Pitfalls of Short Sales and REOs

I just attended a seminar on the "Pitfalls of Short Sales and REOs" hosted by the Santa Clara County Association of Realtors®. This excellent seminar was presented by attorneys David Hamerslough, and Sam Chuck from the law firm of Rossi, Hamerslough,Reischl and Chuck http://www.rhrc.net/. They discussed how to handle short sales and its pitfalls and liabilities. Topics of discussion were loan modifications (more on that in the next post), bankruptcy and foreclosures.

When a client approaches you for a short sale "determine" (I say that loosely because you can't give legal advice as a licensee or Realtor®) if that is the best avenue for them. You want to know if they are candidates for bankruptcy or cram down (when a judge orders the lender to lower the loan), loan modification or possibly foreclosure. Don't advise your clients what to do but recommend them to see an attorney or CPA for expert advice. You, the real estate agent, will have to document all conversations and follow-ups with clients and anybody else you contact in regards to the short sale. If you don't know the answer to a question, don't answer it. Part of our job is to do risk management and especially in these tricky situations it is important to remember that if you overstep your boundaries you expose yourself to liabilities.

The purpose of a short sale is for the lender to release the lien. You should identify whether the lender has recourse or non-recourse. In case of recourse the lender can go after borrower for the outstanding debt so make sure the lender doesn't state (usually in small print) that they have recourse. Again: document all communication and information in a positive way. Read every addendum carefully because they are written to the benefit of the lender not the buyer/seller. The lender can keep the buyer "hostage" for up to 120 days so again be careful and read all addenda. Be mindful of the date you put on the short sale addendum (contract between seller and buyer); without the seller's signature the contract is invalid. It is beneficial for the seller to push that date back as far as they can.

The tax implications of a short sale are different than those of a foreclosure. Foreclosures will affect the seller's credit rating differently than a short sale does but both will be on the record for 7 years. It will take a about 3 to 4 years before a foreclosed on former homeowner will be able to get a market rate loan again.

Let's not forget about the pitfalls for the listing agent of an REO. You become a property manager, general contractor of who know what else you have to do to keep that property attractive and in good shape. Does your E&O insurance cover all these tasks? Read the listing contract carefully and yes, if you want the listing you have to sign it. Be careful that the lender didn't include an addendum which protects them from all liability.

I don't claim to be an expert on short sales but just want to share and recap what was discussed.