Real estate licensees who list property for owners involved with foreclosure consultants, loss mitigation experts, investors or equity purchasers must first make up their mind whether they should be involved at all. Often, the consultant will have some contractual arrangement with the seller before the property is listed for sale. That means a dispassionate investigation of the consultant or expert and the nature of their relationships with the seller is needed before agreeing to list the property. That kind of investigation starts with finding out whether the mitigation expert or consultant is licensed to do business in Oregon. That information is available from the state online at:www.filinginoregon.com.
A quick check of FTC enforcement actions at the national level is a good second step. That can be done on-line at the Federal Trade Commission’s website. Finally, a call to the Financial Fraud/Consumer Protection Section of the Oregon Attorney General’s office (503-947-4333) will tell the licensee if complaints against the particular individual or company have been filed in Oregon. Having this kind of information before taking the listing is essential because it is much easier to decline a listing than get out of one after-the-fact.
Being licensed to do business in Oregon and not appearing on any government listing related to foreclosure scams does not mean it is a good idea to be involved with a particular company. If possible, the licensee should review the mitigation company’s advertising. The FTC singles out the following advertising messages commonly used by what they call “scam artists”:
“Stop Foreclosure Now!”
“We guarantee to stop your foreclosure.”
“Keep Your Home. We know your home is scheduled to be sold. No Problem!”
“We have special relationships within many banks that can speed up case approvals.”
“We Can Save Your Home. Guaranteed. Free Consultation”
“We stop foreclosures everyday. Our team of professionals can stop yours this week!”
Ads like these are aimed at desperate homeowners and intended to convey that an easy fix is available. That kind of advertising should put the licensee on guard and cause him or her to look closely at how the consultant’s or expert’s program actually operates.
Although new scams, and variations on old scams, arise all the time, there are a number of common scams to watch out for. Phony foreclosure counseling or “help” is the simplest of the common foreclosure scams. Under this kind of scam, the “consultant” promises to negotiate some kind of deal with the lender, takes a fee up front and then simply disappears. A real estate licensee can diligently market the property while the consultant who is supposed to be negotiating with the lender is long gone.
A particularly sinister variation of the phony help scam involves having the homeowner make the mortgage payments to the consultant while the “negotiations” are taking place. No negotiations ever take place. The scam artist simply keeps the mortgage payments until the lender finally forecloses. Real estate licensees involved in marketing the property while the seller sends his payments to the scam artist can find themselves a target of the seller’s lawyers when the whole thing blows up. Licensees can also find themselves involved in the aftermath of a phony help scams when the now really desperate homeowner tries for a “quick sale” at the last minute. Usually, it is too late by the time the scam artist is done and therefore such listings are not practical from a business standpoint.
Along the lines of the phony help scam is the bankruptcy scam. In such scams, the “consultant” promises to stop a foreclosure at the eleventh hour for an upfront fee. Once they have the fee, they file bankruptcy on the homeowner’s behalf promising to work something out with the lender. The bankruptcy filing does stop the foreclosure, but only temporarily. Meanwhile, the scam artist has moved on, leaving the homeowner with ruined credit and a complicated bankruptcy action to deal with. As with the phony help scam, real estate licensees find themselves marketing something that can no longer be sold. Licensees may also get involved in the aftermath of bankruptcy scams when the desperate homeowner tries for a “quick sale” at the last minute through the bankruptcy process. Unless experienced in sales involving bankruptcies, taking such listings may not be a good business decision.
By far the most dangerous of scams for real estate licensees are those that involve equity transfers. An equity transfer involves a conveyance of some kind between homeowner and consultant or between the homeowner and an “investor” or “equity purchaser” found or recommended by the consultant. The scam may involve the homeowner signing documents represented to be a new loan that actually transfer title to the “investor” in exchange for a “rescue” loan. Real estate licensees get involved when the investor lists the property for way more than the “rescue” loan. Dealing with this kind of listing is covered later in this section.
