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Archive for the ‘Legal’ Category

Short Sales

J. Andrew English J. Andrew English
Wednesday, February 27th, 2008

I am seeing more and more agents simply pass up on showing short sales because they simply don’t want to deal with the headache. The first problem is that no one is training these agents on how short sales work. As a result, most agents do not understand how the process works and neither do their buyers. With the increasing number of short sales coming on the market, it would make sense for various associations to begin offering training in this field. The biggest complaint I hear from buyer agents is that many times the lender is completely unaware of what is going on. Basically, the listing agent is placing the property for sale at an asking price below what the seller owes on the property, the lender is clueless as to what is going on until the seller or agent notifies them after an offer is procured. As a result, you have a very unhappy buyer agent and frustrated buyer.

If you are a seller in a short sale situation, talk to both your attorney and lender, then talk to your agent about getting the property sold and how to go about this. Disclose to your agent and any buyer that any offer received will be contingent upon lender approval.

Dealing with Reputable Real Estate Companies

Donald L. Plunkett, Jr. Donald L. Plunkett, Jr.
Friday, February 22nd, 2008

The Arizona Republic reported today on a couple that has been indicted for among other things fraud and theft of more than $1MM from real estate investors. They ran three different enterprises: 1031 Exchange Consultants LLC, Tax Management Consultants LLC and Executive Realty Group LLC.

In a 1031 exchange, an investor has proceeds of one sale wired to a qualified intermediary company that is supposed to hold the funds then wire them onto another escrow company when the investor closes on a purchase (this way taxes are avoided on the original sale). Unfortunately, there have been instances where this does not happen as planned. Southwest 1031 Exchange out of Las Vegas was shut down with $80MM to $90MM of investor money missing.

Dealing with reputable service providers in real estate is absolutely essential. Whether it is a real estate broker, a real estate attorney, a mortgage company, a flat fee MLS listing service, a tax preparer, or any other service provider, make sure that the company can be trusted. In the case of the investors who trusted these 1031 companies with their money, they may very well end up with a massive tax liability and an evaporation of the real estate equity that took years to build.

Short Sale broker

Donald L. Plunkett, Jr. Donald L. Plunkett, Jr.
Tuesday, February 5th, 2008

Short Sale FAQs

THERE ARE MANY TAX AND LEGAL ISSUES (FOR INSTANCE, IRS TREATMENT OF DEBT FORGIVENESS) RELATING TO SHORT SALES.  FIRST AND FOREMOST, PLEASE CONTACT YOUR ACCOUNTANT AND ATTORNEY BEFORE MOVING FORWARD.

What is a short sale?

A short sale is when the net proceeds from the sale of the property are not sufficient to pay off the outstanding loans on the property.  A successful short sale would only occur if the lender or lenders who hold the lien on the property agree to release the lien despite being paid less than owed.

When do they occur?

Short sales frequently occur when there is a sharp drop in market values of properties.  There are three types of people generally affected: people who bought the property before the decrease, and either never could afford the payments or can no longer afford the payments.  Also, people who refinanced their property at the inflated value taking cash out of the property.  Finally, people that have received a large lien on the property above and beyond the loan balance, for instance, IRS liens, mechanics liens, judgments, SBA cross collateralization agreements, etc.

Who needs to know the property might be facing a short sale?

If you have listed your property, you must disclose this fact to your listing broker so that they can place a disclaimer in the MLS that the property is in a short sale situation and any purchase contract is contingent on lender(s) approval of short sale.  You will also want to make sure the information is disclosed again in the purchase contract and in communication with buyers and buyers’ agents.Do not assume that everyone knows it is a short sale.  While you are aware of what you did with the property, there is no way for everyone else to know what is owed until the property is escrow and a title commitment has been pulled – and even then there could be unrecorded liens or other issues affecting the property.

Can’t I avoid a short sale by placing money into escrow?

Yes, you can.  Realize that a short sale can be devastating to your credit.  If you have adequate cash, you can deposit it into escrow and avoid a short sale altogether.  For instance, if the net proceeds of a sale came up $10,000 short of the amount needed to pay off your mortgage(s), you could deposit $10,000 into escrow and the sale would go through without destroying your credit while fulfilling the contract that you signed when you took out the mortgage.  Some lenders may even allow the deal to go through by you taking on an unsecured line of credit for the unpaid balance.

Can Congress Realty handle short sales?

Yes, we can.  We will clearly disclose the property is a short sale situation.  We can provide you with a CMA which you can show your lender as they consider the fair market value of the property.  Because you are saving money on commissions, it is quite possible (but not guaranteed) that the bottom line sales price they will accept would be lower than if they had to pay a higher commission, meaning a better sales opportunity for you.  Please remember, however, that lenders are under no obligation whatsoever to accept a short sale.  They can decide they want the full amount paid back or they won’t accept.  After all, it is their money.

What is a hardship letter?

A lender is going to want to know why you cannot make the payments you agreed to and why they should take a loss on the principal balance.  Sellers typically put together a hardship letter explaining changes in employment, income, etc. with pay stubs and tax returns in order to explain their situation.

Hawaii Supreme Court proposed rule change

Donald L. Plunkett, Jr. Donald L. Plunkett, Jr.
Thursday, January 24th, 2008

A proposed rule change by the Hawaii Supreme Court could potentially reduce the job scope of a real estate agent in the state.  Basically, a rule has been proposed that would require someone to have a law license if they want to do the following:

  • Give advice or counsel to another person about the person’s legal rights and obligations or the legal rights and obligations of others.
  • Select, draft, or complete documents that affect the legal rights of another person.
  • Negotiate legal rights or obligations with others on behalf of another person.

So basically, a real estate agent that is not also an attorney would effectively be reduced to someone who markets and shows properties, but is not involved in contracts or negotiations.  The Hawaii Association of REALTORS® is opposed to the rule change and would like to have an exception put in place with regards to real estate transactions.  (Its position is here in a .pdf file)  That seems like a logical position to me.

If the proposed rule change does go into effect, it is going to be extremely interesting to see what changes occur in the marketplace.  For instance,

  • Will real estate agents who are also attorneys have a huge advantage (because their clients don’t have to pay extra to get contracts prepared)?
  • Will attorneys provide flat fee services for basic contracts and advice?
  • Will this rule change be adopted in other states?
  • How will this rule change play into limited service legislation which requires agents in some states to provide certain services that agents in other states may not even be allowed to provide?

Our industry is truly exciting and changing every day.  We will see what happens and adapt.