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Keller Williams Realty San José - Gateway Team
Meeting September 27, 2011
Guest Speakers John Ewell from Chase Bank
408.621.1622 john.m.ewell_at_jpmchase.com Announ
cements Gary Keller on the Power of One-
Video The Solution with Resource
Dynamics eEdge Update with Alex- Special
Feature New Agent Resources Broker Risk
Management Listings, Sales Lotto Tickets ALC
Updates Growth Culture Education-
Ignite Wrap-Up Wants Needs Prospect
Mortgage Audrey Rosalio
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Keller Williams SV Brokers and Agents You Are
Invited To THE SOLUTION Are you ready to
increase your production to peak performance for
todays ever changing real estate market?
  Looking for fresh and usable ideas, systems and
strategies used by current top agents? Attend the
THE SOLUTION workshop, presented by founder,
Rick Kurtz. Seasoned agents, new licensees and
those in between will learn guaranteed methods to
dramatically increase income and create a
consistent and predictable flow of business. BY
TOP ACTIVE AGENTS FOR ALL ACTIVE AGENTS Date
Thursday October 13, 2011 Time 100pm The
Solution Workshop Hosted Lunch Location 180
Great Oaks Blvd, San Jose 50 Gift Card drawing
when 15 agents attend Please join us! RSVP to
Brie or Sign up sheet Don't miss this free
Event!
Rick Kurtz, Speaker/Owner, Resource
Dynamics www.resource.dynamicsltd.com CHECK US
OUT! See outline
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• SHORT SALES HOW TO HANDLE
• This Short Sale White Paper incorporates all
  individual Weekly Practice Tips as of October,
  2011.
• SHORT SALES AN OVERVIEW
• A. BACKGROUND
• A Short Sale is a sale where a lender agrees to
  take less than the full amount due on the loan on
  the property. If there is more than one lender,
  it is the junior lender (as measured by time of
  filing of the deed of trust) who is in the
  greatest danger and should be willing to take
  less than the full amount due. The reason for
  this is that, if there was a foreclosure by the
  holder of the most junior lien, they would not
  get the full payment. If there was a foreclosure
  by a senior lender, such as the holder of the
  first, the junior lienholder(s) could get
  foreclosed out, potentially getting nothing.
• Institutional lenders understand this, and
  usually do not want to take a property back as a
  foreclosure into their Real Estate Owned (REO)
  department, since this is an expensive process
  and looks bad on their record with the
  regulators. They will usually work with you, but
  you have to find the right person to talk to,
  usually a vice president or department head.
• If the junior lienholder is a hard money lender,
  friend or family member, you may find it
  difficult or impossible to negotiate with them.
  You may not have a saleable listing. One phone
  call to that junior lienholder may make that
  clear.
• Listing and selling agents should be aware that
• Lenders are under no obligation to agree to a
  short sale although most institutional lenders
  will actively try to avoid a foreclosure by
  working with the seller/borrower on a short sale.
• Lenders are under no obligation to process a
  request for a short payoff within any particular
  timeframe. So, sellers, buyers and agents must
  be prepared for a process that may take weeks, or
  even months, regardless of the time frames in a
  Purchase Agreement.
• With the exception of certain conforming loan
  lenders who are required to follow commission
  guidelines, lenders are under no obligation to
  agree to a short payoff demand that will allow
  brokers to be paid a commission. However, most
  institutional lenders will agree to a payoff
  demand that will allow brokers to receive a
  commission, if not necessarily the full
  commission agreed to by seller.

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PRACTICE TIPS FOR LISTING AGENTS 1. To avoid
the problem of a short sale, or at least
anticipate it, at the time of taking a listing,
go over the existing financing and indebtedness
on the property with every seller. Begin the
preparation of a Net Sheet. Be careful to be as
accurate as possible with the Net Sheet as this
will be a key document used by the sellers
lender in determining the short payoff amount.
Ask about any liens, judgments or attachments.
Get the Preliminary Title Report (PTR), or a
Property Profile, from escrow early and review it
to see if there will be enough proceeds from the
sale to pay off all recorded liens, judgments and
attachments as well as your commission. If
not, discuss with the seller before you proceed.
Ask if seller is current on loan payments and, if
not, determine how many months seller is behind.
These missed payments plus penalties will be
accrued to the payoff amount due to the lenders.
Start early to resolve the problem. 2.
PREPAYMENT PENALTIES Be sure to include any
prepayment penalties into your calculation, since
this can take a significant amount out of
sellers proceeds. 3. CASH TO CLOSE Do a
detailed net sheet showing all closing expenses
to determine how short the projected sales
price may be. If the amount is not too great,
discuss with your sellers whether they have the
ability, and whether it might make sense, to
bring cash to close the escrow to avoid having to
do a short sale. If your sellers state that they
are willing to do so, document that in writing
since (a) technically, this will not be a Short
Sale and (b) there will be enough cash to close
the sale and cover all closing expenses. Advise
your sellers that, based on their representation,
they will be bringing sufficient cash to close
the escrow so you will not advertise their
property as a short sale. A good idea would be
to actually put this in the Additional Terms
of, or in an Addendum to, the Residential
Listing Agreement. 4. SELLER ALTERNATIVES A
seller has other options to a short sale, such
as (a) the seller/borrower may be able to
negotiate a Short Payoff without a sale of the
property essentially a restructuring of the
debt (b) the seller/borrower may ask the lender
to accept a Deed in Lieu wherein the lender
agrees to accept a conveyance of the property in
satisfaction of the loan (c) a seller/borrower
may even prefer to allow a foreclosure under some
circumstances OR (d) bankruptcy. Do not advise
sellers regarding these alternatives sellers
must be sent to their legal and tax advisors in
making these decisions BEFORE SIGNING A LISTING
AGREEMENT ON A SHORT SALE.