A licensee who works with an investor who has obtained the property by fraud can easily be drawn into the resulting lawsuits especially if the licensee and “investor” establish an ongoing relationship that involves listing all of the investor’s properties. Even when the equity transfer does not involve blatant fraud like misrepresenting documents, it may involve very sharp business practices and heavy sale pressure. The wider the margin between what the “investor” paid and the listing price, the more potential there is for fraud or sharp practices to be involved. Careful assessment of the risk involved in representing such “investors” in the re-sale of the home is essential.
Another popular scam is the “rent to buy” scam. Rent to buy is an equity purchase scam in the sense that the homeowner conveys title to the consultant or investor. Instead of then selling the property for a huge profit, the scam artist lets the former owner rent the house until they can buy it back. Often, however, the terms of the buy back are so onerous the homeowner has no real chance of ever completing the deal. Or, the new owner may simply raise the rent until the homeowner starts missing payments and then evict the homeowner and sell the house. When they go to sell they house, they will usually want to list it with a licensee.
A variation on the “rent to buy” theme involves a homeowner who has stopped making payments and moved out of the property conveying the property to the scam artist who is supposed to have “special knowledge” that allows them to sell the property and split the profits with the homeowner. The mortgage remains with the homeowner. The scam artist then lists the property and either rents it out or seeks a lease/option buyer. They then collect the rent and wait for the lender to foreclosure on the original homeowner. Because the scam involves an equity transfer and subsequent lease, lease purchase or sale, real estate licensees can easily get caught up in such scams.
Avoiding being caught up in foreclosure scams is a matter of diligence. On the listing side, that diligence begins with a careful analysis of agency relationships. Deciding who your client is, or ought to be, is always the first step. That begins by focusing closely on who is asking you to do what. If the seller has approached you to market the property and has hired a foreclosure consultant to negotiate with the lender, you have one client (the seller) who has two agents (you and the consultant). In that case, your duty is to the seller alone.
Representing a seller who is using a foreclosure consultant is not a comfortable position to be in whether there is fraud involved or not. If there is fraud, and the agent says nothing, the seller is likely to conclude the agent was in on it. On the other hand, if the agent does say something and there is no fraud, they risk a business liable/contract interference claim by the consultant. That is why the first step should always be to check out the foreclosure consultant. If the company isn’t registered in Oregon, or their name appears on a government fraud list, the wise agent will avoid the listing.
If there is no obvious problem with the consultant or their company, try to get a look at the consultant’s contracts and advertising before taking the listing. If there is no written contract, the consultant is probably in violation of the Mortgage Rescue Fraud Protection Act. If there is a contract, make sure it contains the required warning language and statutory cancellation form. If all that is in order, look at how the consultant is being paid. This is where upfront fees, rent-backs, equity transfers and the like should come under careful scrutiny. The question here is not one of fraud, but of whether involvement with these practices is a wise business decision.
If the consultant and firm don’t check out, or you feel uncomfortable in anyway regarding the structure of the consulting fee, don’t take the listing. If you do take a listing where the seller has engaged a foreclosure consultant any foreclosure consultant, even the most reputable you should make certain the seller clearly understands the scope of your relationship. You want to make certain the seller understands that you are not responsible for the consultant, the consultant’s conduct, seller’s contract with the consultant, the wisdom of hiring the consultant, or the outcome the consultant achieves. That can be done with a disclaimer attached as an addendum to the listing agreement. Here is a sample of such a disclaimer:
Seller under this Listing Agreement has entered, or will enter, into a separate written agreement with a “foreclosure consultant” who has agreed to provide certain services to the seller under a separate agreement. Seller understands and acknowledges that the listing broker, listing company and the principal broker involved in this Listing Agreement are not responsible for the consultant, the consultant’s conduct, Seller’s contract with the consultant, the wisdom of hiring the consultant or the outcome the consultant achieves. The scope of the services provided Seller under this Listing Agreement are limited to marketing the property to find a buyer ready, willing and able to purchase on terms agreeable to Seller and assisting Seller in performance and closing of any resulting sale contract. Although the listing broker will cooperate with Seller’s consultants as directed by Seller, neither the listing broker or the broker’s principal broker will be responsible for advising Seller on any aspect of the consultant’s services, the terms of the consultant’s contract or the consultant’s conduct in performing services under the contract. Seller is advised to exercise extreme care in entering into any agreement with a foreclosure consultant, or an investor or equity purchaser found or endorsed by the consultant. Foreclosure consulting services are subject to the Oregon Mortgage Rescue Fraud Protection Act. Seller is advised to seek competent legal advice from an attorney regarding the terms, conditions, obligations and services provided by any foreclosure consultant as well as the consultant’s conformance with state laws and regulations. Seller acknowledges that such advice is beyond the scope of a real estate licensee’s training or expertise and Seller is therefore not relying on the listing broker, listing brokerage or the principal broker in any way with regard to the foreclosure consultant or the consultant’s services or conduct.
