about to experience a “transactional train wreck” and some suggestions from experienced agents and C.A.R. Legal staff to help you avoid one.

As the listing agent, it has been weeks since you faxed the lender a request to approve a short sale, but you haven’t heard a word from anyone and the bank isn’t returning your calls.

Rule No. 1: When submitting a short sale offer to any lender, ensure the package contains every required document, from the listing agreement and purchase contract to the hardship letter and HUD-1 settlement statement.

“The biggest problem is that agents don’t send all the information the lender needs to make a decision,” advises Robert Swanson, an agent with Troop Real Estate in Thousand Oaks, who did his first short sale back in 1978. “If they get your file and it doesn’t contain a HUD-1 statement or any of the other information they need to make a decision, that file is going to go back to the bottom of their stack and it may be weeks before it gets to the top again.”

Rule No. 2: Don’t assume the bank has received your short sale package. Swanson sends all short sale packages by fax, overnight mail, and e-mail.

Rule No. 3: Document every phone call and conversation. Also, if you have someone on the phone, use that opportunity to ask questions about the process that may be useful to you the next time you have a transaction with that lender.

Rule No. 4: Be proactive. “The first call the lender is going to receive when they are having their coffee and donuts is from me,” Swanson says. “You have to be willing to get up early to be their first call in the morning and their last call at night.”

Other tips if you’re not getting a response:

• Try the bank’s customer service line and ask the representative to stay on the line until a lender answers the phone;
• If you’ve identified the bank representative who is handling your file, make sure you have all his or her contact information, including telephone extension and e-mail address. And get the boss’s name and contact information while you are at it, in case your contact changes jobs or your file is passed to another contact.

You’ve spent months negotiating the details of a short sale between your client (the seller), his bank, and an interested buyer. Just as it seems the transaction is about to close escrow, you learn that the buyer is backing out.

Many REALTORS® can share a tale or two about ending up on the short end of a short sale. Though lenders say they are willing to consider short sales, these transactions may turn into bona fide train wrecks before they close escrow.

In this scenario, there are a number of actions you, the listing agent, might take to solidify your position.

As an example, the seller and buyer may agree that, upon the lender’s approval of the short sale, the buyer will place a deposit into escrow and remove contingencies within a certain timeframe. Once the buyer’s contingencies are removed in writing, the seller may be entitled to the deposit in the event the buyer gets cold feet.

From a more practical standpoint, you can prevent buyer fall-off by pre-qualifying both sellers and buyers when there is a potential short sale, says Swanson.

“You really need to make sure the buyer has the patience to spend 30 to 90 days waiting for an answer from the bank,” says Swanson. “I try to get my deals done in 21 to 45 days so the buyer won’t walk.”

Another key to avoiding a short sale blow-up is the seller’s motivation and the lender’s interest in the seller’s mortgage.

“You need to know right up front if the seller is working on a loan modification, if they have stopped making payments, or whether there’s a chance that they may file for bankruptcy,” Swanson notes. “Some lenders won’t even consider a short pay unless the homeowner has stopped making payments. You also need to know whether there is a second [trust deed] and who that lender is. Eighty percent of the deals I do are situations where the first and second are with the same lender. If the second is with a subprime lender, chances are they have outsourced loss mitigation and [closing] the deal will be a lot more difficult.”

After months of cold-calling a large bank’s asset manager, he finally agrees to give you a few listings. However, not only does the bank expect you to evict any occupants, but one of the properties is located 250 miles away. You think to yourself, “I don’t want this guy to think I’m not up to the task—and I can probably handle that out-of-area property without bothering to visit it.” So you agree to take the listings.

This scenario contains several red flags signifying possible “danger ahead.”

“First, it is important to remember that you may be dealing with an asset manager who has never been a licensed real estate agent, and who may be dealing with 300 or 400 properties at a time,” says Carlos Aguilar, a San Diego REALTOR® with Axia Real Estate Group and a former asset manager. The result: Usually the faster the home is emptied of tenants and sold, the better. That’s why you should make sure your actions comply with state and federal law.

“Agents have reported situations where they are being told to change the locks or throw out personal property, even though resorting to self-help exposes the agents to potential liability,” says C.A.R. Member Legal Services Attorney Stella Ling. “Rather than taking on those tasks themselves, agents unfamiliar with handling evictions may be better off encouraging the bank to hire an unlawful detainer attorney or eviction service.”

Second, the decision to skip a visit to a distant REO listing is a recipe for trouble down the road, Ling warns.

You may reason that a visit isn’t necessary because your bank client, who is purportedly selling the property “as is,” is exempt by law from completing a Transfer Disclosure Statement. Or you may assume that the REO buyer will hire his or her own inspector to give the property the once-over before escrow closes.

However, California law generally requires an agent to conduct a competent and diligent visual inspection of a one-to-four-unit residential property and disclose any material facts affecting the value or desirability of the property that an investigation would reveal. That law applies to REOs, except certain subdivisions.

Although it’s up to an REO buyer to decide whether to get an inspection, Aguilar discourages buyers from waiving that right when he is the listing agent. If they do, he asks for the written waiver to include a statement that the buyer is doing so against his advice.

As the buyer’s agent, you have been going back and forth for weeks over the details of an REO transaction with the listing agent representing an out-of-state lender. When you last spoke to the bank’s agent, everything seemed to be in order. But as you pull the bank’s latest response from the fax machine, you notice that: (1) The bank has not signed the C.A.R. Residential Purchase Agreement, and (2) the bank attached a 10-page addendum that contains many provisions that are unfavorable to the buyer, including the waiver of the buyer’s rights.

REO transactions may not be like other residential transactions. For one, banks often insist on using their own forms and contracts—ones expressly designed to represent the bank’s interests as the seller. It is not uncommon for a lender to return a buyer’s offer to purchase unsigned or demand that the buyer waive a whole host of provisions.

That said, there are several ways to handle this potential train wreck:

Proceed with the transaction. No signature, no contract, no deal—right? Not necessarily, says Ling. For a buyer to enforce a sales contract, it must generally be signed by the REO lender. However, there are certain exceptions to that general rule. A buyer may choose to move forward, because even an unsigned contract could eventually be ratified through the parties’ subsequent conduct. If the parties both act as if they have a contract by, for example, opening escrow, ordering an inspection, or negotiating a credit in lieu of repairs, a court may rule that these actions created an enforceable contract. Caveat: Make sure your buyer has a strong constitution and understands he or she could lose the deposit.

Reject or renegotiate the undesirable provisions in the addendum. In the end, banks want to close REO deals, and some have become more agreeable in order to move large numbers of properties in the shortest possible time. One approach for the buyer would be to strike out some or all of the offending provisions and see what happens. Tip: Have your buyer sign a C.A.R. REO Advisory, which states that the agent cannot advise the buyer regarding the legal ramifications of lender-prepared addenda. Once the buyer has reviewed the documents and consulted with an attorney, he or she should be better prepared to respond to the lender, if at all.

Roger Cruzen is a freelance writer.