SHORT SALES: HOW TO HANDLE

By William L. Jansen

October, 2011

Corte Madera, California

© Copyright Broker Risk Management 2011

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SHORT SALES – HOW TO HANDLE

Table of Contents Page (s)

SECTION I. SHORT SALES – AN OVERVIEW 4 - 13

Background 4

Practice Tips for Listing Agents 5

Prepayment Penalties 5

Cash to Close 5

Seller Alternatives 5

Reality Check 5

Listing Form 6

Working with Lenders (and Sellers) 6

Commissions 7

Submitting Offers to Lender 7

Mortgage Assistance Relief Services (“MARS”) 8

What is “MARS”? 8

Requirements 8

Forms 8

Compliance 8

Practice Tips for Listing Agents 9

Practice Tips for Buyer Agents 10

Check for Short Sale 10

Discuss with Buyer 10

Purchase Agreement Clause 10

Review Preliminary Title Report 10

Other Offers 10

Commissions 11

Short Sale Information Advisory 11

Things Not to Do 11

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SECTION II. ISSUES FOR LISTING AGENTS 14 – 17

Listing Property with a Recorded Notice of Default 14

Selling Broker Compensation 14

Handling Offers 15

Practice Tips for Listing Agents 16

Is Seller Still Liable 16

5+ Unit Properties 17

SECTION III. ISSUES FOR LISTING /SELLING AGENTS 18 – 29

Short Sale Negotiators: Practice Tips for Listing Agents 18

Experience 18

Documentation 18

Fees and Compensation 18

Advance Fees 19

Buyer to Pay for the Short Sale Negotiator (“SSN”)? 19

Charging the SSN Fee to Buyer’s Agent 19

Charging the SSN Fee to Buyer 19

Practice Tips for Buyer Agents 20

Practice Tips for Brokers/Managers 21

Short Sales with More Than One Lender 22

Payments Outside of Escrow 22

Adequate Notice to 1st Lender of Payment to Second 22

Practice Tips 23

Short Sale Flippers 24

Handling Home Equity Sales Act Transactions 27

Tenant Deposits in Short Sales 29

SECTION IV. ISSUES FOR BUYER AGENTS 30 – 32

Writing the Offer 30

Practice Tips for Buyer Agents 30

Buyer Wants to Cancel – Found Other Property 30

Practice Tips 32

SELLER SHORT SALE ADVISORY FORM 33

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SHORT SALES – HOW TO HANDLE

This Short Sale “White Paper” incorporates all individual Weekly Practice

Tips as of October, 2011.

This document is attorney-client privileged and for the exclusive use of clients of Broker Risk

Management and their agents. It may not be reproduced or distributed without the express

written consent of Broker Risk Management. The advice and recommendations contained

herein are not necessarily indicative of standards of care in the industry, but rather are

intended to suggest good risk management practices.

Copyright© Broker Risk Management 2011

I. SHORT SALES – AN OVERVIEW

A. BACKGROUND

A “Short Sale” is a sale where a lender agrees to take less than the full amount due on the

loan on the property. If there is more than one lender, it is the junior lender (as measured by

time of filing of the deed of trust) who is in the greatest danger and should be willing to take

less than the full amount due. The reason for this is that, if there was a foreclosure by the

holder of the most junior lien, they would not get the full payment. If there was a foreclosure

by a senior lender, such as the holder of the first, the junior lienholder(s) could get foreclosed

out, potentially getting nothing.

Institutional lenders understand this, and usually do not want to take a property back as a

foreclosure into their Real Estate Owned (“REO”) department, since this is an expensive

process and looks bad on their record with the regulators. They will usually work with you,

but you have to find the right person to talk to, usually a vice president or department head.

If the junior lienholder is a hard money lender, friend or family member, you may find it

difficult or impossible to negotiate with them. You may not have a saleable listing. One

phone call to that junior lienholder may make that clear.

Listing and selling agents should be aware that:

Lenders are under no obligation to agree to a short sale; although most

institutional lenders will actively try to avoid a foreclosure by working with

the seller/borrower on a short sale.

Lenders are under no obligation to process a request for a short payoff within

any particular timeframe. So, sellers, buyers and agents must be prepared for

a process that may take weeks, or even months, regardless of the time frames

in a Purchase Agreement.

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With the exception of certain conforming loan lenders who are required to

follow commission guidelines, lenders are under no obligation to agree to a

short payoff demand that will allow brokers to be paid a commission.

However, most institutional lenders will agree to a payoff demand that will

allow brokers to receive a commission, if not necessarily the full commission

agreed to by seller.

PRACTICE TIPS FOR LISTING AGENTS:

1. To avoid the problem of a short sale, or at least anticipate it, at the time of taking a

listing, go over the existing financing and indebtedness on the property with every seller.

Begin the preparation of a Net Sheet. Be careful to be as accurate as possible with the Net

Sheet as this will be a key document used by the seller’s lender in determining the short

payoff amount. Ask about any liens, judgments or attachments. Get the Preliminary Title

Report (“PTR”), or a Property Profile, from escrow early and review it to see if there will be

enough proceeds from the sale to pay off all recorded liens, judgments and attachments – as

well as your commission. If not, discuss with the seller before you proceed. Ask if seller is

current on loan payments and, if not, determine how many months seller is behind. These

missed payments plus penalties will be accrued to the payoff amount due to the lenders. Start

early to resolve the problem.

2. PREPAYMENT PENALTIES: Be sure to include any prepayment penalties into

your calculation, since this can take a significant amount out of seller‟s proceeds.

3. CASH TO CLOSE: Do a detailed “net sheet” showing all closing expenses to

determine how “short” the projected sales price may be. If the amount is not too great,

discuss with your sellers whether they have the ability, and whether it might make sense, to

bring cash to close the escrow to avoid having to do a short sale. If your sellers state that they

are willing to do so, document that in writing since: (a) technically, this will not be a Short

Sale; and (b) there will be enough cash to close the sale and cover all closing expenses.

Advise your sellers that, based on their representation, they will be bringing sufficient cash to

close the escrow so you will not advertise their property as a short sale. A good idea would

be to actually put this in the “Additional Terms of”, or in an Addendum to, the Residential

Listing Agreement.

4. SELLER ALTERNATIVES: A seller has other options to a short sale, such as: (a)

the seller/borrower may be able to negotiate a “Short Payoff” without a sale of the property;

essentially a restructuring of the debt; (b) the seller/borrower may ask the lender to accept a

“Deed in Lieu” wherein the lender agrees to accept a conveyance of the property in

satisfaction of the loan; (c) a seller/borrower may even prefer to allow a foreclosure under

some circumstances; OR (d) bankruptcy. Do not advise sellers regarding these

alternatives: sellers must be sent to their legal and tax advisors in making these

decisions BEFORE SIGNING A LISTING AGREEMENT ON A SHORT SALE.

5. REALITY CHECK: Before proceeding with taking a short sale and expending your

time and expense, assess the likelihood of actually being able to accomplish a short sale given

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the amount of indebtedness, who the lenders/creditors are, and the market for this property at

the projected list and sales price.

6. LISTING FORM: Give your seller a copy of the “Short Sale Information Advisory”

(ZipForms form SSIA) and have seller sign it prior to signing a listing agreement.

7. If you choose to help your seller negotiate a short sale with a lender (you have no

obligation to do so but most sellers don‟t know what to do), some lenders will not talk to you

without written authorization.

FORM: You can get that authorization using CAR form “Authorization to Receive

and Convey Information” (ZipForms ARC).

8. Advise your sellers that the lender will want documentation, which may include: a

“hardship” letter, tax returns, W-2‟s, pay stubs, a list of other assets, etc. Remind your seller

that this information must match the information on the loan application. If the loan

application was wrong, the lender might charge that there was lender fraud when the

loan was taken out.

9. Lenders will usually report the short sale to credit reporting agencies, which will reflect

negatively on the seller/borrower‟s credit report for seven years. If the lender is agreeing to a

short sale, ask them if they are willing to show the file as the more favorable “paid in full.”

Most will not, so discuss this with your seller and get their approval before proceeding with

the lender.

10. You may be able to negotiate even with senior lenders for removal of penalties and

other added fees to help get the total of the demands into escrow reduced. It‟s worth a try.

11. If sellers have any questions about the above, they should be sent to their tax advisor

or attorney. Be careful not to refer your seller-clients to mortgage foreclosure consultants

who charge a fee (NOTE: It is illegal for mortgage foreclosure consultants to charge a fee

in advance of providing services); many of these people are less than honest and you could

incur liability if these consultants damage your clients.

