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David Monroe

Is Your Real Estate Agent Breaking The Law?

Has a real estate agent offered to negotiate a loan modification or a short sale for you, or are you a real estate agent that has offered these services to your client? The purpose of a loan modification is to get the bank to modify the mortgage terms to reduce the interest rate and/or monthly payments on an existing mortgage. On a successful short sale, the bank agrees to take a payoff that is less than what is owed.

As a real estate agent in Washington State, I specialize in short sales. I’m not an attorney and I can’t give legal advice, so if you have any legal questions about the information provided here, I recommend that you seek independent legal counsel.

If a real estate agent or another third party negotiates a loan modification or short sale, they may be practicing law without a license according to Washington State law. The Washington State Supreme Court adopted General Rule (GR) 24 in 2001, defining the practice of law, which includes negotiation of legal rights or responsibilities on behalf of another entity or person(s). Anyone negotiating with the borrower’s lender on their behalf is negotiating the legal rights and responsibilities on the borrower’s original loan agreement with the bank, which would fall under the Supreme Court definition of the practice of law.

Some real estate agents use a third-party short sale service to negotiate short sales on behalf of their clients. Under the same rules, the third-party short sale service would need to use negotiators that are licensed to practice law (i.e. attorneys). Most don't.

I know there may be some real estate agents that are furious as they’re reading this, thinking that this cannot be true they’ve been negotiating their own short sales for months or years and they’ve never heard of this. However, just because you aren’t aware of it doesn’t mean it doesn’t exist and that it cannot affect you. Also, if you’re not in Washington State, you may not be off the hook. Other states most likely have similar laws, so I would encourage you to check your own state laws.

Attorneys are currently using the Washington State Supreme Court General Rule 24 mentioned above as a primary argument against real estate agents and investors in lawsuits when a short sale client is unhappy with the results of a short sale. In one case I’m aware of, an agent outsourced short sale negotiations to a third-party short sale service that wasn’t attorney-driven. The short sale was approved, but after the transaction was complete, the seller claimed that they weren’t aware that they were still liable for the deficiency-- the difference between what the bank was owed and what they received from the short sale. (Short sale negotiators will usually request that the bank forgive any deficiency.) The seller sued the real estate brokerage and named the third-party negotiation service in the lawsuit. The settlement ended up being paid by the broker’s errors and omissions insurance. This is an example of a case where there may have been failure to properly disclose all material facts, but you could potentially be a target of a lawsuit even if you did everything correctly but weren’t able to produce the desired results for the seller. The seller’s attorney playing the “unauthorized practice of law” card could kill your case regardless of whether there was any wrongdoing on your part.

Now I’ll also mention that there’s an unwritten assumption that real estate agents are allowed to negotiate a short sale as part of the real estate transaction. However, real estate agents are licensed to perform limited real estate law which involves filling in the blanks on pre-written real estate forms and contracts. I have not found anything in our laws stating that a real estate agent can negotiate a borrower’s legal rights and responsibilities with their bank, even as a part of the real estate sale transaction. The Promissory Note and Deed of Trust are legal contracts between the borrower and the bank.

I use an experienced attorney to negotiate all of my short sales. I wouldn’t consider doing it any other way. Also, using an attorney with significant short sale experience is imperative. A good attorney will have proven negotiation strategies that may only be available to an attorney. They’ll also be familiar with the different loan products and the loss mitigation rules associated with those loan products (which even the banks’ loss mitigators are often not aware of). An inexperienced attorney will typically have a much lower short sale approval rate.

I know there are a lot of real estate agents negotiating their own short sales, and in my opinion, this carries less risk than outsourcing to a short sale negotiation service that’s not attorney-driven. It’s not my place to tell other agents what they can and can’t do. However, I think it’s important for agents to understand their risks, and to make their own decisions based on the level of risk they feel comfortable with. I tend to have a low risk tolerance, so my business model reflects that.

Published Wednesday, November 4, 2009 4:32 PM by David Monroe
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