Now that we understand that subsequent offers in short sale situations are material facts in the negotiation between seller and lender, we can develop practices and strategies to meet the resulting obligation of honesty, good faith and fair dealing. Timely disclosure, we know is the key to meeting these obligations. That being the case, the time to resolve the subsequent offer dilemma is when negotiation is opened with the lender on the first accepted short sale offer. What are needed are sound business practices that anticipate and handle subsequent offers in short sales before the offers are made. In short, practices that get the seller and agents in front of the situation by anticipating the situation.
There are only a handful of possible ways in which subsequent offers can be handled in short sales. One is to not market and not accept subsequent offers. Another is to accept subsequent offers in a “backup” position and send them to the lender sequentially as the lender rejects them. Another way is to request offers for a specific period of time, then close the offer period, stop marketing and send the best offer to the lender. Another is to accept all offers on a short sale contingency and send them all to the lender. Yet another is to send only offers better than previous offers by a set amount and then only until a certain cutoff date. Which among these alternatives is best depends on the circumstances.
There may be situations where the size of the deficiency doesn’t concern the seller or where there simply isn’t time to mess with subsequent offers. In such cases, the agent would submit the first offer with a cover letter or email (or phone conversation with a follow-up letter or email) that says due to the circumstances the seller will not market or seek subsequent offers. If the lender says nothing, they have agreed to that approach. If they do say something, the seller can negotiate with the lender to resolve the issue. That may involve postponing a foreclosure, taking only backup offers or whatever is necessary. Meanwhile, the accepted offer is in the works and the seller’s and agent’s duty of honesty, good faith and fair dealing has been met by communicating their intent to the lender.
Communicating intent to the lender is the key to meeting the duties of honesty, good faith and fair dealing. For instance, another way to handle the multiple offer potential would be to advertise (MLS comments are advertisements) that the seller will entertain all offers for a specified time (three weeks, a month, six weeks, whatever) and then accept and forward the best offer to the lender. Buyers would then make offers with an expiration date longer than the specified period. A buyer could, of course, revoke their offer at any time prior to the seller’s acceptance at the end of the period, but so what? To make this work, all that is necessary is to work out the details with the seller and inform the lender of how the seller intends to proceed. Silence is again agreement for honesty, good faith and fair dealing purposes. If the lender objects, the seller and the lender can work out the lender’s problems.
If the situation is such that the seller intends to continue marketing and accepting better offers to forward to the lender, then the thing to do right at the beginning is to establish some criteria with the lender regarding subsequent offers. That can be done with a cover letter that accompanies submission of the first accepted offer. In the letter, the seller can tell the lender they will continue to market for a specific period of time and accept and forward better offers. This lets the seller decide how long he wants to continue looking for a better offer and to define “better.”
How long the seller wants to seek better offers depends on the situation. Certainly, the foreclosure date is going to be a factor. There may be other considerations for the seller based on lender plans. Since all that is happening here is that the seller is covering his honesty, good faith and fair dealing obligation, setting a marketing time or criteria for determining a better offer is just informational. The same is true of defining what will be considered a better offer. The idea, again, is to communicate to the lender the seller’s idea of what is reasonable in the circumstances. If nothing is said by the lender, the assumption is that whatever the seller decided is considered reasonable. If something is said by the lender, the matter is negotiated and resolved.
There is a final scenario that should be mentioned while we are talking about communication and resolving matters by negotiation. There is a movement in some areas of the country to have sellers accept subsequent offers in short sales in what is termed “backup position.” This means the seller will accept, but not forward to the lender, any subsequent offers in short sales by having buyers agree to a backup position before the seller will accept an offer. This approach confuses the sale agreement with the lender/seller agreement and raises a couple of serious issues.
The first issue arising when sellers take backup offers in short sale situations is whether the backup offer is better in the sense of reducing the lender’s potential loss. If it is for a higher offer, accepting it as backup and not forwarding it raises the same honesty, good faith and fair dealing problem as simply rejecting the offer. As far as the lender is concerned, an offer not forwarded is an offer that is hidden. As we have already discussed, hiding better offers while negotiating with a lender to reduce the payoff on a loan raises very serious liability problems. Calling the hidden offer a backup offer doesn’t change anything with respect to the relationship between the lender and the seller.