12. The fact that this is a short sale must be disclosed to a buyer. This must be done, in the

purchase agreement; however, good practice would be to alert a prospective buyer and the

buyer‟s agent prior to the writing of an offer so they are not taken by surprise at the time of

the contract ratification.

13. Since the purchase contract must state that this will be a short sale, and that close of

escrow by seller is conditioned upon the successful negotiation with the lender(s) to demand

not more collectively than the sale proceeds, net of closing expenses including commissions,

ALWAYS use the CAR “Short Sale Addendum” (or in the PRDS region, use the PRDS

Short Sale Addendum.)

14. Sellers should be advised that there can be adverse tax consequences to seller as a

result of a short sale to the extent that seller receives relief from mortgage debt by the lender

in a short sale unless the property loan qualifies for the federal and California exclusion from

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this tax as a “Qualified Principal Residence Indebtedness,” which is defined as debt incurred

in acquiring, constructing, or substantially improving the residence (up to $2 million) plus

other criteria. All such relief from mortgage indebtedness is taxed by the State of California.

Send your sellers to their tax advisors for advice on this subject.

FORM: CAR form Short Sale Addendum (ZipForms Form SSA) covers items 14

and 15, above and should be incorporated into every short sale purchase agreement.

FOR FURTHER INFORMATION: See the CAR Legal Memorandum

entitled “Taxation of Foreclosures, Deeds in Lieu of Foreclosure, and Short

Sales” at http://www.car.org/legal/tax-folder/taxation-foreclosures-

shortsales/

15. COMMISSIONS: If you anticipate that the sale will or might be a short sale, place a

conditional offer of compensation in the MLS broker comments, such as:

“Short sale – subject to lender approval. Any reduction in total commission

received will be split evenly between Listing and Selling Brokers.”

If you are taking a listing which might, or might not, be a short sale depending on the

final sales price, you still want to protect your commission in the event you are ratifying at a

price which will make the transaction a short sale by putting the following in the MLS

confidential remarks:

“If this is a short sale – subject to lender approval, any reduction in total

commission received will be split evenly between Listing and Selling Brokers.”

Or, alternatively, you can propose some other arrangement as to who absorbs any

shortfall in total commission received. It would appear, however, that an even split between

listing and selling brokers would be most equitable.

FOR FURTHER INFORMATION: CAR has good information online

entitled “Short Sale Advertising” at: http://www.car.org/legal/advertising-

folder/short-sale-advertising/

16. SUBMITTING OFFERS TO LENDER: Once you have submitted an offer to the

lender for consideration of a short payoff by them (and the contract is contingent on lender‟s

approval of a short payoff as it should be), continue to market the property. With your seller‟s

permission, if you receive another offer, or offers, you should ratify those in backup position

and submit those offers to the lender for their consideration as well. The lender has the right,

for example, to choose to reject the first offer on their desk and accept a later, better offer. In

such a case, the first offeror‟s contract is effectively cancelled (and should be mutually

cancelled in writing) based on the Short Payoff contingency, and the second offer accepted by

the lender for a short payoff proceeds forward. A higher offering price may benefit your

seller by making the lender more willing to participate in the short sale and/or reduce.

NOTE: The ZipForms form Short Sale Addendum requires seller to notify buyer if any

accepted backup offers or other subsequent offers are submitted to seller’s lender.

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17. MORTGAGE ASSISTANCE RELIEF SERVICES (“MARS”)

A. WHAT IS “MARS?” The Federal Trade Commission enacted rules called

Mortgage Assistance Relief Services (MARS) for real estate agents and others who

negotiate short sales (and loan modifications, deeds-in-lieu, etc.) on behalf of

borrowers/sellers. These rules became effective January 31, 2011.

B. REQUIREMENTS: Under the MARS regulations, real estate agents who

provide, arrange for, or advertise short sale negotiation services for short sale sellers must

comply with the MARS rules, including, but not limited to, certain disclosure, advertising and

record keeping requirements. Further, MARS states that licensees subject to these rules may

not do any of the following:

1. Request or receive any payment until the seller enters into a written

agreement with the lender. (Note that California law further restricts advance fees.)

2. Represent that a seller should not contact the lender;

3. Misrepresent the likelihood of obtaining a short sale;

4. Misrepresent the amount of time it will take to complete a short sale;

5. Misrepresent the seller‟s obligation to make loan payments; or

6. Represent the benefits of any MARS service unless such representation is

based upon reliable evidence.

C. FORMS: CAR has created two forms for complying with the MARS

regulations. They are:

1. MARS Short Sale Negotiating Notice (ZipForms form MARSSN)

2. MARS Offer of Mortgage Relief Notice (ZipForms form MARSMRN)

D. COMPLIANCE: The Federal Trade Commission (which created the MARS

regulations), and now the newly-created federal Consumer Financial Protection Bureau

(“CFPB”), which has taken over the MARS regulations from the FTC, have made clear that

the MARS regulations do not apply to real estate listing agents who take short sale listings so

long as the agents meet three criteria:

1. The agents are licensed and maintain good standing under state law;

2. They are acting in compliance with state law governing the practices of

brokers and agents; and,

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3. They are assisting or attempting to assist a consumer in negotiating, obtaining

or arranging a short sale of a dwelling in the course of securing the sale of the consumer‟s

home.

4. So, if listing agents and brokers satisfy the above three requirements, they no

longer need to:

a. Provide CAR form MARSSN when taking the listing.

b. Provide form MARSMRN at the time they obtain the lender approval

letter.

c. Include the MARS disclaimer notice in advertisements when marketing

properties.

d. Comply with MARS‟ other record keeping and monitoring requirements.

However, because there remains some concern amongst attorneys surrounding the MARS

disclosures at the time that the lender‟s Term Sheet is delivered to the seller, and at the time

that the seller then delivers that Term Sheet to the buyer per the requirements of the Short

Sale Addendum to the Purchase Agreement, a disclosure that addresses these issues should

be given to sellers at the time that the Term Sheets are delivered to your seller on each of

your short sale transactions. (SEE TIP 2 BELOW.)

PRACTICE TIPS FOR LISTING AGENTS:

1. As a short sale listing agent you no longer have to give sellers the MARSSN or the

MARSMRN forms, nor do you have to include the MARS advertising disclaimer in your

advertisements regarding short sale listings.

2. As a short sale listing agent, each time that you deliver a Term Sheet from a lender

to your seller, give your seller a copy of the “Seller Advisory Regarding Lender’s Term

Sheet and Seller’s Instructions to Listing Agent.” This Advisory appears at the end of

this document.

3. Review the paragraph entitled “Instructions to Listing Agent” which contains a

default instruction that seller must give you, the listing agent, a written instruction before you

deliver the Term Sheet to the buyer’s agent. If you wish to have a different instruction, there

are check boxes for that purpose. Have your seller check one of those boxes ONLY if you

want to change the default instruction.

4. Have the seller sign this document, giving seller a copy for their files.

5. Only deliver the Term Sheet to buyer’s agent per the instruction from seller.

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6. Any DRE licensee engaging in the following activities must still comply with

MARS:

a. Pure short sale negotiations.

b. Promoting their services as a way to help property owners avoid foreclosure.

c. Loan modification negotiations.

d. Deed-in-lieu negotiations.

PRACTICE TIPS FOR BUYERS’ AGENTS:

1. CHECK FOR SHORT SALE: Prior to writing an offer, review the MLS remarks

to see if the listing agent has indicated that this property is, or may be, a short sale.

2. DISCUSS WITH BUYER: Upon learning that this is a short sale, discuss the

situation with your buyer. Your buyer is taking a bit of a risk since your buyer could spend

hundreds or thousands on inspections and loan applications, only to have the deal cancel

because the seller could not negotiate a short sale with their lender, or the lender chooses to

approve another contract from a different buyer. Make sure your buyer understands the risks

and is making a conscious decision to proceed. Document your transaction log and/or

confirm the decision in an e-mail or other correspondence with your buyer.

It is not a good idea to have a buyer who is coming out of a 1031 Exchange enter

into a contract to buy a property which will be subject to a short sale. The short sale may take

months, which could force a close of escrow on this “up-leg property” past the time required

to complete the exchange, resulting in severe tax consequences to the buyer/exchanger.

3. PURCHASE AGREEMENT CLAUSE: Be sure that the Short Sale Addendum

is a part of the purchase agreement (CAR form SSA). This form can protect your buyer in

the event the lender does not respond to a request for a short payoff in a timely manner by

allowing your buyer to cancel the purchase agreement and get the buyer‟s deposit returned if

the lender does not approve the short payoff within the time specified. It does allow the seller

to cancel as well in that situation, so buyer should be aware of that possibility. It also allows

for the parties to agree as to whether the time for contract performance and contingency

removal will commence upon the approval by the seller‟s lender of the short payoff (the

default mode), or at the time of ratification of the contract.