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5. REALITY CHECK Before proceeding with taking
a short sale and expending your time and expense,
assess the likelihood of actually being able to
accomplish a short sale given the amount of
indebtedness, who the lenders/creditors are, and
the market for this property at the projected
list and sales price. 6. LISTING FORM Give
your seller a copy of the Short Sale Information
Advisory (ZipForms form SSIA) and have seller
sign it prior to signing a listing agreement. 7.
If you choose to help your seller negotiate a
short sale with a lender (you have no obligation
to do so but most sellers dont know what to do),
some lenders will not talk to you without written
authorization. FORM You can get that
authorization using CAR form Authorization to
Receive and Convey Information (ZipForms
ARC). 8. Advise your sellers that the lender
will want documentation, which may include a
hardship letter, tax returns, W-2s, pay stubs,
a list of other assets, etc. Remind your seller
that this information must match the information
on the loan application. If the loan application
was wrong, the lender might charge that there was
lender fraud when the loan was taken out. 9.
Lenders will usually report the short sale to
credit reporting agencies, which will reflect
negatively on the seller/borrowers credit report
for seven years. If the lender is agreeing to a
short sale, ask them if they are willing to show
the file as the more favorable paid in full.
Most will not, so discuss this with your seller
and get their approval before proceeding with the
lender. 10. You may be able to negotiate even
with senior lenders for removal of penalties and
other added fees to help get the total of the
demands into escrow reduced. Its worth a
try. 11. If sellers have any questions about the
above, they should be sent to their tax advisor
or attorney. Be careful not to refer your
seller-clients to mortgage foreclosure
consultants who charge a fee (NOTE It is
illegal for mortgage foreclosure consultants to
charge a fee in advance of providing services)
many of these people are less than honest and you
could incur liability if these consultants damage
your clients. 12. The fact that this is a short
sale must be disclosed to a buyer. This must be
done, in the purchase agreement however, good
practice would be to alert a prospective buyer
and the buyers agent prior to the writing of an
offer so they are not taken by surprise at the
time of the contract ratification. 13. Since the
purchase contract must state that this will be a
short sale, and that close of escrow by seller is
conditioned upon the successful negotiation with
the lender(s) to demand not more collectively
than the sale proceeds, net of closing expenses
including commissions, ALWAYS use the CAR Short
Sale Addendum (or in the PRDS region, use the
PRDS Short Sale Addendum.)
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14. Sellers should be advised that there can be
adverse tax consequences to seller as a result of
a short sale to the extent that seller receives
relief from mortgage debt by the lender in a
short sale unless the property loan qualifies for
the federal and California exclusion from this
tax as a Qualified Principal Residence
Indebtedness, which is defined as debt incurred
in acquiring, constructing, or substantially
improving the residence (up to 2 million) plus
other criteria. All such relief from mortgage
indebtedness is taxed by the State of California.
Send your sellers to their tax advisors for
advice on this subject. FORM CAR form Short
Sale Addendum (ZipForms Form SSA) covers items 14
and 15, above and should be incorporated into
every short sale purchase agreement. FOR
FURTHER INFORMATION See the CAR Legal
Memorandum entitled Taxation of Foreclosures,
Deeds in Lieu of Foreclosure, and Short Sales
at http//www.car.org/legal/tax-folder/taxatio
n-foreclosures-shortsales/ 15. COMMISSIONS If
you anticipate that the sale will or might be a
short sale, place a conditional offer of
compensation in the MLS broker comments, such
as Short sale subject to lender
approval. Any reduction in total commission
received will be split evenly between Listing and
Selling Brokers. If you are taking a listing
which might, or might not, be a short sale
depending on the final sales price, you still
want to protect your commission in the event you
are ratifying at a price which will make the
transaction a short sale by putting the following
in the MLS confidential remarks If
this is a short sale subject to lender
approval, any reduction in total commission
received will be split evenly between Listing and
Selling Brokers. Or, alternatively, you can
propose some other arrangement as to who absorbs
any shortfall in total commission received. It
would appear, however, that an even split between
listing and selling brokers would be most
equitable. FOR FURTHER INFORMATION CAR has good
information online entitled Short Sale
Advertising at http//www.car.org/legal/adverti
sing-folder/short-sale-advertising/ 16.