To use the backup offer approach safely when a subsequent offer has the potential to reduce the lender’s loss, the seller would need the lender’s approval to treat subsequent offers as backups. That can be done by communicating in a cover letter to the lender, with the first accepted offer just like with other processes, the intent to take backup offers. Don’t be too surprised if the lender disagrees on this one. We are talking here about subsequent offers that are better in the sense of reducing the lender’s potential loss. In reality, a seller would be free, without any further communications with the lender, to accept in backup position an offer for less money than the one already forwarded to the lender.
The key to a successful short sale lies in understanding that in negotiations with a lender over how much money the lender is willing to forgive, the seller cannot hide from the lender other offers that have the potential of reducing the lender’s loss. The way to deal with that obligation is to tell the lender what you are going to do with subsequent offers when you submit the first one. If the lender doesn’t object to the plan, the seller has met his obligation of honesty, good faith and fair dealing. If the lender does object, the seller negotiates a process the lender will agree to. That way, you never get into a situation where the seller is hiding material information from the lender.
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The idea of getting to the last best offer applies equally to all offers in short sale situations, not just those with escalator clauses. The big question in short sales is how much “better” does an offer need to be before it should be accepted by the seller and forwarded to the lender. Notice first, there are two steps: (1) accepted by the seller and (2) forwarded to the lender. If an offer is not accepted by the seller, there is nothing to forward to the lender. This is where the two-contract nature of short sales becomes important.
Short sales, we have already said, are about sellers reaching agreements with lenders about mortgages or notes. To get that agreement (the seller/lender agreement), the seller needs to show the lender a particular offer the seller has accepted and negotiate with the lender based on that accepted offer. There is nothing that says a seller must accept and forward every offer they receive. The seller does not lose control of their property just because they are seeking an accommodation on their mortgage or note. What happens instead when a seller seeks an accommodation agreement from a lender is that the seller takes on the duties of honesty, good faith and fair dealing with respect to the accommodation agreement. The intentional lack of honesty is called fraud.
Fraud is about deceit. It is about the intentional concealment of material fact. The material fact we are talking about in a short sale is the fact of another offer. That fact is material to the lender because the seller is asking the lender to reduce the payoff on the mortgage or note based on the price of an accepted offer. If I negotiate for the lender to take a $50,000 loss by hiding the existence of an offer that would substantially reduce their loss, I am not being honest, dealing fairly or performing the mortgage reduction agreement in good faith once I get it. Stated plainly, once a seller asks the lender to take a loss based on a specific offer, they cannot simply ignore subsequent better offers.
That the seller cannot ignore subsequent better offers does not mean they have to continue to market the property or take all subsequent offers. They may very well want to do those things, but we are talking about whether they have to do them. The seller’s obligation is honesty, good faith and fair dealing. Good faith, and fair dealing are, setting aside for the moment intent, basically the same thing as honesty. The simplest way to be honest is to make full timely disclosures of material facts.
In real estate, disclosures are often thought of as forms to be signed. Disclosure is actually just the act of imparting what is secret or not fully understood. The legal definition, when it comes to contracts and agreements, is: “obligation of parties to reveal fact which is material if its revelation is necessary because of the position of the parties to each other.” As soon as the seller starts negotiating with the lender to reduce the payoff on their note, a subsequent better offer becomes material because of the position of the parties to each other. Other than as the triggering event for the lender/seller negotiations on the mortgage or note, the underlying sale agreement has nothing to do with it.
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Buyers will sometimes include in their offer a clause in which they agree to pay a sum (typically a thousand dollars or so) “over any other buyer’s offer.” Escalator clauses appeared at the height of the real estate bubble and are now reappearing in the short sale market. Escalator clauses were then, and are again now, a buyer gimmick designed to trick the seller into leaving money on the table. What the buyer with the clause hopes is that they will get the property without having to bid against other informed buyers.
Escalator clauses work only if the competing buyers do not know of the clause. Keeping the existence of an escalator clause a secret from other buyers means risking leaving money on the table because there is no way to know if one of the other buyers might have paid even more for the property than was paid under the escalator. In a short sale situation, leaving money on the table means the seller risking a larger deficiency, tax burden, or credit hit than would otherwise be the case.
As was the case during the earlier bubble, an escalator clause signals a buyer who is trying to purchase at less than their best offer price. Sometimes, escalator clause buyers will actually tell the seller what the buyer’s best offer price really is by placing a limit price on the escalator. A rational seller will always seek each buyer’s best offer. It follows that an offer with an escalator clause should always be rejected and the buyer asked to make their last best offer.