4. REVIEW PRELIMINARY TITLE REPORT: Immediately upon getting the

PTR, review the liens on the property. If the total liens and encumbrances start to approach

the purchase price, and listing agent has not advised you that this may be a short sale, discuss

the situation with the listing agent.

5. OTHER OFFERS: Your buyer should also be advised that the lender may

entertain other offers from other buyers, agree to work with another buyer, and reject your

buyer‟s offer. Even if your buyer‟s offer has been accepted by seller subject to the existing

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lender‟s approval, the lender may accept another, better offer even though your contract has

been submitted for quite some time. Your buyer should be advised that if they expend funds

on inspections and on obtaining a loan, they could lose these funds if buyer‟s contract is

rejected by the lender.

6. COMMISSIONS: Check MLS comments re broker compensation. If you are a

buyer‟s agent concerned about getting paid on a short sale, you can enter into a Buyer-Broker

Agreement with your Buyer. (CAR form BRE or BRNE)

Please also read the comprehensive CAR Legal Memorandum “Short Sales” at:

http://www.car.org/legal/foreclosure-short-sale-folder/short-sales/

18. SHORT SALE INFORMATION ADVISORY

As any agent who has handled short sales knows, these transactions are different animals

from regular sales. There are many legal, tax, contractual, strategic and tactical

considerations which must be taken into consideration by a seller or a buyer before deciding

to proceed with a short sale transaction. It is important that agents not only be aware of these

issues, but also to advise their seller and buyer clients regarding those matters, and document

their files as to having given such advice.

For these reasons, always give your seller a Short Sale Information Advisory (ZipForms

form SSIA) as soon as you have listed a short sale property.

19. THINGS NOT TO DO

Here are some troubling Short Sale trends to watch out for:

A. Straw buyers to get the bank to commit to a price. Some listing agents create

dummy contracts or have a straw buyer write a short sale contract to send to the seller‟s lender

to get the lender to commit to a price. DON’T DO THAT.

B. Not informing the bank that the short sale buyer cancelled -- to try to get the

bank to commit to a price. Some listing agents do not inform the seller‟s lender that the first

buyer has cancelled in order keep the lengthy process going, or to get the bank to commit to a

price, and then advertise that price. DON’T DO THAT. You and your seller owe a duty of

honesty and fair dealing. See comments below.

C. Advertising that a lender has approved a short payoff price. Some listing agents

advertise that the lender has already approved a short sales price. DON’T DO THAT. The

seller‟s lender may change their mind and require a higher contract price, and the buyer has

relied on the listing agent‟s representation that the short sale will be easily approved by the

lender.

D. Also, remember, the lender is entitled to know the whole truth. The seller has a

contract with the lender (the Promissory Note secured by the Deed of Trust) and thus has an

obligation to the lender of honesty and fair dealing. The listing agent has a fiduciary duty to

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inform the seller of pertinent information so that the seller does not take steps to deprive the

lender of the benefits of that contract by concealing facts detrimental to the bank.

If the lender gives an approval on a sales price that is then advertised, the listing agent

may have deprived the lender of the opportunity to achieve a higher sales price. Also, there is

no guarantee that the lender will approve that price on a subsequent contract with a different

buyer.

E. Not accepting back-up contracts, or not sending back-up contracts, to the lender. When taking a listing, ask the lender‟s negotiator what they want to see. Most want to see all

offers. In fact, many lenders have guidelines that state that they want to see all offers. And

the Term Sheet accepting the short payoff often has a representation that the lender has seen

all offers. If the negotiator for the lender tells you that they do not want to see any more

contracts, document that statement in your file. Unless instructed otherwise by seller‟s lender,

if you receive other offers, recommend to your seller that he/she ratify the best offer or offers

in back-up and send them to the lender.

F. The second lienholder says it is OKAY to pay them outside of escrow. In many

cases where there are two lienholders (banks) on the property, the second lienholder (who is

usually totally under water) wants to be paid more money than the first lienholder (who is

only partially under water) is willing to allow. So, if the listing agent, the short sale

facilitator, or even the negotiator for the second lienholder suggests a method to get money to

the second outside of escrow, DON’T DO THAT. That is a violation of the specific escrow

instructions of the first lienholder in their Term Sheet.

G. The second lienholder wants the agents to pay them a part of their commission.

In a variation on that, the second lienholder wants a payment from the agents from their

commission through escrow which will be shown on the HUD-1. The problem is that the first

lienholder has authorized a certain amount to be paid to the second. This should not be done

unless you have evidence that the first lienholder has approved such a payment in a timely

manner in advance of close of escrow. The HUD-1 comes late and is often overlooked and

cannot be counted on as providing adequate notice to the first of the payment to the second.

H. Schemes to get money to the seller, or for the benefit of the seller. Virtually every

Term Sheet from seller‟s lenders in short sales states that no money shall be paid to the seller.

This means directly or indirectly, such as to pay indebtedness of the seller. There are various

approaches to get around this prohibition – and they are getting more creative.

I. For example, Sellers come up with last-minute seller debts that must be paid

outside of escrow. In a recent trend, after the buyer is in escrow and wants to close, and

perhaps after the lender has approved the short payoff, then listing agent announces that there

is a seller debt that must be paid by the buyer outside of escrow. In some versions, the listing

agent says that the lender must not know. In other versions, the listing agent will represent

that the lender has approved the payment outside of escrow. Unless you have written

approval from someone in authority from the lender or lenders (which you won‟t get, because

lenders don‟t approve such payments), DON’T DO THAT.

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In yet a more cynical approach, the listing agent will announce that there is a person or

entity (usually a recently-formed LLC) who has a judgment against the seller, or mechanic‟s

liens which will be filed against the property (thus stopping the sale) unless the payment is

made by buyer. In these schemes, usually the seller and listing agent are in on the scam.

They may even have a person with a contractor‟s license file bogus mechanic‟s liens for a

portion of the kickback. Don‟t fall for these scams.

Also, if your buyer thinks that they want to participate in such a payment, advise your

buyer to talk to an attorney.

BOTTOM LINE: The longer short sales are around the more “creative” the sellers

and unscrupulous agents are becoming. This short sale phenomenon will end someday, and

you want to keep your license, your money and your reputation.

If the scheme doesn‟t pass the “smell test” or even the “giggle test” (you have to laugh

as they are explaining it to you), look deeper, and you would be wise to pass.

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II. LISTING AGENTS

A. LISTING PROPERTY WITH A RECORDED NOTICE OF DEFAULT

There is no reason that a property with a Notice of Default (“NOD”) recorded against it

can‟t be listed. However the buyer‟s agent and/or buyer should be advised that there is a

NOD on the property; they are going to find out anyway when the preliminary title report

comes in.

PRACTICE TIPS:

1. If you list, or are about to list, a property with a recorded NOD against it, note the date

when the NOD was recorded. The lender can then publish, post and mail a Notice of Sale

(“NOS”) three months after the NOD was recorded. The sale by the trustee under the Deed of

Trust “on the courthouse steps” cannot be sooner than twenty days after the publishing,

posting and mailing of the NOS. So, you have about 111 days from the recordation of the

NOD until the sale of the property on the courthouse steps. It can be longer depending on

how fast the foreclosing creditor wants to move.

2. You should advise prospective buyers‟ agents of the recorded NOD since it may

impact the buyer adversely if the escrow cannot close prior to the date scheduled for the

foreclosure sale.

3. If you have a sale of the property with the recorded NOD, and the close of escrow may

not occur until after the date scheduled for the foreclosure sale, try negotiating with the

foreclosing creditor (lender) for a delay in the foreclosure sale to allow the escrow to close,

since most lenders do not want to take over foreclosed properties into their REO (Real Estate

Owned) portfolio.

4. NOTE: If the property is a 1-4 unit residence and has a recorded NOD, the property is

seller‟s primary residence and the buyer is an investor, then this is a Home Equity Sales Act

transaction and you must use the CAR Notice of Default Purchase Agreement, the Home

Equity Notice of Cancellation and the Declaration and Proof of License forms (CAR forms

NODPA, HEND and DPL). For more information see:

CAR Legal Memo entitled “NOD & Investor Transactions: Home Equity Sales

Contracts” at http://www.car.org/legal/foreclosure-short-sale-folder/home-equity-sales-

contracts/

Weekly Practice Tip entitled “Handling Home Equity Sales Act Transactions”

B. SELLING BROKER COMPENSATION

Unfortunately, if a listing broker offers an unqualified 3% or 2-½% commission, for

example, to the coop broker, and a short sale lender reduces the total commission (to, say,

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4%) then, unless there is a “conditional offer of compensation,” the listing broker will owe the

amount offered to the co-op broker in the MLS.