SUBMITTING OFFERS TO LENDER Once you have
submitted an offer to the lender for
consideration of a short payoff by them (and the
contract is contingent on lenders approval of a
short payoff as it should be), continue to market
the property. With your sellers permission, if
you receive another offer, or offers, you should
ratify those in backup position and submit those
offers to the lender for their consideration as
well. The lender has the right, for example, to
choose to reject the first offer on their desk
and accept a later, better offer. In such a
case, the first offerors contract is effectively
cancelled (and should be mutually cancelled in
writing) based on the Short Payoff contingency,
and the second offer accepted by the lender for a
short payoff proceeds forward. A higher offering
price may benefit your seller by making the
lender more willing to participate in the short
sale and/or reduce. NOTE The ZipForms form
Short Sale Addendum requires seller to notify
buyer if any accepted backup offers or other
subsequent offers are submitted to sellers
lender.
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17. MORTGAGE ASSISTANCE RELIEF SERVICES
(MARS)   A. WHAT IS MARS?  The Federal
Trade Commission enacted rules called Mortgage
Assistance Relief Services (MARS) for real estate
agents and others who negotiate short sales (and
loan modifications, deeds-in-lieu, etc.) on
behalf of borrowers/sellers. These rules became
effective January 31, 2011.  B. REQUIREMENTS
Under the MARS regulations, real estate agents
who provide, arrange for, or advertise short sale
negotiation services for short sale sellers must
comply with the MARS rules, including, but not
limited to, certain disclosure, advertising and
record keeping requirements. Further, MARS
states that licensees subject to these rules may
not do any of the following   1. Request or
receive any payment until the seller enters into
a written agreement with the lender. (Note that
California law further restricts advance
fees.) 2. Represent that a seller should not
contact the lender 3. Misrepresent the
likelihood of obtaining a short sale 4.
Misrepresent the amount of time it will take to
complete a short sale 5. Misrepresent the
sellers obligation to make loan payments or
6. Represent the benefits of any MARS service
unless such representation is based upon reliable
evidence.  C. FORMS CAR has created two forms
for complying with the MARS regulations. They
are  1. MARS Short Sale Negotiating Notice
(ZipForms form MARSSN)   2. MARS Offer of
Mortgage Relief Notice (ZipForms form MARSMRN) D.
COMPLIANCE The Federal Trade Commission
(which created the MARS regulations), and now the
newly-created federal Consumer Financial
Protection Bureau (CFPB), which has taken over
the MARS regulations from the FTC, have made
clear that the MARS regulations do not apply to
real estate listing agents who take short sale
listings so long as the agents meet three
criteria 1. The agents are licensed and
maintain good standing under state law 2.
They are acting in compliance with state law
governing the practices of brokers and agents
and, 3. They are assisting or attempting to
assist a consumer in negotiating, obtaining or
arranging a short sale of a dwelling in the
course of securing the sale of the consumers
home. 4. So, if listing agents and brokers
satisfy the above three requirements, they no
longer need to a. Provide CAR form MARSSN when
taking the listing. b. Provide form MARSMRN at
the time they obtain the lender approval letter.
c. Include the MARS disclaimer notice in
advertisements when marketing properties. d.
Comply with MARS other record keeping and
monitoring requirements.
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However, because there remains some concern
amongst attorneys surrounding the MARS
disclosures at the time that the lenders Term
Sheet is delivered to the seller, and at the time
that the seller then delivers that Term Sheet to
the buyer per the requirements of the Short Sale
Addendum to the Purchase Agreement, a disclosure
that addresses these issues should be given to
sellers at the time that the Term Sheets are
delivered to your seller on each of your short
sale transactions. (SEE TIP 2 BELOW.) PRACTICE
TIPS FOR LISTING AGENTS 1. As a short sale
listing agent you no longer have to give sellers
the MARSSN or the MARSMRN forms, nor do you have
to include the MARS advertising disclaimer in
your advertisements regarding short sale
listings. 2. As a short sale listing agent, each
time that you deliver a Term Sheet from a lender
to your seller, give your seller a copy of the
Seller Advisory Regarding Lenders Term Sheet
and Sellers Instructions to Listing Agent.
This Advisory appears at the end of this
document. 3. Review the paragraph entitled
Instructions to Listing Agent which contains a
default instruction that seller must give you,
the listing agent, a written instruction before
you deliver the Term Sheet to the buyers agent.
If you wish to have a different instruction,
there are check boxes for that purpose. Have
your seller check one of those boxes ONLY if you
want to change the default instruction. 4. Have
the seller sign this document, giving seller a
copy for their files. 5. Only deliver the Term
Sheet to buyers agent per the instruction from
seller. 6. Any DRE licensee engaging in the
following activities must still comply with
MARS a. Pure short sale negotiations. b.
Promoting their services as a way to help
property owners avoid foreclosure. c. Loan
modification negotiations. d. Deed-in-lieu
negotiations.
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PRACTICE TIPS FOR BUYERS AGENTS 1. CHECK FOR
SHORT SALE Prior to writing an offer, review
the MLS remarks to see if the listing agent has
indicated that this property is, or may be, a
short sale. 2. DISCUSS WITH BUYER Upon
learning that this is a short sale, discuss the
situation with your buyer. Your buyer is taking
a bit of a risk since your buyer could spend
hundreds or thousands on inspections and loan
applications, only to have the deal cancel
because the seller could not negotiate a short
sale with their lender, or the lender chooses to
approve another contract from a different buyer.
