Short Sale, Foreclosure and Strategic Default

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Thursday, October 18, 2007

California short sale addendum - Legal comments

California Association of Realtors short sale addendum with this authors lawyers comments to follow.


- Advises that the seller may be required to bring in funds to close
escrow or to obtain lenders' agreement to accept less than what's
owed.
- Advises that alternatives to a short sale may be more appropriate,
such as refinancing, bankruptcy, or foreclosure, depending on the
seller's own circumstances.
- Authorizes the listing agent to advertise a property as a short sale.
- Authorizes the listing agent to contact lenders concerning their
approval of a short sale.
- Advises the seller that a short sale has possible tax, credit, and
other legal consequences and that Broker has advised seller to consult with tax and legal counsel. Broker cannot give legal or tax advice.. "

The new addendum accomplishes two things, it rather mildly puts sellers on notice they should seek legal advice and illustrates when Realtors begin to practice law without a license.

1. Conspicuous by their absence are the words "negotiate" with banks or "represent". Real estate agents in California may be authorized (by the seller) to seek approval of the short sale transaction from the lender. Notice -- how limited the Realtors role may be. The Realtors may advertise a short sale and seek approval of the short sale from the lender.

California Real Estate agents are not hereby authorized to review a homeowner's financials, send those financials to the lenders as part of a short sale package or negotiate agreements with the bank in which the bank agrees to refrain from seeking deficiencies or report loan forgiveness to the IRS.

2. Note California homeowners are hereby advised there may be superior options to a short sale such as refinancing or foreclosure. So, before a California home or real estate owner agrees to a short sale, she should be aware a FORECLOSURE may be a more appropriate option.

(I am surprised that a Deed in Lieu of Foreclosure is not mentioned as this option when negotiated by an attorney is far superior to short sale in most situations for California homeowners. Realtors are not licensed to discuss this effects of the wide array of pre foreclosure options.)

3. Sellers are also advised that there may be possible tax, credit and legal consequences. Again, it seems pretty clear this addendum is not giving permission to Realtors to advise sellers about these consequences.



I think this addendum is a good first step. At least now some of the public will realize they need to find out from a lawyer if a short sale makes sense. (in my opinion it almost never does unless certain releases are negotiated drafted and signed by the lenders. )

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