Click here to download a copy of the sample disclaimer.
Another situation that can arise when working with foreclosure consultants or other mitigation experts is when the consultant, or an investor or equity purchaser of some kind working with the consultant, wants to list the property. Such situations can be fraught with peril for a real estate licensee and, therefore, must be very carefully and dispassionately reviewed. Principal brokers are well advised to have a policy that forbids brokers from entering into any listing agreement with anyone who is not the owner of record at the time the listing is taken unless the listing has been reviewed and pre-approved by the principal broker.
The reason for having such a policy is twofold. First, foreclosure consultants and their associated investors or equity purchasers are not usually the owner of the property they want to list. Instead, they usually have some sort of contingent interest such as an unexercised option, contingent sale contract or limited power of attorney. Whatever the vehicle used by the consultant, investor or equity purchaser, if they are not presently the owner of record (or have recorded power of attorney that specifically grants them the right to sell this piece of real property on the record owner’s behalf), the broker must have the true owner’s written permission to market and show the property. This is the case because of real estate advertising rules and civil laws like those for trespass. It is critical that any listing file for a listing with anyone other than the record owner contain a copy of the record owner’s written permission to market and show.
Demanding the written permission of the record owner to market and show does not make the record owner the listing broker’s client. It does, however, raise the second reason for extreme caution when listing property for a foreclosure consultant or their investor or equity purchaser the potential for unintended or misunderstood agency relationships and the resulting conflicts of interest. Simply put, the broker can find themselves caught between the interests of the record owner who is not their client, but has given the broker permission to market and show, and the consultant or investor who is their client because they signed the listing.
As with any potential conflict of interest, the solution (other than avoiding the situation altogether) is full disclosure. Here, the consultant or investor is the client, not the record owner. The broker needs something in the file that shows the record owner has not only given marketing and showing permission, but understands that the broker does not represent the record owner, does represent the consultant or investor but is not responsible to either for the relationship or transaction between the record owner and the consultant or investor. That means a disclosure to the client consultant or investor that, with their permission, is shared with the record owner. Here is sample of such a disclosure:
Seller under this Listing Agreement has entered, or will enter, into a separate written option, purchase or other binding agreement with record owner of the listed property. The record owner has agreed in writing that the listing brokerage may market and show the property on behalf of Seller. Seller agrees the listing broker may provide a copy of this disclosure to the record owner. Seller, and record owner, understand and acknowledge that neither the listing broker, listing brokerage or the principal broker involved in this Listing Agreement are responsible for the agreement between Seller and the record owner, it terms, provisions, fairness or consequences. The scope of the services provided under this Listing Agreement are limited to marketing the property to find a buyer ready, willing and able to purchase on the terms of this Listing Agreement and assisting Seller in performance and closing of any resulting sale contract between Seller and a subsequent purchaser. Although the listing broker will cooperate with the record owner as directed by Seller in showing the property, neither the listing broker nor the broker’s principal broker will be responsible for advising record owner or Seller on any aspect of the agreement between Seller and the record owner. Seller and record owner are advised to seek competent legal advice from an attorney regarding the terms, conditions, obligations and conformance with state laws and regulations of their agreement. Seller and record owner acknowledge that such advice is beyond the scope of a real estate licensee’s training or expertise. Seller is not relying on the listing broker, listing brokerage or the principal broker in any way with regard to the agreement between Seller and the record owner. The record owner is hereby specifically advised that the listing broker, the listing brokerage and the principal broker represent only the Seller under this Listing Agreement and do not represent the record owner and are not in anyway responsible to the record owner.