While it is usually not permissible to make conditional offers of compensation to co-

operating brokers in the MLS, there are two exceptions where, under the CAR model MLS

rules, you can make the co-op broker‟s compensation conditional upon the approval of a third

party: (1) probates (conditioned on court approval), and (2) short sales (conditioned on the

lender‟s demand).

PRACTICE TIPS:

1. If you anticipate that the sale will or might be a short sale, place the following

condition in the MLS broker comments:

“Short sale commission subject to lender approval. Any reduction in

commission will be split evenly between Listing and Selling Brokers.”

2. Or, alternatively, you can propose some other arrangement as to who absorbs any

shortfall in total commission received. It would appear, however, that an even split would be

most equitable.

3. If you are a buyer‟s agent concerned about getting paid on a short sale, you can

enter into a Buyer-Broker Agreement with your Buyer. (CAR form BRE or BRNE)

C. HANDLING OFFERS

Some listing agents are confused as to how to handle offers on short sales. Should all

“offers” be presented to the bank? Should the offers be presented to the seller to ratify the

best offer and send that to the bank?

Initially, you should contact the seller‟s lender(s) and ask them what they want you to do.

Virtually all lenders will want you to send them a ratified contract; though there have been a

small number of smaller lenders who have asked to see all offers.

When is a contract “accepted” or “ratified”? Remember, the ratification of the

contract in a short sale is between the seller and the buyer, and the seller’s lender is not

involved in the contract. Some agents are under the misconception that the contract is not

“ratified” until the lender “accepts” it. However, the lender does not “accept” anything; the

lender merely agrees to accept a short payoff in order to allow the transaction to close. Short

sale contracts are just like all other contracts, except that there is one (large) contingency – the

lender‟s willingness to accept less than what they are owed.

In fact, it is not good practice to send the lenders one or more unratified offers. This is

because the people at the banks who are handling the short sales are very busy and a large

number of offers just confuse them. Also, it takes weeks for a lender to get around to

reviewing and approving the file and, by this time, the offers have all expired and, in many

cases, the buyer has moved on to other properties.

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PRACTICE TIPS LISTING AGENTS:

1. If the lender wants to see only a ratified offer, then handle the offer(s) as you would

handle any other transaction. If there are multiple offers, then handle that as you normally

would handle multiple offers, ratify the best purchase agreement (with the Short Sale

Addendum a part of the contract), and forward it to the lender(s) for their approval.

2. Continue marketing the property. The Short Sale Addendum (“SSA”) provides that

the seller will continue to market the property. This is a good idea because, as a listing agent,

you want to secure the highest price to the lender for your seller. The higher the sale price,

the better chance that the lender will accept the contract.

3. Back-Up Contracts: if, after you have ratified a contract and have sent it to the

lender, other offers come in, then handle those as you would any other back-up offer; with

your seller‟s permission, ratify a contract in back-up (for this purpose use a special pre-printed

clause, such as the ZipForms Purchase Agreement Addendum – form PAA, paragraph 1 on

Back-Up Offers) with the SSA attached, and send it on to the lender.

4. Of course, it would usually make sense to do so if this back-up offer were better

than the existing contract (in price and/or terms) because the lender is going to choose the best

(usually highest) contract and reject the other; or if the buyer in first position is weak or in

danger of canceling. But, check with the lender anyway. A quick close, all cash, few

contingencies from a qualified buyer may be attractive to the lender even if the price is the

same or even lower.

D. IS SELLER STILL LIABLE?

1. RESIDENTIAL 1-4 UNITS: A new law, SB 458, went into effect July 15, 2011, and

basically provides that all lenders who approve a short sale on a residential 1-4 unit

property have no right to pursue the borrower/seller for any deficiency or loss as a result of

consenting to and accepting the short payoff.

Background: It is common practice for most lenders when accepting a short payoff in a

“Term Sheet” to: (a) require that the Seller sign a new note, and possibly even record a deed

of trust against other property owned by seller; (b) state that the seller remains liable for any

amount forgiven by the lender(s) as a result of the short sale; (c) state that the lender(s)

reserve(s) their right to hold the seller liable for that amount in the future; or (d) be silent as to

future seller liability for that amount.

In the absence of a clear statement by a lender in their Term Sheet that the seller/borrower

has no further liability on the note, while prior law has not been entirely clear on this point,

the seller likely will have an ongoing liability to that lender after the short sale – whether or

not the loan in question is a first loan or junior loan, or even whether it is a recourse or a non-

recourse loan.

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Some details:

(a) The consent a lender to a short payoff obligates that lender to accept the short sale

proceeds as full payment, and to fully discharge the remaining amount of the indebtedness on

the note secured by a deed of trust.

(b) This new law applies to ALL deed of trust holders on residential 1-4 units,

whether purchase money, refinance, investor, etc.

(c) However, if the borrower/seller commits either fraud or waste with respect to the

property, then the lender may pursue that borrower/seller, and other third parties who are

involved, for any deficiency suffered by the lender as a result of the short sale. (“Waste” is

the legal concept of either committing or allowing damage or destruction to the property so

as to reduce the value of the property. NOTE: If a seller of a property moves out and

abandons the property, some lenders consider that to be “waste” because the property can

then begin to deteriorate. Some lenders will take steps to take over the property at this

point.)

(d) The law does not apply if the borrower/seller is a corporation or political

subdivision of the state.

2. 5+ UNIT PROPERTIES

Because this new law does not apply to 5+ unit properties, in some situations

banks may require the seller to pay cash or sign a promissory note as a condition to the short

sale approval on these properties. In other situations, lenders are “reserving their rights” to

recover after the sale from the seller the amount they lost in the short sale. Still other lenders

do not address the subject of ongoing liability of the seller/borrower to the lender on the

amounts that the lender is losing on the short sale.

PRACTICE TIPS:

a. When a lender in a short sale issues its Term Sheet, READ IT.

b. In every short sale, you MUST advise your seller to take the Term Sheet to

an attorney for review and advice

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III. ISSUES FOR BOTH LISTING AND SELLING AGENTS

A. SHORT SALE NEGOTIATORS

1. PRACTICE TIPS: LISTING AGENTS

(a) First, be aware that it is the responsibility of the seller and the listing agent to

negotiate with the seller‟s lender to obtain approval of the short sale amount. Further, it is the

responsibility of the listing agent, not the buyer or buyer‟s agent, to pay for such a service.

(b) The listing agent must have the SELLER sign an agreement to allow this person to

act on their behalf in the transaction. Remember, you are bringing in another licensee into the

transaction to represent your seller.

(c) Short sale negotiators (“SSN‟s”) must be DRE-licensed brokers. Listing agents

should verify that the SSN under consideration has a DRE broker license. DO NOT HIRE A

SSN WHO IS NOT A DRE-LICENSED BROKER. (Note: Attorneys may act as SSN’s

also if they are doing so in the course of providing legal advice to clients. However, there are

not a great number of attorneys engaging in this activity. The California Bar Association is

warning attorneys to be careful in this activity as they are seeing abuses by some attorneys.

Finally, not-for-profit consumer credit consulting agencies may also negotiate with lenders.)

(d) In addition, all persons working for a DRE licensed broker who are engaging in

negotiations with the seller‟s lender must be licensed because this is considered to be licensed

activity by the DRE.

NOTE: The penalty for acting as a DRE licensee without a license is $20,000 for an

individual and $60,000 for corporations. The DRE will turn over any such complaints to

the local District Attorney for prosecution under a new law effective as of 1/1/09.

(e) If the SSN is a DRE licensee, the listing agent should first thoroughly investigate

the SSN to assure that the facilitator is competent. If the SSN is not competent, the listing

agent could have a claim against them for allowing such a person to work on behalf of their

seller. Some things to consider when hiring a facilitator:

(i) Experience: There are an increasing number of persons holding themselves

out as SSN‟s. Some have little actual experience in negotiating with lenders. Verify the

experience of the short sale facilitator by requesting and talking to referrals.

(ii) Documentation: Before you recommend a SSN to your seller, read all of their

documentation to clearly understand what they will do and what the costs will be. Look for

any of the issues raised above. Discuss with your broker or manager if you have any

questions prior to hiring them.