Make sure your buyer understands the risks and is
making a conscious decision to proceed. Document
your transaction log and/or confirm the decision
in an e-mail or other correspondence with your
buyer. It is not a good idea to have a buyer who
is coming out of a 1031 Exchange enter into a
contract to buy a property which will be subject
to a short sale. The short sale may take months,
which could force a close of escrow on this
up-leg property past the time required to
complete the exchange, resulting in severe tax
consequences to the buyer/exchanger. 3. PURCHASE
AGREEMENT CLAUSE Be sure that the Short Sale
Addendum is a part of the purchase agreement (CAR
form SSA). This form can protect your buyer in
the event the lender does not respond to a
request for a short payoff in a timely manner by
allowing your buyer to cancel the purchase
agreement and get the buyers deposit returned if
the lender does not approve the short payoff
within the time specified. It does allow the
seller to cancel as well in that situation, so
buyer should be aware of that possibility. It
also allows for the parties to agree as to
whether the time for contract performance and
contingency removal will commence upon the
approval by the sellers lender of the short
payoff (the default mode), or at the time of
ratification of the contract. 4. REVIEW
PRELIMINARY TITLE REPORT Immediately upon
getting the PTR, review the liens on the
property. If the total liens and encumbrances
start to approach the purchase price, and listing
agent has not advised you that this may be a
short sale, discuss the situation with the
listing agent. 5. OTHER OFFERS Your buyer
should also be advised that the lender may
entertain other offers from other buyers, agree
to work with another buyer, and reject your
buyers offer. Even if your buyers offer has
been accepted by seller subject to the existing
lenders approval, the lender may accept another,
better offer even though your contract has been
submitted for quite some time. Your buyer should
be advised that if they expend funds on
inspections and on obtaining a loan, they could
lose these funds if buyers contract is rejected
by the lender. 6. COMMISSIONS Check MLS
comments re broker compensation. If you are a
buyers agent concerned about getting paid on a
short sale, you can enter into a Buyer-Broker
Agreement with your Buyer. (CAR form BRE or
BRNE) Please also read the comprehensive CAR
Legal Memorandum Short Sales at http//www.car
.org/legal/foreclosure-short-sale-folder/short-sal
es/ 18. SHORT SALE INFORMATION ADVISORY As any
agent who has handled short sales knows, these
transactions are different animals from regular
sales. There are many legal, tax, contractual,
strategic and tactical considerations which must
be taken into consideration by a seller or a
buyer before deciding to proceed with a short
sale transaction. It is important that agents
not only be aware of these issues, but also to
advise their seller and buyer clients regarding
those matters, and document their files as to
having given such advice. For these reasons,
always give your seller a Short Sale Information
Advisory (ZipForms form SSIA) as soon as you have
listed a short sale property.
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19. THINGS NOT TO DO Here are some troubling
Short Sale trends to watch out for A. Straw
buyers to get the bank to commit to a price.
Some listing agents create dummy contracts or
have a straw buyer write a short sale contract to
send to the sellers lender to get the lender to
commit to a price. DONT DO THAT. B. Not
informing the bank that the short sale buyer
cancelled -- to try to get the bank to commit to
a price. Some listing agents do not inform the
sellers lender that the first buyer has
cancelled in order keep the lengthy process
going, or to get the bank to commit to a price,
and then advertise that price. DONT DO THAT.
You and your seller owe a duty of honesty and
fair dealing. See comments below. C.
Advertising that a lender has approved a short
payoff price. Some listing agents advertise that
the lender has already approved a short sales
price. DONT DO THAT. The sellers lender may
change their mind and require a higher contract
price, and the buyer has relied on the listing
agents representation that the short sale will
be easily approved by the lender. D. Also,
remember, the lender is entitled to know the
whole truth. The seller has a contract with the
lender (the Promissory Note secured by the Deed
of Trust) and thus has an obligation to the
lender of honesty and fair dealing. The listing
agent has a fiduciary duty to inform the seller
of pertinent information so that the seller does
not take steps to deprive the lender of the
benefits of that contract by concealing facts
detrimental to the bank. If the lender gives an
approval on a sales price that is then
advertised, the listing agent may have deprived
the lender of the opportunity to achieve a higher
sales price. Also, there is no guarantee that
the lender will approve that price on a
subsequent contract with a different buyer. E.
Not accepting back-up contracts, or not sending
back-up contracts, to the lender. When taking a
listing, ask the lenders negotiator what they
want to see. Most want to see all offers. In
fact, many lenders have guidelines that state
that they want to see all offers. And the Term
Sheet accepting the short payoff often has a
representation that the lender has seen all
offers. If the negotiator for the lender tells
you that they do not want to see any more
contracts, document that statement in your file.
Unless instructed otherwise by sellers lender,
if you receive other offers, recommend to your
seller that he/she ratify the best offer or
offers in back-up and send them to the lender. F.