If there are multiple offers pending at the time the offer with the escalator is made, each offer can be rejected and each buyer informed there are multiple offers and they should make their last best offer by such and such a date. The best offer is then accepted and forwarded to the lender. If the escalator comes after another offer has already been accepted and forwarded to the lender, simply reject it and ask for the buyer’s last best offer. If the buyer is just fishing for a fool, they will go away. If not, they will make their best offer. Either way, the situation is resolved without bringing in the complication of an offer with an escalator clause into an already complicated situation.
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In an ordinary multiple offer situation, the seller alone has control of the situation and can make up their own mind about the wisdom of pursuing better offers. In a short sale situation, however, the seller is also negotiating with the lender over modification of the mortgage or note. The seller, depending on the exact situation, may or may not be liable for any deficiency should the lender end up foreclosing. See the Foreclosure section of this topic for an explanation of deficiency judgments under Oregon foreclosure statutes. The seller may or may not suffer tax consequences based on the amount of debt forgiven. The size of the deficiency can also affect the seller’s credit rating. All of this suggests the lender’s and seller’s interests in obtaining the best possible offer coincide and sellers should accept and forward for consideration better offers if they are made. Paragraph #5 of the short sale addendum reflects this conventional view of short sales.
The problem is that in real life the interests of the lender, the seller and multiple buyers can, and do, conflict in ways that make deciding what to do about subsequent offers in a short sale situation very difficult. This difficulty can make it very hard for an agent to serve their client’s interests and avoid risk. Take, for example, something as simple as an escalator clause in a short sale.
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How long the distressed property market will last is hard to say. It is clearly a market aberration and, therefore, one would not expect it to last very long. While it does last, real estate agents who deal with distressed property will have to adjust. Paradoxically, that means adjusting to a hot market in the worse real estate market in memory. Hot markets are driven by investors hoping to buy low and sell high. Ordinary homebuyers may also be attracted to the market. That means, as it did at the height of the bubble, more people chasing the same properties. That in turn, as during the original bubble, means dealing with escalator clauses, multiple offers, frenzied buyers and sharp business practices.
Multiple offers, including agency and license law implications of being involved in multiple offers, are covered in the Multiple Offers section of Writing the Deal. The mechanics of dealing with multiple offers in the short sale context are, however, very different. To understand why that is the case, one must focus on the dual contract nature of a short sale. Although rarely appreciated by agents, a short sale actually involves two agreements that is, two contracts. The first is a standard purchase and sale agreement between seller and buyer. The second is a loan satisfaction agreement between the seller and the seller’s lender(s).
What the industry calls a “short sale addendum” is really just a real property contract contingency. It is no different in that respect than a 72-hour contingency or other contingency that must be satisfied before a party is obligated to perform the contract. The industry has dealt with buyer-side contingencies for years. What is different about a short sale is that the contingency conditions the seller’s obligation to sell, not the buyer’s obligation to purchase. In a short sale, the seller’s obligation to transfer title is contingent on the seller obtaining their creditor’s consent to lower the payoff on the seller’s mortgage or note so the seller can deliver clear title. To do that, the seller must reach an agreement with their lender(s) about satisfaction of the debt the seller owes the lender.
It is common in the industry to think of the interaction between seller and lender as one of the lender “approving” of the sale, but that is not what is going on. The lender is not a party to the sale and their approval of the sale itself will have no affect whatever on the seller’s obligation to the lender under the mortgage or note. What the lender is approving is not the sale, but a modification to their mortgage or note. The fact that lenders will almost always demand changes in the underlying sale agreement as a condition to agreeing to modify their mortgage or note does not make the lender a party to the sale itself.
It is important to understand the two agreements nature of short sales before trying to understand the impact of multiple offers in short sale situations. The first impact of having two agreements is that because the lender will consent to only one deal, the short sale addendum itself effectively works as a backup offer contingency would in an ordinary real estate transaction. The short sale addendum by itself protects the seller from becoming obligated to transfer title in more than one deal. That means the seller can accept as many offers as they like as long as each uses a short sale addendum that makes the seller’s obligation to sell contingent on the seller and lender reaching an agreement on the mortgage or note.
In short sales, there is no need to have offers in backup position as is done in ordinary sales. Every offer is in backup position, regardless of the order accepted, because the seller’s obligation to convey title is contingent in every offer. The impact of this simple truth is spelled out in paragraph #5 of the short sale addendum most used in Oregon where the buyer is warned that the listing will remain “active” and the seller will continue to consider and submit to the lender(s) competing offers. This warning in the short sale addendum is a multiple offer warning.