(iii) Fees and Compensation: How is the SSN being compensated? Many

charge a percentage of the sales price to be paid by the seller. Others charge a flat fee.

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Listing agents should shop for the best fee amongst the qualified SSN contenders. Look out

for those SSN‟s who charge the buyer or buyer‟s agent. (See below for a detailed discussion.)

(iv) Advance Fees: Some SSN‟s charge a fee to the seller upfront for the service.

However, because this is DRE-licensed activity, no DRE licensee can take a fee from a

principal prior to performing a licensed service unless they have had that “Advance Fee”

arrangement approved beforehand by the DRE. There are penalties for violating this Advance

Fee arrangement. However, there are no prohibitions for SSN‟s charging fees upfront to the

listing agent or broker.

See Weekly Practice Tip: “Advance Fees”

(f) Finally, do not sign a document hiring a SSN without the prior review and written

approval of your manager or broker.

2. BUYER TO PAY FOR THE SSN?

(a) Charging the SSN Fee to the Buyer’s Agent: A number of SSN‟s are

attempting to charge all or a part of their fee to the buyer‟s agent by putting comments such as

the following in the Confidential Remarks section of the MLS:

“Short sale commissions subject to lender approval. Any reduction to be split

50-50 between listing office and selling office AFTER DEDUCTION __% FOR PAYMENT

OF THE SHORT SALE NEGOTIATOR‟S FEE.”

This is considered to be a “Conditional Offer of Compensation” and a violation

of MLS rules if your MLS has adopted the CAR/NAR Model MLS Rules, which most MLS‟s

have done. If you see such an attempt to use the MLS to get the buyer‟s agent to pay the SSN

fee, check to see that this MLS has adopted the Model Rules, and then contact the listing

broker and point out the MLS violation, and if they insist file a complaint with the MLS.

(b) Charging the SSN Fee To The Buyer: A great number of SSN „s are starting to

insist that the buyers pay a part of their fee, either directly, or by way of a rebate of a seller

credit to buyer, which credit the SSN insists that buyer put into the purchase agreement. In

some instances, the SSN states that the offer will not be ratified unless these terms are agreed

to.

In one scenario, the SSN often presents the buyer with a document for the buyer

to sign stating that the SSN, who has been hired by the seller or the listing broker, is working

on behalf of the buyer to obtain a low purchase price and, therefore, buyer agrees to request a

credit from seller for closing costs (say 3%) which buyer then agrees to rebate to the

facilitator as a fee for their negotiating and facilitating services.

Some of these SSN‟s documents also contain indemnities and hold harmless

language whereby the buyer holds the facilitator harmless for their actions in the transaction.

This scenario raises a number of troubling legal issues:

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(i) Undisclosed Dual Agency: The SSN, hired by the seller or listing broker, is

now stating that he/she represents the buyer in the transaction. The SSN has become a dual

agent which, under the California Business and Professions Code, requires the knowledge and

informed consent of both parties. Both parties would have to be given an Agency Disclosure

by the facilitator, and the dual agency would have to be confirmed in writing. In most cases,

this is not being done by the SSN‟s.

NOTE: The penalties for undisclosed dual agency can include that either

party can cancel the contract, they can refuse to pay a commission, they can sue for

damages, they can file an ethics complaint, and they can file a complaint with the

California Department of Real Estate.

(ii) Full Disclosure of Payments to the Parties: If the buyer is being required to

sign a document that requires them to request a credit for closing costs and then agrees to

rebate that amount to the SSN, or just to simply be responsible to pay the SSN for their

services, this then constitutes a payment to a DRE licensee and, regardless of what it is called,

must be disclosed to all parties. It is illegal under the Business and Professions Code for a

DRE-licensed broker to receive a secret payment or compensation.

(iii) Full Disclosure to the Seller’s Lenders: Further, such a payment from the

buyer to the SSN, and the requirement that the buyer request the credit for closing costs, must

be fully disclosed in writing to the seller‟s lender prior to the time that the seller’s lender

agrees to accept a short payoff. The reason for this is that the seller‟s lender typically will

give the short sale approval under certain conditions including that only a certain amount is

paid to the licensees in the transaction (say 4%). If the buyer then rebates the closing costs

received as a credit from seller (say 3%) to the SSN, then the DRE licensees in the transaction

have received 7%, which is more than the lender allowed as a condition of the closing. This

violates the lender‟s closing instructions. IT IS NOT A SUFFICIENT DISCLOSURE TO

THE LENDER THAT THIS PAYMENT TO THE SSN APPEARS ON THE HUD-1

AFTER CLOSING.

(iv) Indemnities and Hold Harmless Language: If a SSN is asking upfront to be

held harmless and indemnified for their actions in the transaction, this should be a red flag to

alert your buyer that they should have this document reviewed by their attorney prior to

signing.

These troubling practices have the full attention of the California Department of

Real Estate Enforcement Division. For a full discussion of the DRE‟s view of this practice,

read:

”Update regarding short sales fraud and related issues” in the Fall 2010 DRE Bulletin

located at: http://www.dre.ca.gov/pdf_docs/rebfall_10.pdf

3. PRACTICE TIPS: BUYER AGENTS

(a) If you are presented with a contract, or an addendum to the purchase agreement,

in which your buyer would be obligated to pay all, or a portion, of the seller‟s SSN‟s fee,

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discuss that document with your buyer. The SSN may call this fee by a number of names

(e.g., “loss mitigation fee” or a “discount fee”), but whatever the name, it is seller‟s

responsibility to negotiate with the seller‟s lender to obtain a short sale payoff so that the

transaction can close.

(b) Discuss with your buyer whether buyer wishes to participate by agreeing to pay

this fee. They have a right to say “No”, but some buyers may fear jeopardizing the purchase

if they refuse. Discuss these issues with your buyer and document your client‟s decision.

(c) Review the document(s) presented to you by the SSN, or the listing agent on

behalf of the SSN. Does it create any indemnities or hold harmless language in favor of the

facilitator, seller or listing agent? If so, recommend in writing that your buyer have this

document reviewed by their legal advisor before signing.

(d) Also, check whether the SSN, by asking your buyer to pay all or a part of the

SSN ‟s fee, is creating a dual agency with your buyer. Consider whether you want this

unknown, new person representing your buyer, and discuss this with your buyer. Is there a

full disclosure of dual agency and informed consent by both parties?

(e) If a SSN refuses to present your buyer‟s offer if you do not sign their

documentation, contact the listing agent‟s manager or broker to apprise them of the situation.

Remember, all offers must be presented to sellers in a timely manner. In the absence of an

informed decision by a seller to agree to this (why would the seller do so in light of all the

facts?), your offer must be presented whether or not your buyer signs the SSN‟s documents.

(f) If all else fails and your buyer wishes to go ahead with the transaction and pay the

fee, then ratify the contract and immediately send a communication to the listing agent and

the SSN which could read substantially as follows, (with changes for your particular

situation):

“You have required the buyer to pay your Short Sale Negotiator fee in the amount

of __% of the purchase price (or $____), and to ask for a credit for non-recurring closing

costs in the amount of __% of the purchase price (or $____). You also stated that you were

working also on my buyer’s behalf to get the best price from seller’s lender. We do not

know what agreement you have with seller or what has been disclosed to the seller

regarding this arrangement; and we do not know what you have or will disclose to seller’s

lender(s). We trust, unless informed otherwise, that you have fully and timely disclosed this

full arrangement to both seller and seller’s lender(s).”

4. PRACTICE TIPS: BROKER/MANAGERS

(a) It is a good idea to prepare a list of approved SSN‟s after having properly vetted

them, so that each agent is not forced to make the decision.

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(b) Decide whether it is even a good idea to have SSN‟s who engage in the above

practices to make presentations to your agents. Do your due diligence before allowing SSN‟s

to present their program to your agents.

(c) Insist that all agents who are planning on hiring a SSN (who is not on a company-

approved list) get prior management approval.

(d) It may also be a good idea to identify agents in your office who are experienced

at negotiating with lenders. This approach allows for more control by the broker over the

quality of the process, and a fair allocation of the fees for the services. The fees for this in-

house SSN should be paid out of the listing portion of the commission. Attempts to charge

seller extra for this fee could be considered to be an unearned fee under RESPA, and should

not be passed on to the buyer‟s agent or buyer, as discussed above.

B. SHORT SALES WITH MORE THAN ONE LENDER

When there is more than one lender on a property, it is not unusual for the first lender to

allow only a limited payment to the second lender (for example, $3,000). It is also not

unusual for the second to demand a payment in an amount greater than the first lender will

allow.

