Real estate agents know that short sales are likely to be time-consuming and frustrating. What many don't know is that short sales carry high risks of legal liability for agents. This message was delivered on a variety of occasions at the recent meetings of the directors of the California Association of Realtors® (CAR), held in Sacramento, California. It was discussed by CAR attorneys at a member legal forum; it was discussed in a meeting of attorneys who represent brokerages and Realtor® associations, and it was discussed in presentations by the Real Estate Commissioner.
One area of short sales that is fraught with liability is in the use of negotiators. In California, short sale negotiators must possess a real estate license and are subject to a variety of regulations. Moreover, a negotiator's agency relation to the principals is frequently unclear and undisclosed. Undisclosed dual agency is a particular problem.
At the CAR meetings special emphasis was directed to the unfortunately common practice of short-sale listing agents deliberately setting an artificially low listing price and/or submitting low offers for bank approval while discouraging or ignoring higher ones. Sometimes this practice occurs simply in the context of the agent trying to get a sale as quickly as possible. At other times the practice is part of a strategy to enable the buyer to "flip" the property.
How can one justify the agent not trying to achieve a higher price? An agent, a flipper, or a short-sale seminar instructor may say something like this: "Look, the seller's not going to get any money out of the transaction anyway. So he or she really doesn't care what the price is. They just want to be done with it, and the sooner the better. The lower price is really in the seller's interest, because it resolves their problem sooner."
Well, that rationale would have its point if it were true, but too often it isn't. That is because, in many cases, the purchase price does make a difference to the short-sale seller. To explain this, we begin by noting that, while there are some situations where the forgiven debt in a short sale may not be taxable, in many cases -- likely most -- it is. Typically, then, the short-sale seller will be faced with one of two unpleasant possibilities: (a) the unpaid debt will be forgiven by the lender and the amount will then be treated as taxable income, or (b) the lender will allow the sale to go through, but will reserve the right to pursue the seller for the unpaid debt amount.
In short, generally, the purchase price does make a difference to the short-sale seller, because the higher the price the lower the amount of either taxable income or unforgiven debt. The agent who ignores or conceals this fact is inviting a future legal action that will allow him to participate in the seller's financial problems. In California, he may have an opportunity to explain his behavior to the Department of Real Estate as well.
Additionally, if the above scenario also includes a deliberate attempt by the agent to influence the BPO (Broker Price Opinion) to come in significantly lower than fair market value, then a federal charge of bank fraud could be added to the list of liabilities.
Many agents have learned legally dubious short sale strategies at seminars and through books and tapes. It is an unfortunate, albeit understandable, fact that on occasion classes giving such advice take place at Realtor® association facilities. It is common for the sponsors of these classes to assure everyone that their programs have all been approved by the Department of Real Estate, legions of attorneys, H.U.D., and maybe even the White House. Of course they lie; and how is the person responsible for scheduling classes supposed to know? That is why a very strong piece of advice coming out of the CAR meetings was that Realtor® associations should be sure that classes dealing with short sale issues should first be vetted by the association's legal counsel.