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When a Realtor lists or sells a short sale house, careful consideration must be given to state and federal laws, in addition to the National Association of Realtors Code of Ethics. A short sale in today’s environment is a political hot button. For that reason, greater attention than usual must be focused on exactly what we, as Realtors do.
There is no tolerance for misinformation, errors, or lack of professionalism when listing and selling short sale properties. More and more state and federal regulatory agencies are looking into these issues. A seller believing their salesperson has taken advantage of them in a short sale or pre-foreclosure will file and ethics complaint.
In this article, I’m covering the Code of Ethics Articles 1, 4, 5, 11, 13, and 17. Please note these are not the only Articles that can be violated in a short sale transaction. A careless, uninformed, or unprofessional salesperson could potentially violate all of the 17 Articles.
Article 1 … Protect and promote your clients interests, but be honest with all parties.
To understand our responsibilities under this article, we should review Standard of Practice 1-9. “The obligation of Realtors to preserve confidential information (as defined by state law) provided by their clients in the course of any agency relationship…”
Let me assure you that we are not only dealing with state, but also federal laws. Part of the information we obtain from our customers when listing a short sale property includes the seller’s Social Security Number. Without that, and additional personal information, the seller’s mortgage lender will not discuss with us our customer’s financial issues.
Federal and state laws have very strict requirements concerning personal information. Article 1 mirrors these laws. If you are careless with a customer’s personal information you not only violate state and federal laws but are also in violation of Article 1.
Article 4…When buying or selling, make your position in the transaction or interests known.
When Article 4 is discussed at my short sale workshops, I always start by asking if anyone buys properties that they have listed. There usually is a number of salespeople that answer ‘yes’.
When we first talk with a seller about a short sale, we have to make a decisions right at the beginning either. I am acting in the capacity of a Realtor and will list your house as a short sale; or I am an investor and plan to purchase your house if I can make the numbers work.
Under Florida License Law, we can start as a listing agent then transition to an investor as long as proper agency disclosures are made. However, I believe that a salesperson that lists a short sale property would be hard pressed to defend their position.
Picture a tearful seller in front of a judge, “Your honor, this salesperson did not try to market my house. He knew my position and caused me to loose valuable marketing time because all along he planed to buy my house. And now he has put my family into a position that caused us to loose our home and all our equity.”
Remember, even though a salesperson complies with Florida License Law, a short sale is a political hot button. I don’t think anyone wants to defend themselves in court or in front of a Professional Standards Panel on accusations that they profited and the seller lost their home.
Article 5…Disclose present or contemplated interests in any property to all parties.
When I discuss Article 5 at my short sale workshops, I always ask if anyone is working with an investor. I then ask if they are going to list or manage the property as a rental after the investor has purchased it. Again, salespeople often answer ‘yes’. That positive answer indicates that the salesperson has an interest or potential interest in the transaction and that interest should be disclosed.
Article 11…Be knowledgeable and competent in the fields of practice in which you ordinarily engage. Obtain assistance or disclose lack of experience if necessary.
Brokers, when your sales associates list or sell a short sale property without specific knowledge of what they are doing, there are two words with which you must become familiar – WALKING LAWSUIT. You should insist your sales associates attend a short sale workshop.
Article 13…Do not engage in the unauthorized practice of Law.
When Article 13 is discussed at my workshop, salespeople firmly state they would never violate Article 13, so I provide a little story. We are sitting on our tearful seller’s couch. They hold up there mortgage and ask a question about their mortgage.
Like all good salespeople we would be able to rip through the verbiage and provide our seller the answer. My next question is, “What is a mortgage?” At first I usually don’t get the right answer. The correct answer is, “A mortgage is a contract.” I follow that with; “Who is authorized to interpret a contract for another.” Only attorneys have the authority to interpret a party’s rights and interests in a contract.
Salespeople provide the answers because they believe they are helping their customer.
Article 17…Arbitrate contractual and specific non-contractual disputes with other Realtors and with your clients.
The reason Article 17 is included is because of the way short sale offers are accepted and approved. The seller starts the process by accepting the offer contingent upon the seller’s mortgage holder(s) approval of the short sale offer.
A listing broker offering a set percent or dollar amount as a brokerage fee in the Multiple Listing Service must pay that amount to the selling broker. Unfortunately, the seller’s mortgage holder(s) and in some cases a court may ‘cram down’ the brokerage fee when they approve the short sale offer.
If the listing broker did not indicate in the Multiple Listing Service offering that the brokerage fee was subject to change at the time the short sale offer is approved by the seller’s lender(s), the selling broker could file an arbitration case demanding the advertised amount. When listing short sale properties make it clear that the brokerage fee may be changed by the seller’s mortgage holder(s) or possibly a court.
The last issue that needs to be addressed is listing agents who offer huge brokerage fees on short sale listings knowing that the seller’s mortgage holder(s) will cram down the brokerage fee. Not only could this be an ethics violation, it could also be a licensing law violation concerning false advertising.
I’ll say it again. Short sales and pre-foreclosure properties are political hot buttons. Just tune into the evening news and you’ll hear about these issues. As Realtors we don’t want to be part of those headlines. The headlines we want to hear about Realtors are how we help distressed homeowners overcome these negative issues and sell their house.
In the final article of this series, I’ll write about the actual mechanics of how to put the paperwork together and send a professional short sale package to the lender.
Wishing you continued real estate success.
Ulrich Leinhase, GRI
Educating Successful Real Estate Professionals™