When this happens, occasionally the listing agent, the SSN, or even the second lender will

suggest that a payment be made to the second either outside of escrow, or through escrow and

further suggests that since this payment will appear on the HUD-1, it is okay to do so. The

money to the second may be requested from the buyer, or from the agent or agents.

Such practice is NOT acceptable. There are two issues here:

1. Payments Outside of Escrow:

Rule of Thumb: If you hear the words “lender” and “outside of escrow” in the

same sentence, RUN!!! Lenders are entitled to know the whole transaction. If the holder of

the first were to find out about the payment to the holder of the second outside of escrow, that

first lender could allege that they were entitled to that money, and that their escrow

instructions were violated. This can result in civil damages in favor of the lender, and also be

a violation of federal law.

2. Adequate Notice to the First Lender of the Payment to the Second: HUD-1 IS

NOT ENOUGH.

Many agents, SSN‟s and some escrow officers believe that if the payment to the

second is greater than allowed by the first lender and is identified as such in a HUD-1 which

the first lender sees prior to COE, then that is sufficient notice to the first lender of that

payment from the buyer (or from agents‟ commissions) to the second lender.

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That practice is not allowed by lenders, who view such payments to the second as

violations of their escrow instructions as set forth in the Term Sheet authorizing the

allowable payoffs in escrow. More than one escrow company has found this out the hard way

by having to reimburse the first lenders for such payments.

Worse, that liability can splash back on the agents involved as well. Listing agents

have a duty to tell the seller of such arrangements. And, sellers have the duty of honesty and

fair dealing to their lender (because of their contract – the promissory note – with the lender)

to inform the lender of the transaction in its entirety.

PRACTICE TIPS:

(a) All dealings with lenders in short sales must be done honestly, above board and

with the full knowledge of all parties.

(b) Don‟t allow yourself to be drawn into a scheme to make payments outside of

escrow, just to make a short sale work. It‟s not worth it. The deal may die. But, that‟s better

than the alternative.

(c) Do not engage in such practices even if the negotiator for the junior lienholder

tells you it is okay, and may even tell you how to get the money to them.

(d) Work hard to try to get the lenders to compromise pointing out that they will

almost certainly be worse off if there is a foreclosure.

(e) ALL payments to all lenders MUST be disclosed to ALL lenders. This means that

the first lender must approve, IN WRITING, any payments to junior lienholders. Placing

such payments in a HUD-1 is not sufficient.

(f) In one variation, the holder of the second will demand that the agents give up a

portion of their commissions to the second. Again, this can only be done with the written

permission of the first lender.

(g) In yet another variation, the listing agent will tell the buyer‟s agent (usually late in

the escrow) that the seller has other debts that must be paid or they will stop the transaction

(such as a mechanic‟s lien or abstract of judgment which is about to be filed). Listing agent

will demand that buyer pay some money, allegedly to pay off these seller‟s debts, outside of

escrow. These ploys are usually scams to get some money to the seller – itself a violation of

the Term Sheet/escrow instructions. For all of the above reasons do not participate in such a

scheme.

(h) When in doubt, talk to your manager or broker.

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C. SHORT SALE FLIPPERS

There has been an increase in the number of “Short Sale Flippers” fueled, partly, by the

long timeframes for short sales to close, the desperation of sellers, and the chance for

opportunists to make money.

In this type of transaction, there is the current property owner/seller (“Seller”), the original

listing agent (“Listing Agent”), the short sale flipper (“Flipper”), the buyer‟s agent

representing the Flipper (“Flipper Buyer Agent”), the Flipper‟s listing agent (“Flipper Listing

Agent”), the ultimate buyer (“Buyer”) and that buyer‟s agent (“Buyer Agent”).

What is a Flipper? As discussed here, a Flipper is a person or entity who intends to

enter into a contract to purchase the property and immediately sell it, perhaps in a

double escrow, without any improvements to the property. If a buyer intends to buy a

short sale property, close on the sale, improve the property, and then sell it, that buyer is not

considered a “Flipper” for purposes of this discussion.

1. Listing Agent: If you are the listing agent on a short sale:

(a) Do not interact with a Flipper in a way to solicit, promote or encourage a Flipper

to write an offer on your short sale listing.

(b) If the Flipper is represented by a Flipper Buyer Agent, advise that Buyer Agent to

submit the offer for your Seller‟s consideration. Advise your Seller of the intent of this

purchaser. This is important information for the Seller to know because the Flipper is seeking

a low (perhaps artificially low) price so as to make a profit by re-selling the property. While

the Seller may not seem to care at this time, Seller will care if the lender seeks to recover from

Seller the money the lender lost on the short sale.

(c) DO NOT also represent (or allow any agents in your office to represent) a

Flipper on the purchase of your listing. This can compromise you and your company‟s

fiduciary duty to the Seller to get the best price. This is because the Flipper is going to try to

sell the property for a profit. If the Seller‟s lender reserves the right to hold Seller liable for

the amounts they lost on the short sale, the Seller‟s potential obligation to that lender is

arguably increased by the difference between the sale price to the Flipper and the final price

to the ultimate Buyer.

(d) If the Listing Agent is the one dealing with the seller‟s lender trying to convince

that lender to accept a Flipper‟s offer as the “highest and best,” without telling the lender that

there is another Buyer out there willing to pay more, that is fraud.

(e) Even if the Listing Agent is not dealing directly with the bank, the Listing Agent

owes the Seller a fiduciary duty, and the Listing Agent’s knowledge is imputed to the

Seller. The Seller has a duty of honesty and fair dealing with the bank because of their

contract with the bank (the Promissory Note). The Listing Agent can easily be pulled in

on a conspiracy theory with the Seller, or a derivative action by the Seller, for not being

truthful with Seller‟s lender.

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(f) The Listing Agent has a fiduciary duty to tell his client that the Flipper has

re-sold the property at a higher price. If the Listing Agent does not so inform the Seller

and recommend to his Seller that the Seller inform the short sale lender of the Flipper‟s

transaction, the Listing Agent could be liable to the bank on a conspiracy theory when the

Seller does not make the disclosure.

(g) A contract with a Flipper can also be dangerous because, if the Flipper is

unsuccessful in finding a buyer to pay more, the Flipper may just cancel the contract with

Seller. The Seller thus has lost considerable time within which a foreclosure could be filed, or

an existing foreclosure action could proceed closer to a foreclosure sale.

(h) The thrust of recent laws has been to protect the consumer. In dealing with short

sales, we must always ask, “Is this the best deal for the client?” Did we fulfill our duty of the

highest level of trust, care and confidence to the Seller, putting the Seller‟s interests ahead of

the agent‟s interests? Will the Seller be happy when the lender tries to recover the amount

they lost in the short sale and they find out that the agents made two commissions and the

Flipper made a profit? The Seller may think he/she is happy just to get rid of the problem

property, but that will be short lived when the bank knocks on the door seeking their money.

2. Flipper: Some real estate agents think it is a good idea to become a Flipper.

Individual agents can, unless prohibited or limited by their broker‟s policy, purchase property

for their own account.

However, even if the broker’s policy allows agents to buy short sale properties, no

agent who intends to be a Flipper should attempt to purchase a property that is listed by

their own brokerage company.

The problem is obvious: The Listing Agent, Flipper and Flipper‟s Agent are all the

same company -- and that opens the claim that the brokerage conspired to sell Seller‟s

property at a low price in order to make a profit and two commissions. But, again, if the

Seller has a contingent liability to the lender for the shortfall, that Seller may be looking for

someone to blame. Such a case would be hard to defend.

And remember, if a DRE licensee is purchasing property for their own account, they

are held to the same standards as an agent representing a client.

3. Flipper Buyer Agent:

(a) There are a number of persons and organizations acting as Flippers soliciting

agents to work with them (including listing agents) to secure many properties to purchase and

flip. Many of these require the Seller to allow the Flipper to negotiate with the Seller‟s

lender. It is dangerous to work with these Flippers because you, as the Buyer Agent for the

Flipper, have no control over what the Flipper tells the Seller‟s lender in order to induce the

lender to take the lower price sufficient for the Flipper to turn around and sell the property for

a profit. And, you are, or become, aware of their practices making it hard to later claim you

didn‟t know what they were doing.

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(b) Even for Flippers who are not volume purchasers, and some who might simply be

individuals doing the occasional transaction, no agent should represent a Flipper as a Buyer‟s

Agent, and at the same time assist in negotiating with the Seller‟s lender, or provide comps

for the sale price, as this may result in misleading the lender.