The second lienholder says it is OKAY to pay
them outside of escrow. In many cases where
there are two lienholders (banks) on the
property, the second lienholder (who is usually
totally under water) wants to be paid more money
than the first lienholder (who is only partially
under water) is willing to allow. So, if the
listing agent, the short sale facilitator, or
even the negotiator for the second lienholder
suggests a method to get money to the second
outside of escrow, DONT DO THAT. That is a
violation of the specific escrow instructions of
the first lienholder in their Term Sheet.
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G. The second lienholder wants the agents to pay
them a part of their commission. In a variation
on that, the second lienholder wants a payment
from the agents from their commission through
escrow which will be shown on the HUD-1. The
problem is that the first lienholder has
authorized a certain amount to be paid to the
second. This should not be done unless you have
evidence that the first lienholder has approved
such a payment in a timely manner in advance of
close of escrow. The HUD-1 comes late and is
often overlooked and cannot be counted on as
providing adequate notice to the first of the
payment to the second. H. Schemes to get money
to the seller, or for the benefit of the seller.
Virtually every Term Sheet from sellers lenders
in short sales states that no money shall be paid
to the seller. This means directly or
indirectly, such as to pay indebtedness of the
seller. There are various approaches to get
around this prohibition and they are getting
more creative. I. For example, Sellers come up
with last-minute seller debts that must be paid
outside of escrow. In a recent trend, after the
buyer is in escrow and wants to close, and
perhaps after the lender has approved the short
payoff, then listing agent announces that there
is a seller debt that must be paid by the buyer
outside of escrow. In some versions, the listing
agent says that the lender must not know. In
other versions, the listing agent will represent
that the lender has approved the payment outside
of escrow. Unless you have written approval from
someone in authority from the lender or lenders
(which you wont get, because lenders dont
approve such payments), DONT DO THAT. In yet a
more cynical approach, the listing agent will
announce that there is a person or entity
(usually a recently-formed LLC) who has a
judgment against the seller, or mechanics liens
which will be filed against the property (thus
stopping the sale) unless the payment is made by
buyer. In these schemes, usually the seller and
listing agent are in on the scam. They may even
have a person with a contractors license file
bogus mechanics liens for a portion of the
kickback. Dont fall for these scams. Also, if
your buyer thinks that they want to participate
in such a payment, advise your buyer to talk to
an attorney.
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BOTTOM LINE The longer short sales are around
the more creative the sellers and unscrupulous
agents are becoming. This short sale phenomenon
will end someday, and you want to keep your
license, your money and your reputation. If the
scheme doesnt pass the smell test or even the
giggle test (you have to laugh as they are
explaining it to you), look deeper, and you would
be wise to pass. II. LISTING AGENTS A.
LISTING PROPERTY WITH A RECORDED NOTICE OF
DEFAULT There is no reason that a property with a
Notice of Default (NOD) recorded against it
cant be listed. However the buyers agent
and/or buyer should be advised that there is a
NOD on the property they are going to find out
anyway when the preliminary title report comes
in. PRACTICE TIPS 1. If you list, or are about
to list, a property with a recorded NOD against
it, note the date when the NOD was recorded. The
lender can then publish, post and mail a Notice
of Sale (NOS) three months after the NOD was
recorded. The sale by the trustee under the Deed
of Trust on the courthouse steps cannot be
sooner than twenty days after the publishing,
posting and mailing of the NOS. So, you have
about 111 days from the recordation of the NOD
until the sale of the property on the courthouse
steps. It can be longer depending on how fast
the foreclosing creditor wants to move. 2. You
should advise prospective buyers agents of the
recorded NOD since it may impact the buyer
adversely if the escrow cannot close prior to the
date scheduled for the foreclosure sale. 3. If
you have a sale of the property with the recorded
NOD, and the close of escrow may not occur until
after the date scheduled for the foreclosure
sale, try negotiating with the foreclosing
creditor (lender) for a delay in the foreclosure
sale to allow the escrow to close, since most
lenders do not want to take over foreclosed
properties into their REO (Real Estate Owned)
portfolio. 4. NOTE If the property is a 1-4
unit residence and has a recorded NOD, the
property is sellers primary residence and the
buyer is an investor, then this is a Home Equity
Sales Act transaction and you must use the CAR
Notice of Default Purchase Agreement, the Home
Equity Notice of Cancellation and the Declaration
and Proof of License forms (CAR forms NODPA, HEND
and DPL). For more information see CAR Legal
Memo entitled NOD Investor Transactions Home
Equity Sales Contracts at http//www.car.org/lega
l/foreclosure-short-sale-folder/home-equity-sales-
contracts/ Weekly Practice Tip entitled
Handling Home Equity Sales Act Transactions
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B. SELLING BROKER COMPENSATION Unfortunately,
if a listing broker offers an unqualified 3 or
2-½ commission, for example, to the coop broker,
and a short sale lender reduces the total
commission (to, say, 4) then, unless there is a
conditional offer of compensation, the listing
broker will owe the amount offered to the co-op
broker in the MLS. While it is usually not
permissible to make conditional offers of
compensation to co-operating brokers in the MLS,
there are two exceptions where, under the CAR
model MLS rules, you can make the co-op brokers
compensation conditional upon the approval of a
third party (1) probates (conditioned on court
approval), and (2) short sales (conditioned on
the lenders demand). PRACTICE TIPS 1. If you
anticipate that the sale will or might be a short
sale, place the following condition in the MLS
broker comments Short sale commission subject
to lender approval. Any reduction in commission
will be split evenly between Listing and Selling
Brokers. 2. Or, alternatively, you can propose
some other arrangement as to who absorbs any
shortfall in total commission received. It would
appear, however, that an even split would be most
equitable. 3. If you are a buyers agent
concerned about getting paid on a short sale, you
can enter into a Buyer-Broker Agreement with your
Buyer. (CAR form BRE or BRNE) C. HANDLING
OFFERS Some listing agents are confused as to how
to handle offers on short sales. Should all
offers be presented to the bank? Should the
offers be presented to the seller to ratify the
best offer and send that to the bank? Initially,
you should contact the sellers lender(s) and ask
them what they want you to do. Virtually all
lenders will want you to send them a ratified
contract though there have been a small number
of smaller lenders who have asked to see all
offers. When is a contract accepted or
ratified? Remember, the ratification of the
contract in a short sale is between the seller
and the buyer, and the sellers lender is not
involved in the contract. Some agents are under
the misconception that the contract is not
ratified until the lender accepts it.
