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I was reading about short sales, as I do every Sunday morning on a great site for short sale information Short Sale Superstars. There was a discussion about a Bank of America Short Sale that had been approved, and then denied after the approval, a few days before closing. The reason:

The seller was a real estate broker and the listing agent works for the seller. The buyer used the listing agent to represent her.

Surprise Surprise, B of A said this is not an Arm's Length Transaction and rescinded the approval.

There are multiple things wrong with transaction so let me see if I can organize the problems coherently.

1. All short sales must be an Arm's Length Transaction and an affidavit needs to be signed by all parties saying they are not related to each other in any way. The listing agent works for the seller so that is not arms length.

2. The seller may be offered a closing incentive by the bank, but is not allowed to receive any money from the buyer. Since the buyer is using the the listing agent who works for the seller and would have received commission for the sale, a portion of which would go to the broker, then the seller is getting money from the buyer.

3. Again, since the listing agent works for the seller and would get commission from the sale, a portion of which would go to the broker, the seller would be receiving money from the sale outside of the closing incentive.

4. The buyer has agreed to a dual agency and is entitled to the information that the listing agent works for the seller and that this can cause potential problems with The Arm's Length Transaction.

I do not know if the seller was trying to pull something over on the bank, or if he was just not familiar with short sales but this was totally avoidable.

Buyers: get your own agent to represent you.

Sellers: If you are a broker, get a different company to represent you. If you are an agent, get another agent to represent you, not your broker, and ask the bank if it is ok to be represented by someone else in your campany first, not after you are about to close.

If you have any questions about buying or selling a short sale in Santa Clara or San Mateo County please feel free to contact me.

Marcy Moyer

Keller Williams Realty

www.marcymoyer.com

marcy@marcymoyer.com

650-619-9285

D.R.E. 01191194

PRESENTING THE SHORT SALE ADDENDUM YOU CAN'T SIGN!   Agents hold on to your wallets as this could cost you big time!  This is just too big and important to let one blog article suffice.  And developments on this are occurring quickly.  The problem was pointed out in my ActiveRain re-blog Freddie Mac Short Sale Addendum - Item #13 - I DON'T THINK SO!! on September 9, 2011.

On September 3^rd there was a telephone conference call between ALTA (American Land Title Association) staff in Washington, DC and Freddie Mac’s Short Sale team to specifically discuss the addendum reproduced in Freddie Mac Short Sale Addendum - Item #13 - I DON'T THINK SO!! .  No resolution was then reached and as of today, none has been presented.

According to the below emailed alert to certain ALTA members (including our title underwriter), the problem with the document goes much further than even reported in my earlier blog article.  ALTA points out that (1) the document requires closing and escrow agents to certify information that is not available to them; (2) the document places a negligent misrepresentation standard on the escrow / closing agent that requires the escrow / closing agent to use reasonable efforts to determine if the transaction is arm’s length – without setting forth what those reasonable efforts would or could be; and (3) the document requires that the document be signed by the escrow / closing agent individually, without corporate protection, meaning that if there is a loss because of fraud or misrepresentation by any party to the transaction, the agent could be fully and personally liable. SINCE REAL ESTATE AGENTS ALSO SIGN THIS DOCUMENT, THE SAME LIABILITY AND RISK AFFECTS THEM AS WELL.

I am checking with my E&O carrier to see if they will cover such a claim.  If they don’t, then I cannot risk my own capital and family wealth for the meager fees of a short sale closing, and I suspect anyone who actually realizes what this document does, also will not close such a sale.

For any of you that think this is negotiable, here is a response I got today when I told a Bank of America negotiator on a Freddie Mac loan that I can’t sign if the E&O won’t cover the claim. “Thank you for letting me know.  Without the document we cannot proceed with the short sale and must decline the file.  How long do you think it will take for your E & O carrier to make a decision as to allow you to sign the document?  I cannot have any outstanding files, so should I decline the file at this time or do you think this is something that can be checked on quickly?”

Fraud is a big problem with some markets of distressed property and I have written about it in several articles - often times with flipsters phoo phooing the concept as being fraud: SHORT SALE FLIP - QUESTIONABLE METHODS;  Short Sales and Title Insurance - Critical Look at Hybrid Closing Schemes;  IS SHORT SALE FLIPPING CRIMINAL ACTIVITY?.

ALTA is looking for examples where the Addendum is causing hardship to borrowers and consumers.  If you have any please send the information to Steve Gottheim, Legislative and Regulatory Counsel to ALTA at steve@alta.org.

Here is the information transmitted by ALTA:

 ALTA Meets With Freddie Mac Short Sale Team About Troublesome Addendums
On Friday, ALTA staff held a conference call with members of Freddie Mac's Short Sale team about the industry's concerns over new short sale addendums. These addendums are intended to help prevent short sale fraud (which is on the rise) by requiring all of the parties involved in the transaction to sign an affidavit attesting that it is a true arms-length transaction.

The addendums present three concerns for the industry. First, the affidavit requires a closing or escrow agent to certify information that is not available to them, in particular whether the transaction is arms length. The relationship between the buyer and seller may not be evident from the public record information or their identification documents. Second, the affidavit places a negligent misrepresentation standard on the escrow agent. Unlike a "to the best of my knowledge standard" a negligence standard requires the escrow agent to use the reasonable efforts of an ordinary person to determine whether the transaction is arms length. Instead of laying out clearly what the escrow agent must do to release themselves from liability, the escrow agent is at risk of liability if fraud is discovered after signing the affidavit. Lastly, the affidavit requires the escrow agent to sign the transaction in a personal capacity as well as in a corporate capacity. Thus if fraud is discovered, then Freddie or the servicer can go after the escrow agent's personal property and monies in addition to going after the corporation.

Before signing any of these addendums, ALTA suggests escrow agents reach out to their attorneys to discuss the legal risks and whether the agent has the authority to sign the document. It might also be good practice to review your companies E & O insurance policy to determine whether these addendums are within the scope of that policy.

While the short sale team expressed sympathy for the title industry's concerns and were open to discussing potential solutions, Freddie's general counsel is not keen on removing the requirement all together unless the problem becomes a bigger issue. Over the next few weeks, ALTA staff will be working with interested parties to develop potential solutions. If you would like to learn more or have any comments please contact ALTA's Legislative and Regulatory Counsel Steve Gottheim at steve@alta.org

I have still not heard from my errors and omission carriers on this issue.  An initial "from the hip" reaction was that E&O did not cover this as it was not the performance of legal services.  But the respondant did not realize that a "short sale facilitator" is just the title on the document and we have a written retainer with the client to perform legal services including legal advice and guidance on the completion of these and the other myriad forms.  So "the jury is still out".

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Copyright 2011 Richard P. Zaretsky, Esq.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make.  This article is for information purposes and is not specific advice to any one reader.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660   RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide!  Shortsales@Florida-Counsel.com  New Website www.Florida-Counsel.com. 

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