(c) Some Flippers state that they are upfront with the Seller‟s lender because the

purchase agreement will state that they are purchasing the property for resale. But, lenders

are entitled to know “the deal.” So, it is not enough to state in the contract that the Flipper is

buying the property for re-sale. If the lender were to be told the whole picture, including the

second contract for a higher price, would they approve the price on the Flipper contract? Not

likely. If one is concerned that disclosing this scenario to the seller‟s lender will “blow the

deal,” that is reason enough not to do these deals.

4. Flipper Listing Agent: This is usually the same person as the Flipper Buyer Agent.

The issue for this agent is that the Flipper is listing and marketing a property which he/she

does not yet own. While this is not in and of itself illegal, it raises problems.

(a) The Flipper and the Listing Agent must disclose to the Buyer that the Flipper does

not own the property and the close of escrow is conditioned on the completion of the short

sale purchase by the Flipper from the original Seller.

(b) Any disclosures, reports or other information that the Flipper or Flipper‟s Buyer

Agent, receives in the purchase escrow must be fully disclosed in the sale to the ultimate

Buyer.

5. Buyer Agent:

(a) If you see a property that you suspect is a short sale flip, check the PTR to see who

the owner on title is.

(b) If it is a short sale flip, the contract between the Flipper and your Buyer typically

will contain language to the effect that the Flipper‟s obligation to close escrow is contingent

upon the successful close of escrow of the first transaction with true owner/Seller.

(c) There are great risks and possible benefits for a Buyer in this scenario.

(i) One benefit for the Buyer in the scenario, who may want a short escrow, is that

the Flipper may have been in escrow for quite a while and has worked out a short sale with

the Seller‟s lender. Lenders sometimes take three months, or more, to approve a short sale.

The Flipper may be well down the road, or even have a lender short payoff negotiated when

your Buyer starts negotiation with the Flipper to buy the property. That could lead to a

relatively short escrow for Buyer who does not want to wait months for a bank to approve a

short payoff.

(ii) However, there are great risks for the Buyer also. If the bank does not approve

the sale to the Flipper, or a higher contract is ratified by Seller and sent to the lender, then

Buyer‟s contract with the Flipper will fail because Flipper cannot deliver title, and the

contingency stated above will let the Flipper cancel the contract with your Buyer.

27

(iii) You know nothing about the transaction between the Flipper and the Seller. Is

the Flipper or Seller working timely to get the short payoff? Is there a new Notice of Default

on the property? You and Buyer won‟t know unless you get an updated Preliminary Title

Report regularly.

(iv) Flipper will know little about the property and so the disclosures from Flipper

to your Buyer may be minimal; although Flipper should give your buyer all inspection reports

and other disclosures received by Flipper in the purchase from Owner.

(v) Finally, your Buyer may be paying too much. Remember, this only works if

Flipper is in contract at a price allowing for a profit on the flip. He has the seller, and

ultimately the seller‟s lender, agreeing to a lower price.

(vi) There is no guarantee, however, that your Buyer will have a shorter escrow.

Discuss with your Buyer his/her ability or willingness to have a longer escrow.

(vii) One option is to go directly to Seller, or Seller‟s Listing Agent, to see if you can

submit an offer to Seller directly, which would be ratified in back-up and sent to the Seller‟s

bank for consideration. Your offer may be for more than the Flipper‟s contract with Seller,

but less than the Flipper is asking on the flip.

(viii) As in all other situations, send your Buyers to their legal and tax advisors.

D. HANDLING HOME EQUITY SALES ACT TRANSACTIONS

A Home Equity Sales Act (“HESA”) transaction is one where:

1. The property is a 1-4 unit residence,

2. The property is the principal residence of the seller,

3. The property has a Notice of Default recorded against it, and

4. The buyer is an investor (also known as an “equity buyer”).

If all four of the above answers are “Yes,” then this is a HESA transaction and the

seller must be given a notice that they have five business days to cancel this agreement,

and the buyer’s agent must give seller a written statement that the agent holds a valid,

current DRE license, and provide written proof of that license.

NOTE: The previous requirement that a bond be obtained before a real estate licensee

could represent an equity buyer/investor in a HESA transaction has been eliminated by the

California courts as of April, 2008.

If this is a HESA sale, you must do all of the following:

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1. Access ZipForms and download the following forms:

(a) The current version of the Notice of Default Purchase Agreement (NODPA).

(b) The Home Equity Notice of Cancellation (HENC) which prints with the NODPA.

(c) The “Declaration and Proof of Real Estate License.” (DPL)

All three forms must be used when representing an equity buyer on a HESA sale.

2. Do NOT use an old version of the NODPA, nor do you need to use the old Home

Equity Agency Addendum (HEAA) which has been eliminated.

3. Use CAR form DPL which asks for written proof of your real estate license, as well as

your broker‟s real estate license if you hold a salesperson‟s license. This written proof can be:

(a) A copy of your (and, if applicable, your broker‟s) actual license; or,

(b) A copy of the print-out from the DRE website of your (and, if applicable, your

broker‟s) license information.

4. PRACTICE TIPS:

(a) Ask your escrow officer to keep you updated as to whether a Notice of Default has

been recorded against the property being sold. If a Notice of Default is recorded on the

property during escrow, immediately consult with your manager to determine the best

approach to give the seller the notice of the right to cancel.

(b) BUYER OCCUPANT: If you are representing a buyer who purports to be an

owner-occupant buyer, then the HESA does not apply, and you may reasonably rely on your

buyer‟s representation. In that case, you do not have to use the NODPA or the HENC, but

can just use a regular purchase agreement. However, be aware of “red flags” that may arise

which cause you to doubt your buyer‟s true intention to occupy, and discuss with your

manager.

(c) SELLER MOVES OUT: Many agents ask “But what if the seller has moved out?

Do I still have to use the NODPA and give the seller the 5-day notice of the right to cancel?”

That depends on the facts of the case. If the seller just moved out to a local hotel, then maybe

not; because it is likely that the seller has not yet established a new principal residence.

Also, if the seller moved out after being approached by the buyer or buyer‟s agent,

that might look as though the buyer or agent convinced the unsuspecting seller to move out

just so the buyer and his/her client could make the transaction work.

When in doubt, just use the above procedures and be safe.

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(d) CALCULATING THE FIVE BUSINESS DAYS TO CANCEL: The HENC

form, and the Notice on the last page of the NODPA regarding seller‟s right to cancel in five

business days, both require that the time for the termination of seller‟s right to rescind be in

the contract. However, there is no way to know when the contract will actually ratify at the

time the offer is written. So, one approach is to leave this blank and then calculate and fill in

the last date for seller to cancel on the date that the contract actually ratifies.

NOTE: In calculating the five business days, delete weekends and holidays.

The day the contract is ratified is day “0” and the next business day is day “1.”

(e) Until a seller‟s five-day right to cancel has expired, neither the investor-buyer nor

buyer‟s agent should: (i) pay the seller any consideration; (ii) induce a seller to sign any

document transferring any interest in the property, nor accept such a document; (iii) record

any instrument signed by seller; or (iv) transfer or encumber any interest in the property to a

third party.

(f) Brokers in brokerage offices should make copies of their broker‟s licenses, or print-

outs of their license information from the DRE website, available to their sales agents to be

attached to the new DPL form for HESA transactions.

For further information, read the CAR Legal Memorandum entitled: “Notice of

Default and Investor-Buyer Transactions: Home Equity Sales Contracts” at:

http://www.car.org/legal/foreclosure-short-sale-folder/home-equity-sales-contracts/

E. TENANT DEPOSITS IN SHORT SALES

In all residential sales, when the property sells, the landlord is obligated to turn over all of

the tenants‟ security deposits either to the new buyer, or return them to the tenants. In short

sales, the seller usually has spent the security deposits and cannot do so. Tenants can sue

either the old landlord (seller) or the new landlord (buyer), or both, for the return of the

deposits. But usually because the seller is gone, the new buyer is stuck with having to pay the

security deposits to the tenants, even though they did not receive them from the seller.

The buyer can sue the seller for those missing security deposits. The venue would most

likely be small claims court if the total security deposit is less than $7,500 for non-corporate

owners. If the buyer obtains a judgment against the seller, that judgment can be collected

years later, even if the seller is broke now.

PRACTICE TIP: If your short sale buyer is concerned about not receiving the security

deposits for the tenants, recommend in writing that they discuss the matter with a landlord-

tenant attorney prior to removal of contingencies.