However, the lender does not accept anything
the lender merely agrees to accept a short payoff
in order to allow the transaction to close.
Short sale contracts are just like all other
contracts, except that there is one (large)
contingency the lenders willingness to accept
less than what they are owed. In fact, it is not
good practice to send the lenders one or more
unratified offers. This is because the people at
the banks who are handling the short sales are
very busy and a large number of offers just
confuse them. Also, it takes weeks for a lender
to get around to reviewing and approving the file
and, by this time, the offers have all expired
and, in many cases, the buyer has moved on to
other properties.
15
PRACTICE TIPS LISTING AGENTS 1. If the lender
wants to see only a ratified offer, then handle
the offer(s) as you would handle any other
transaction. If there are multiple offers, then
handle that as you normally would handle multiple
offers, ratify the best purchase agreement (with
the Short Sale Addendum a part of the contract),
and forward it to the lender(s) for their
approval. 2. Continue marketing the property.
The Short Sale Addendum (SSA) provides that the
seller will continue to market the property.
This is a good idea because, as a listing agent,
you want to secure the highest price to the
lender for your seller. The higher the sale
price, the better chance that the lender will
accept the contract. 3. Back-Up Contracts if,
after you have ratified a contract and have sent
it to the lender, other offers come in, then
handle those as you would any other back-up
offer with your sellers permission, ratify a
contract in back-up (for this purpose use a
special pre-printed clause, such as the ZipForms
Purchase Agreement Addendum form PAA, paragraph
1 on Back-Up Offers) with the SSA attached, and
send it on to the lender. 4. Of course, it
would usually make sense to do so if this back-up
offer were better than the existing contract (in
price and/or terms) because the lender is going
to choose the best (usually highest) contract and
reject the other or if the buyer in first
position is weak or in danger of canceling. But,
check with the lender anyway. A quick close, all
cash, few contingencies from a qualified buyer
may be attractive to the lender even if the price
is the same or even lower. D. IS SELLER STILL
LIABLE? 1. RESIDENTIAL 1-4 UNITS A new law, SB
458, went into effect July 15, 2011, and
basically provides that all lenders who approve a
short sale on a residential 1-4 unit property
have no right to pursue the borrower/seller for
any deficiency or loss as a result of consenting
to and accepting the short payoff.   Background
It is common practice for most lenders when
accepting a short payoff in a Term Sheet to
(a) require that the Seller sign a new note, and
possibly even record a deed of trust against
other property owned by seller (b) state that
the seller remains liable for any amount forgiven
by the lender(s) as a result of the short sale
(c) state that the lender(s) reserve(s) their
right to hold the seller liable for that amount
in the future or (d) be silent as to future
seller liability for that amount.   In the
absence of a clear statement by a lender in their
Term Sheet that the seller/borrower has no
further liability on the note, while prior law
has not been entirely clear on this point, the
seller likely will have an ongoing liability to
that lender after the short sale whether or not
the loan in question is a first loan or junior
loan, or even whether it is a recourse or a
non-recourse loan.
16
Some details (a) The consent a lender to a
short payoff obligates that lender to accept the
short sale proceeds as full payment, and to fully
discharge the remaining amount of the
indebtedness on the note secured by a deed of
trust. (b) This new law applies to ALL deed of
trust holders on residential 1-4 units, whether
purchase money, refinance, investor, etc. (c)
However, if the borrower/seller commits either
fraud or waste with respect to the property, then
the lender may pursue that borrower/seller, and
other third parties who are involved, for any
deficiency suffered by the lender as a result of
the short sale. (Waste is the legal concept of
either committing or allowing damage or
destruction to the property so as to reduce the
value of the property. NOTE If a seller of a
property moves out and abandons the property,
some lenders consider that to be waste because
the property can then begin to deteriorate. Some
lenders will take steps to take over the property
at this point.) (d) The law does not apply if
the borrower/seller is a corporation or political
subdivision of the state. 2. 5 UNIT
PROPERTIES Because this new law does not apply to
5 unit properties, in some situations banks may
require the seller to pay cash or sign a
promissory note as a condition to the short sale
approval on these properties. In other
situations, lenders are reserving their rights
to recover after the sale from the seller the
amount they lost in the short sale. Still other
lenders do not address the subject of ongoing
liability of the seller/borrower to the lender on
the amounts that the lender is losing on the
short sale. PRACTICE TIPS a. When a lender in
a short sale issues its Term Sheet, READ IT. b.
