Find Line Formula Wit A Set Of Points And Slope The Short Sale Dilemma – Understanding Fiduciary Responsibility

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The Short Sale Dilemma – Understanding Fiduciary Responsibility

In the simplest of terms a real estate agent owes a fiduciary duty to a client. This legal and ethical relationship of trust and confidence binds the customer to the agent in reliance on security and assistance during the transaction process. For a real estate broker and agent, fiduciary responsibility is a clearly defined relationship that requires special knowledge, dutiful care, and practical comfort.

Traditionally, the mechanics of real estate transactions allow the seller to profit financially by selling their property to the highest bidder. In these situations the role of the broker/agent includes advising on how to best position the property for sale, qualifying potential buyers, negotiating for the highest price, and maneuvering through the logistics of escrow. But what happens when profit is removed from the equation?

What is a Realtor’s fiduciary responsibility in a short sale?

First and foremost, a real estate professional must understand how this term is defined. According to the 2004 edition of California Real Estate Practice by Lowell Anderson, Daniel S. Otto and William H. Peever, a fiduciary duty is one of good faith and trust. “An agent must be loyal to his or her principal, putting the agent’s principal interests first. An agent’s actions, therefore, cannot be inconsistent with the principal interests. An agent cannot act in a self-serving manner. His or her principal.”

According to the National Association of Realtors, a fiduciary duty is like an old car. Abbreviations used for duties outlined by NAR. These responsibilities include:

1. Obedience – Duty to promptly follow and obey all lawful instructions of the principal

2. Loyalty – Duty to act in the best interests of the client, putting their interests above your own

3. Disclosure – Duty to disclose all relevant facts affecting the principal’s decision at the time of transaction

4. Confidentiality – Duty to protect principal secrets, unless doing so would violate disclosure laws

5. Accounting – Duty to account for all funds and income entrusted to you by the principal

6. Due care and diligence – The duty to use all of your real estate skills in the pursuit of principal matters, including the responsibility to know that you are beyond the scope of your knowledge.

Two transactions

A short sale actually involves two separate transactions that happen simultaneously. The first is a real estate transaction, where a prospective seller enlists a Realtor® to find a buyer ready, willing and able to purchase real property. Most agents are more qualified to handle this part of the equation as it falls within the realm of expertise they all share. Many other non-short sale transactions such as agents and brokers are paid for this work through real estate commissions earned on the successful completion of the sale.

The second transaction in the short sale process is a financial transaction. It is between the principal and one or more lien-holders who have a financial claim against the real estate in question, over and above the net purchase price offered by the purchaser in the aforementioned first transaction. Unfortunately many Realtors® attempting to handle this transaction do not have the technical expertise or experience to dutifully represent the principal in this matter. This transaction has legal implications, tax consequences, and may carry significant financial implications. Additionally, unless the agent charges the negotiation fee paid by the lender on the HUD-1, they do not get paid for the work on this second transaction.

Understand who the customer is

In the world of REO it is sometimes lost on the listing broker that his or her client is not the bank at the time of the short sale. Exactly the opposite. If you were to ask a loss mitigation representative at your local bank how they view a defaulting seller requesting a short payment, you might be surprised to learn that the relationship is considered adversarial. Anything and everything collected by the bank’s representatives can be used when negotiating a settlement against the defaulting seller.

Effective client representatives, asset managers, and loss mitigation specialists are sometimes warm and pleasant while building a bank case against your client with every financial document you share. You are not working together to find a solution. They are always looking for the last possible money they can extract from your customer before writing off the balance as a loss. Agents would be advised to understand the dynamics of this relationship and exercise extreme caution with their approach to loan negotiations.

What constitutes the best offer?

As I mentioned above, a defaulting seller walks away from a full short sale with the same amount in their pocket regardless of the purchase price. Zero, zilch, nada. The short lender in the transaction will, as a condition of their approval, specifically address this point and strictly prohibit the defaulting seller from any financial gain. As in many distressed sales, the best deal is often not the highest-priced offer, but rather the offer that presents the greatest “certainty of closing” for both the distressed seller and the bank to accept a loss. My point here is not to argue that value is completely irrelevant; Instead I suggest that when reviewing multiple offers, consider how much staying power potential buyers have with other intangible assets such as buying/investing experience, and patience.

I have seen short sales completed in less than 90 days and I have heard of short sales that have taken over a year to complete. In most cases, the difficulty in closing a short sale is motivating the interested buyer to close. It is not uncommon for retail buyers to submit offers on multiple short sale listings in the hope that at least one lender in the group will absorb the loss. The unfortunate reality is that many families cannot afford to wait months to make housing decisions. Parents need to accommodate work demands, children have school schedules, and families, especially in this market, have other options.

How to get the ball rolling – propose a strategy

A short lender has no interest in discussing a short sale transaction unless a qualified offer is in hand. To address this issue, temptation sometimes drives a distressed seller and their agent to submit an offer, any offer, to the bank, even if the buyer is not genuine. Using “straw buyers” is a dangerous practice and leads agents and their clients down a slippery slope. Even if the principal suggests or demands the use of these tactics, the agent has a fiduciary duty to comply with the letter of the law. It is the agents’ responsibility to be aware of both legal and illegal practices and to notify the client when such lines are crossed.

Only verified offers from genuine buyers should be accepted and/or submitted to the lender with a complete short sale package. If a home is sluggish on the market, the agent has a responsibility to find out what may be causing the problem for the seller, why buyers aren’t writing offers, or why agents are neglecting to show their property. If a defaulting seller has waited too long in the foreclosure process to allow for normal marketing time, the agent has the responsibility to price the listing appropriately to allow for maximum interest from the buying community.

Putting it all together

Fiduciary responsibilities require a broker/agent to implement a responsible business plan that includes full awareness of the real estate process. Understanding what can be done legally, determining who the client really is, understanding the client’s objectives, protecting the client’s interests, and diligently advocating on their behalf are fundamental to the agent/client relationship. Although agents’ expertise and experience are relied upon to guide them through real estate transactions, agents’ fiduciary duty is to put the clients’ interests and desires above their own.

Short sales present a unique set of circumstances that defy common practice due to the absence of profit for the principal and the burdensome financial transaction that accompanies real estate sales. Brokers/agents who take on short sale listings bear the burden of responsibility to know when their clients are in over their heads. It’s not enough to simply declare yourself a short sale specialist because distressed properties are the only properties that sell in your market.

Brokers and agents should understand that a seller’s primary objective in a short sale is to avoid foreclosure. This objective is accomplished only if and when a genuine offer is submitted from a genuine buyer and approved by the loan modification lender. If you take a short sale listing, the bank is not your client and is not working with your principal to meet your goals. The broker/agent is responsible for understanding this adversarial relationship, protecting their client’s interests, and maintaining a modicum of confidentiality on their behalf. A broker/agent who accepts a short sale listing must be willing to set aside subjective viewpoints and objectively present all possible options to the client. Finally, a broker/agent must understand the correct legal procedures required to complete the sale of the property with possible default from both the buyer’s and the seller’s perspective.

The responsibility is great, but the reward for helping a client avoid foreclosure is even greater. Your fiduciary duty can be easily maintained if you educate yourself, understand the process, remain objective, and focus on the client’s goals.

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