Click here to download a copy of the disclosure.
The final issue when it comes to dealing with foreclosure consultants is the business wisdom of the relationship. Certainly, no business relationship is wise if there is any hint that fraud may be involved. In that regard, it is worth keeping in mind the ten “red flags” published by the Federal Trade Commission (FTC). The FTC recommends that anyone looking for foreclosure prevention avoid any business that:
- Guarantees to stop the foreclosure process no matter what your circumstances
- Instructs you not to contact your lender, lawyer, or credit or housing counselor
- Collects a fee before providing you with any services
- Accepts payment only by cashier’s check or wire transfer
- Encourages you to lease your home so you can buy it back over time
- Tells you to make your mortgage payments directly to it, rather than your lender
- Tells you to transfer your property deed or title to it
- Offers to buy your house for cash at a fixed price that is not set by the housing market at the time of sale
- Offers to fill out paperwork for you
- Pressures you to sign paperwork you haven’t had a chance to read thoroughly or that you don’t understand.
If there is no indication that fraud may be involved, and all involved are willing to let the broker use the proper disclosures and disclaimers, there is still the matter of whether the listing is worth the cost. This is a very hard thing for real estate brokers, especially in a down market where listings are scarce. Private foreclosure consultants, investors and equity purchasers have learned that real estate licensees are often willing to absorb the cost of marketing real property without regard to the likelihood of a sale. This willingness is, in effect, a subsidy for down market investors.
Because they do not need to expend money on marketing the property, consultants and investors can focus their efforts and capital on finding and tying up distressed property. The more property they can find and tie up, the better their odds of making a profit. To the consultant or investor, it is strictly a numbers game. If they tie up a hundred properties and sell only one, they make money as long as the profit on the one exceeds the expense of tying up the hundred. Since they are not expending any money on marketing the property they tie up, they may not be, and generally are not, very concerned about market viability. The record owner and the real estate broker who pays for the marketing take the risk of no sale, not the consultant or investor.
In addition to the Fraud Protection Act, Oregon laws also regulate what are called “debt management services.” The 2009 Legislature substantially changed the laws regarding debt management services found in ORS chapter 697. In House Bill 2191, the legislature expanded the existing definition of “debt management service” to include, among other things, “obtaining or attempting to obtain as an intermediary on a consumer’s behalf a concession from a creditor including, but not limited to, a reduction in principal, interest, penalties or fees associated with a debt.” A person who “provides or performs, or represents that the person can or will provide or perform a debt management service in return for or in expectation of money or other valuable consideration” must register with the Director of the Department of Consumer and Business Services (DCBS) and comply with DCBS rules and regulations. Unlike the Fraud Protection Act, there is no express exemption in HB 2191 for real estate licensees.
The key to dealing with the debt management services laws is to avoid being paid for any activity that falls within the definition of “debt management services.” It is the “in return for” and “in expectation of” language in the law, instead of a specific exception, that protects ordinary real estate activity. As long as the real estate licensee is being paid, and expects to be paid, only a real estate commission pursuant to a listing, the incidental assistance offered the seller in obtaining creditor consent to the transaction in a short sale should not be considered debt management services. On the other hand, a real estate licensee who hires out to sellers listed with other agents, or FSBO’s, or operates on behalf of “investors” or “equity purchasers” or otherwise is involved in short sales other than under a listing agreement with the owner, needs to carefully consider debt management services regulations.
Real estate licensees involved in short sales under a listing agreement with the owner of the property, should carefully spell out their involvement in a written addendum to the listing. In this way, problems with both the Fraud Protection Act and Debt Management Service laws can be avoided by explaining in writing the exclusive real estate nature of the relationship. In this way, it can be made clear that the real estate licensee is being paid a real estate commission for providing brokerage services and not for obtaining agreements with the seller’s creditors regarding the seller’s debts. The real estate deal calls for the creditor’s consent sufficient to clear the title; it does not require the real estate agent to negotiate new terms for the note or mortgage agreement between seller and creditor regarding the underlying indebtedness. That remains the seller’s responsibility. Click here for a sample Addendum to Short Sale Listing Contract.
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