In every short sale, you MUST advise your seller
to take the Term Sheet to an attorney for review
and advice
17
III. ISSUES FOR BOTH LISTING AND SELLING
AGENTS A. SHORT SALE NEGOTIATORS 1. PRACTICE
TIPS LISTING AGENTS (a) First, be aware
that it is the responsibility of the seller and
the listing agent to negotiate with the sellers
lender to obtain approval of the short sale
amount. Further, it is the responsibility of the
listing agent, not the buyer or buyers agent, to
pay for such a service. (b) The listing agent
must have the SELLER sign an agreement to allow
this person to act on their behalf in the
transaction. Remember, you are bringing in
another licensee into the transaction to
represent your seller. (c) Short sale
negotiators (SSNs) must be DRE-licensed
brokers. Listing agents should verify that the
SSN under consideration has a DRE broker license.
DO NOT HIRE A SSN WHO IS NOT A DRE-LICENSED
BROKER. (Note Attorneys may act as SSNs also
if they are doing so in the course of providing
legal advice to clients. However, there are not
a great number of attorneys engaging in this
activity. The California Bar Association is
warning attorneys to be careful in this activity
as they are seeing abuses by some attorneys.
Finally, not-for-profit consumer credit
consulting agencies may also negotiate with
lenders.) (d) In addition, all persons
working for a DRE licensed broker who are
engaging in negotiations with the sellers lender
must be licensed because this is considered to be
licensed activity by the DRE. NOTE The penalty
for acting as a DRE licensee without a license is
20,000 for an individual and 60,000 for
corporations. The DRE will turn over any such
complaints to the local District Attorney for
prosecution under a new law effective as of
1/1/09. (e) If the SSN is a DRE licensee, the
listing agent should first thoroughly investigate
the SSN to assure that the facilitator is
competent. If the SSN is not competent, the
listing agent could have a claim against them for
allowing such a person to work on behalf of their
seller. Some things to consider when hiring a
facilitator (i) Experience  There are an
increasing number of persons holding themselves
out as SSNs. Some have little actual experience
in negotiating with lenders.  Verify the
experience of the short sale facilitator by
requesting and talking to referrals.  (ii)
Documentation  Before you recommend a SSN to
your seller, read all of their documentation to
clearly understand what they will do and what the
costs will be.  Look for any of the issues raised
above. Discuss with your broker or manager if
you have any questions prior to hiring
them. (iii) Fees and Compensation  How is the
SSN being compensated?  Many charge a percentage
of the sales price to be paid by the seller. 
Others charge a flat fee.  Listing agents should
shop for the best fee amongst the qualified SSN
contenders.  Look out for those SSNs who charge
the buyer or buyers agent. (See below for a
detailed discussion.) (iv) Advance Fees  Some
SSNs charge a fee to the seller upfront for the
service.  However, because this is DRE-licensed
activity, no DRE licensee can take a fee from a
principal prior to performing a licensed service
unless they have had that Advance Fee
arrangement approved beforehand by the DRE. 
There are penalties for violating this Advance
Fee arrangement.  However, there are no
prohibitions for SSNs charging fees upfront to
the listing agent or broker. See Weekly
Practice Tip  Advance Fees 
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(f) Finally, do not sign a document hiring a
SSN without the prior review and written approval
of your manager or broker. 2. BUYER TO PAY FOR
THE SSN? (a) Charging the SSN Fee to the
Buyers Agent A number of SSNs are attempting
to charge all or a part of their fee to the
buyers agent by putting comments such as the
following in the Confidential Remarks section of
the MLS Short sale commissions subject to
lender approval. Any reduction to be split 50-50
between listing office and selling office AFTER
DEDUCTION __ FOR PAYMENT OF THE SHORT SALE
NEGOTIATORS FEE. This is considered to be a
Conditional Offer of Compensation and a
violation of MLS rules if your MLS has adopted
the CAR/NAR Model MLS Rules, which most MLSs
have done. If you see such an attempt to use the
MLS to get the buyers agent to pay the SSN fee,
check to see that this MLS has adopted the Model
Rules, and then contact the listing broker and
point out the MLS violation, and if they insist
file a complaint with the MLS. (b) Charging the
SSN Fee To The Buyer A great number of SSN s
are starting to insist that the buyers pay a part
of their fee, either directly, or by way of a
rebate of a seller credit to buyer, which credit
the SSN insists that buyer put into the purchase
agreement. In some instances, the SSN states
that the offer will not be ratified unless these
terms are agreed to. In one scenario, the SSN
often presents the buyer with a document for the
buyer to sign stating that the SSN, who has been
hired by the seller or the listing broker, is
working on behalf of the buyer to obtain a low
purchase price and, therefore, buyer agrees to
request a credit from seller for closing costs
(say 3) which buyer then agrees to rebate to the
facilitator as a fee for their negotiating and
facilitating services. Some of these SSNs
documents also contain indemnities and hold
harmless language whereby the buyer holds the
facilitator harmless for their actions in the
transaction. This scenario raises a number of
troubling legal issues (i) Undisclosed Dual
Agency The SSN, hired by the seller or listing
broker, is now stating that he/she represents the
buyer in the transaction. The SSN has become a
dual agent which, under the California Business
and Professions Code, requires the knowledge and
informed consent of both parties. Both parties
would have to be given an Agency Disclosure by
the facilitator, and the dual agency would have
to be confirmed in writing. In most cases, this
is not being done by the SSNs.