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IV. BUYER AGENTS

A. WRITING THE OFFER

When representing a buyer on a short sale, there are a number of factors that make the

short sale different from a regular sale. First, these transactions will take longer, perhaps

weeks or even months longer. Second, in a short sale, another offer may be received by the

seller and forwarded to the seller‟s lender who may agree to the terms of that offer and, at

least implicitly, reject your contract. In essence, the contingency in the Short Sale Addendum

for seller to receive written approval of your short sale will not be received, and your contract

therefore would need to be cancelled.

PRACTICE TIPS:

Buyer’s Agents:

1. As a buyer‟s agent, prepare your buyer for the fact that the short sale will take a long

time.

2. Do not allow a buyer with a short timeframe, such as a buyer looking for an up-leg

property on a 1031 Exchange, to enter into a contract on a short sale.

3. In recognition of the long time frame, you might want to recommend to your buyer

that the contingency in Paragraph 1.A of the SSA (for the seller to receive the short sale

payoff from the lender) be reduced from the default 45 days to a relatively short time, say two

to three weeks. That way, if your buyer no longer wishes to wait for the lender‟s approval on

this transaction, the buyer may terminate the purchase agreement pursuant to that contingency

at the end of that timeframe. This timeframe can later be extended by agreement and

Addendum.

4. Also, a buyer‟s agent may wish to keep the default position in Paragraph 3 of the

SSA which allows buyer to deposit their initial deposit check 3 business days after seller

delivers the acceptable lender Term Sheet(s); and also keep the default position in Paragraph

2 which provides that the timeframes for contract performance (contingencies, close of

escrow, etc.) do not commence until the seller receives an acceptable Term Sheet(s) from the

lender(s) and delivers copies to the buyer.

B. BUYER WANTS TO CANCEL – FOUND OTHER PROPERTY

Example: You represent buyers in a short sale. You ratified the purchase agreement

with the seller three weeks ago, and are waiting to hear from the seller‟s bank that they will

approve the contract and a short payoff. Now, the buyers have found another property that

they like more – and the price is better. Can they just cancel the contract at this point?

Answer: That depends on what the contract says.

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(We are assuming here for this discussion that there has been a ratified contract between

seller and buyer. Sometimes listing agents will just submit unratified offers to the seller’s

lender; but this is not good practice for a variety of reasons.

If buyers and seller have signed the purchase agreement, addenda, counter-offers, etc., in this

short sale, just as in other types of transactions, then this is just like all other ratified

contracts with one additional contingency – approval from the seller’s lender.)

Remember, once a buyer has a ratified contract, that buyer is obligated to buy the property

unless they have a contractual right (a contingency) or statutory right (the TDS, e.g.) to

cancel; or unless the seller acts in bad faith or the property is substantially destroyed, etc.

So, here it depends on how the contract is written. Hopefully, you used the ZipForms

Short Sale Addendum (Form SSA).

If, for example, you used the default 45 days in paragraph 1.A of the SSA, and you have

now passed the 45th

day since ratification, and seller has not received a written approval from

seller‟s lender of your transaction per the terms of the SSA and delivered a copy to you, then

your buyers can safely cancel because that contingency on the seller‟s part has not been met.

Some buyers ask if they have to actually have a home inspection before they cancel

by not removing the inspection contingency. The answer is that the seller may ask why

they are cancelling and, even though the purchase agreement forms do not require the buyers

to give a reason, if the buyers do not offer a reasonable explanation, the seller may be

suspicious and refuse to sign cancellation papers and may seek to recover the deposit based on

an allegation of bad faith. So, unless the buyers have actually had a home inspection, or have

otherwise obtained other adverse material information affecting the value or desirability of the

home, the buyers run the risk of a fight over the return of the deposit, or other actual damages

(if liquidated damages has not been agreed to).

Of course, they could also rely on the TDS, or other statutory disclosure, as grounds for

cancelling if that reason is available to them by virtue of the timing of the giving of the TDS.

In either event, buyers must act in good faith when cancelling a Purchase Agreement

For more information on the buyer’s rights to cancel because of the TDS, see:

CAR Legal Memo: “Transfer Disclosure Statement Law” at:

http://www.car.org/legal/disclosure-folder/transfer-disclosure-statement/

Weekly Practice Tip entitled “Can Parties Cancel in their Sole Discretion?”

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PRACTICE TIPS:

1. In a short sale, always use the Short Sale Addendum.

2. As buyer‟s agents, discuss with your buyer whether to shorten the time in paragraph

1.A of the SSA for seller to received lender approval of the short sale, so as to not lock your

buyer into a contract for a long time. This date may later be extended by addendum.

3. If your buyers are changing their mind about the purchase, or have found another

property they like better, remind them that they can‟t just change their minds without the

potential risk of damages to the seller.

See Weekly Practice Tip entitled “Buyer Remorse.”

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(BROKER NAME)

SELLER ADVISORY REGARDING LENDER’S TERM SHEET

AND SELLER’S INSTRUCTIONS TO LISTING AGENT

This Advisory and Instructions to Listing Agent is being provided to you with the Term Sheet from

your lender approving a Short Sale payoff to that lender. The Term Sheet and this Advisory contain

important information regarding your Short Sale. Read them carefully.

Property Address: _________________________________________________________

1. A California law, effective as of July 15, 2011, requires that the holders of all loans

secured by 1 to 4 unit residential properties must give up their rights to pursue the Sellers for

any loss suffered by them as a result of a Short Sale after the short payoff is approved (in the

“Term Sheet”) and the transaction closes. This protection is lost, however, if a Seller commits

fraud with respect to the sale of the real property, or causes “waste” (damages the real

property), in which case the lender(s) may seek damages against the Seller, and any

participating third party.

2. You do not have to accept the terms offered by the lender(s) if the Short Sale is

approved. See the Short Sale Addendum for details. If you accept the lender(s)’ offer, the

commission to the brokers in the transaction will come from the sale proceeds in an amount

approved by your lender(s) in the Term Sheet(s). Listing Broker will seek no other

compensation from you unless agreed in writing by you and approved by the lender(s).

3. Seek Legal and Tax Advice. Real estate agents are not attorneys and are not qualified to

give legal or tax advice regarding a lender’s Term Sheet or its legal or tax effects. Listing

Agent urges you to contact a qualified California real estate attorney regarding the terms and

conditions proposed by the lender in the Term Sheet, and also to discuss this transaction with

your tax advisor, prior to making any determination as to whether to proceed with the Short

Sale.

4. INSTRUCTIONS TO LISTING AGENT. The Short Sale Addendum to the Purchase

Agreement provides that you, the Seller have a set time frame to deliver the Term Sheet(s) to

the Buyer. During this time you should review the Term Sheet(s) with your attorney and/or

tax advisor. Once the Term Sheet is delivered to the Buyer, your Short Sale Contingency is

automatically removed and your ability to safely terminate the transaction because of the

Term Sheet is limited.

Upon receipt of the Term Sheet(s) by you, you instruct Listing Agent to deliver the

lender(s)’ Term Sheet(s) to the Buyer and/or the Buyer’s Agent only after you notify the

Listing Agent in writing that your attorney and/or tax advisor has reviewed and

approved the lender(s)’ Term Sheet(s).

Or, (if checked):

□ Listing Agent is authorized to deliver the Lender(s)’ Term Sheet to the Buyer and/or the

Buyer’s Agent on _________________, 201_ (date) without further instructions from Seller.

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□ Other Instructions __________________________________________________________

__________________________________________________________________________

5. If you stop paying your monthly mortgage payments, you could lose your home and

damage your credit. If you have ceased making mortgage payments, the lender(s) may file a

Notice of Default and proceed with a foreclosure even though there are ongoing short sale

negotiations. Negotiating a short sale does not stop the foreclosure process. You

understand and acknowledge that Listing Agent cannot and does not guarantee that a short

sale can be obtained from the Lender(s) or that the foreclosure process can or will be stopped.

6. No cash to Seller. You, as Seller, may not receive any cash, or other valuable

consideration, from either agents or Buyer, paid directly to or for your benefit, either through

or outside of escrow, without the written approval of all existing lenders. This includes any

holding over or rent-back agreements. Disclosing such payment, or other consideration,

solely on a HUD-1, without the lender(s) otherwise giving their written consent, is generally

considered by lenders to constitute a violation of the Term Sheet(s), and may be a form of

lender fraud.

BY SIGNING BELOW, I/WE ACKNOWLEDGE AND AGREE THAT I/WE HAVE

RECEIVED, READ AND UNDERSTOOD THE ADVICE IN THIS ADVISORY.

Seller__________________________________ Date: _________________, 201__

Seller__________________________________ Date: _________________, 201__