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In the last few years, short sales have become a growth industry. At the end of 2008 and especially in early Spring 2009, the federal government moved to make the market for toxic real estate assets more liquid through policy changes, asset purchase programs and capital infusion. Toxic assets are assets that are worth less than what has been invested in them. If a market contains too many toxic assets, the assets become hard to sell, even at a loss. Such assets are then said to be “illiquid.” Time on market is a measure of liquidity in the residential real estate market.
Short sales are a mechanism for marketing toxic assets in an illiquid market. Normally, and this was certainly the case when the residential housing market first turned sour, there is little incentive for lenders to participate in short sales. Unless a short sale will result in significantly less loss to the lender than foreclosing on the property, the lender has no incentive to discount their loan. Short sales, therefore, are traditionally about convincing the lender that taking the short sale deal will actually make them money. See the Do the Numbers section of this subject.
In economic terms, the government’s intervention in the distressed property market created a market entry opportunity. In a sense, this new distressed property entry opportunity is an echo of the residential real estate market entry opportunity created by the easy credit that caused the real estate market bubble in the first place. Indeed, many of the same mortgage brokers, property flippers and real estate speculators who drove the real estate bubble are back as foreclosure consultants and equity purchasers. Basically, the government is using its money and influence to encourage sales at well below what would otherwise be the market price in order to increase liquidity and, therefore, clear the market of distressed properties.
Encouraging sales at below market price does two things. First, it increases market activity, particularly market activity in distressed property. Today distressed properties in the guise of short sales and REOs make up about 20% of real estate listings in the average market but account for more than half of all sales. Secondly, encouraging below market sales creates a new market bubble. The distressed property bubble is intended to stop the deflation created by the end of the original bubble. In many markets it is generating the same kind of frenzied activity as was seen market-wide at the height of the original bubble.
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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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Real estate licensees come into contact with foreclosure consultants and mitigation experts because most “rescues” involve trying to sell the property usually as a short sale. The involvement of foreclosure consultants or loss mitigation experts in real estate sales conducted through real estate licensees raises serious risk management and business issues for the licensees involved. Licensees must be aware of potential for involvement in fraud. Even if no fraud is involved, potentially difficult agency issues can arise when the seller has hired a foreclosure consultant. The viability of listings involving foreclosure consultants must always be assessed from a business as well as a legal and risk management point of view.
Most foreclosure consultants are not licensed to practice real estate. That means sharing any part of a commission, or even promising to share any part of a commission, is illegal. Foreclosure consultant will sometimes have schemes for evading the commission sharing rule. Some of these may, depending on how exactly they work, be legal if the payment comes from a party to the contract rather than the agent. Such arrangements, however, will tend to tie the agent to the consultant’s business and business practices. No agent should even agree to any arrangement regarding the commission when a foreclosure consultant is involved without first checking with their principal broker.
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With the downturn of the real estate market in 2008, a rising tide of foreclosures created an entry opportunity for what are called foreclosure consultants or mitigation experts. Often, these consultants and experts team up with investors or equity purchasers. The stated purpose of individuals and organizations involved in foreclosure consulting or mitigation is to help distressed homeowners avoid foreclosure. It is the threat of foreclosure that drives short sale listings and brings real estate licensees into contact with foreclosure consultants, mitigation experts and the like. Click here for Frequently Asked Questions on foreclosure consultants and short sale negotiators.
Although there are honest and reputable people involved in foreclosure consulting and loss mitigation, these activities can involve very sharp business practices and even fraud. The federal Department of Housing and Urban Development (HUD) publishes a list of “HUD-approved Organizations” that provide foreclosure prevention related counseling. The list is available at: www.dfcs.oregon.gov/ml/foreclosure/counselors.html. The Oregon Department of Finance and Corporate Securities (DFCS) publishes extensive information about foreclosure scams. The information is available at: www.dfcs.oregon.gov/ml/foreclosure/foreclosure_fraud.html. General information about preventing and dealing with foreclosure is available from the Oregon State Bar on their Legal links Cable Television Show. The relevant episodes are available here.
Desperate homeowners facing foreclosure will often clutch at straws and are therefore easy prey for sharp operators. It is for that reason that the Federal Trade Commission (FTC) publishes a consumer information pamphlet called “Foreclosure Rescue Scams: Another Potential Stress for Homeowners in Distress.” The publication is available online from the FTC at: www.ftc.gov/bcp/edu/pubs/consumer/credit/cre42.shtm. The pamphlet warns consumers about foreclosure scams, explains how common scams work and offers a list of “red flags.” The FTC also publishes a list of lawsuits against, and settlements with, foreclosure “rescuers” here.
The FTC and multiple state attorney generals have been actively prosecuting foreclosure rescue companies that are conducting these types of scams on distressed homeowners. Some states, including Oregon, have enacted laws that specifically regulate these types of businesses. The FTC began its own rulemaking process in 2009 and has now issued a final rule impacting many real estate licensees in what is being called the MARS Rule (Mortgage Assistance Relief Services Rule) which became effective January 31, 2011.
The MARS rule covers short sale negotiations. The rule defines Mortgage Assistance Relief Services as a service, plan or program offered or provided to the consumer in exchange for consideration that provides services in relation to a consumer mortgage, including a possible loan modification which includes negotiating a short sale of a dwelling on behalf of a consumer. Additionally, the FTC defines Mortgage Relief Service Provider as someone who provides or offers to provide, or arrange to provide, any mortgage assistance relief service.
As you can see, these FTC definitions mean that, absent an exception, the MARS rule can have an impact on a real estate licensee who handles almost any type of short sale transaction.
While the rule is primarily aimed at companies that offer loan modification services to consumers, the rule falls squarely on real estate licensees as well and requires a disclosure be given by parties, including real estate licensees, who are involved in negotiating short sales. The FTC has defined negotiate to include contacting a lender about the possibility of short sale transaction involving a consumer loan. Therefore, it is recommended that the disclosure be given anytime you are dealing with a short sale where you represent the seller until and unless an exemption is granted to real estate licensees by the FTC. For a sample disclosure and more information on MARS please click here. However, due to response from real estate licensees, the FTC issued a statement that it would not enforce most provisions of its MARS Rule against real estate brokers and their agents who assist financially distressed consumers in obtaining short sales from their lenders or servicers. Read more about the FTC forbearance here.
Like the federal government, Oregon has moved to protect homeowners from foreclosure scams. In 2007, the Oregon legislature responded to growing concern about foreclosure scams when it passed the Oregon Mortgage Rescue Fraud Protection Act: House Bill 3630 (HB 3630). A copy of the entire bill is available from the Oregon Legislature at: www.leg.state.or.us/08ssorlaws/0019.html. The new law is codified at ORS 646A.700 through 646A.765. Click here for a copy of the statutes. The Act has a number of features real estate licensees should be familiar with.
The Oregon Mortgage Rescue Fraud Protection Act applies to a person who acts as a “foreclosure consultant.” The term is broadly defined to include anyone who, for compensation, offers to help a homeowner stop foreclosure or in some way renegotiate or otherwise modify a loan or rights under a trust deed or mortgage. Real estate licensees are exempt from the Act “if acting within the scope of that license.” To act within the scope of a real estate license means to act under a listing agreement or as the representative of a buyer.
The Fraud Protection Act creates contractual notice, rescission and cancellation rights for homeowners who contract with foreclosure consultants. Foreclosure consulting can be done only under a written contract. The written contract must be presented to the homeowner at least twenty-four hours before it is signed by the homeowner. It must be in the language spoken by the homeowner and used in discussion between the homeowner and the consultant. The terms of the service and payment must be plainly expressed. The contract must contain a statutory notice that begins with the following warning: “THIS IS AN IMPORTANT LEGAL CONTRACT AND CAN RESULT IN THE LOSS OF YOUR HOME. YOU SHOULD CONTACT A LAWYER OR OTHER PROFESSIONAL ADVISER BEFORE SIGNING.” If the consultant does not meet the requirements of the Act, they are in violation of the Unlawful Trade Practices Act.
Under the Act, foreclosure consulting contracts can be cancelled at anytime by the homeowner. The consultant must provide the homeowner with a statutory cancellation form. A copy of a form that meets the statutory requirements is available here. If the homeowner exercises their right to unilaterally cancel the contract, they must pay for any services actually delivered prior to cancellation and any money expended by the consultant on their behalf. Any consideration received by the consultant from a third party must be fully disclosed to the homeowner in writing. If the consultant is involved in facilitating or arranging for an equity conveyance (typically, to an “investor” or “equity purchaser”), the consultant cannot be paid by the equity purchaser.
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