19
NOTE The penalties for undisclosed dual agency
can include that either party can cancel the
contract, they can refuse to pay a commission,
they can sue for damages, they can file an ethics
complaint, and they can file a complaint with the
California Department of Real Estate. (ii) Full
Disclosure of Payments to the Parties If the
buyer is being required to sign a document that
requires them to request a credit for closing
costs and then agrees to rebate that amount to
the SSN, or just to simply be responsible to pay
the SSN for their services, this then constitutes
a payment to a DRE licensee and, regardless of
what it is called, must be disclosed to all
parties. It is illegal under the Business and
Professions Code for a DRE-licensed broker to
receive a secret payment or compensation. (iii)
Full Disclosure to the Sellers Lenders
Further, such a payment from the buyer to the
SSN, and the requirement that the buyer request
the credit for closing costs, must be fully
disclosed in writing to the sellers lender prior
to the time that the sellers lender agrees to
accept a short payoff. The reason for this is
that the sellers lender typically will give the
short sale approval under certain conditions
including that only a certain amount is paid to
the licensees in the transaction (say 4). If
the buyer then rebates the closing costs received
as a credit from seller (say 3) to the SSN, then
the DRE licensees in the transaction have
received 7, which is more than the lender
allowed as a condition of the closing. This
violates the lenders closing instructions. IT
IS NOT A SUFFICIENT DISCLOSURE TO THE LENDER THAT
THIS PAYMENT TO THE SSN APPEARS ON THE HUD-1
AFTER CLOSING. (iv) Indemnities and Hold
Harmless Language If a SSN is asking upfront to
be held harmless and indemnified for their
actions in the transaction, this should be a red
flag to alert your buyer that they should have
this document reviewed by their attorney prior to
signing. These troubling practices have the full
attention of the California Department of Real
Estate Enforcement Division. For a full
discussion of the DREs view of this practice,
read Update regarding short sales fraud and
related issues in the Fall 2010 DRE Bulletin
located at http//www.dre.ca.gov/pdf_docs/rebfal
l_10.pdf
20
3. PRACTICE TIPS BUYER AGENTS (a) If you are
presented with a contract, or an addendum to the
purchase agreement, in which your buyer would be
obligated to pay all, or a portion, of the
sellers SSNs fee, discuss that document with
your buyer.  The SSN may call this fee by a
number of names (e.g., loss mitigation fee or a
discount fee), but whatever the name, it is
sellers responsibility to negotiate with the
sellers lender to obtain a short sale payoff so
that the transaction can close.  (b) Discuss
with your buyer whether buyer wishes to
participate by agreeing to pay this fee.  They
have a right to say No, but some buyers may
fear jeopardizing the purchase if they refuse. 
Discuss these issues with your buyer and document
your clients decision.  (c) Review the
document(s) presented to you by the SSN, or the
listing agent on behalf of the SSN.  Does it
create any indemnities or hold harmless language
in favor of the facilitator, seller or listing
agent?  If so, recommend in writing that your
buyer have this document reviewed by their legal
advisor before signing.  (d) Also, check
whether the SSN, by asking your buyer to pay all
or a part of the SSN s fee, is creating a dual
agency with your buyer.  Consider whether you
want this unknown, new person representing your
buyer, and discuss this with your buyer. Is
there a full disclosure of dual agency and
informed consent by both parties?  (e) If a
SSN refuses to present your buyers offer if you
do not sign their documentation, contact the
listing agents manager or broker to apprise them
of the situation. Remember, all offers must be
presented to sellers in a timely manner. In the
absence of an informed decision by a seller to
agree to this (why would the seller do so in
light of all the facts?), your offer must be
presented whether or not your buyer signs the
SSNs documents. (f) If all else fails and your
buyer wishes to go ahead with the transaction and
pay the fee, then ratify the contract and
immediately send a communication to the listing
agent and the SSN which could read substantially
as follows, (with changes for your particular
situation) You have required the buyer to pay
your Short Sale Negotiator fee in the amount of
__ of the purchase price (or ____), and to ask
for a credit for non-recurring closing costs in
the amount of __ of the purchase price (or
____). You also stated that you were working
also on my buyers behalf to get the best price
from sellers lender. We do not know what
agreement you have with seller or what has been
disclosed to the seller regarding this
arrangement and we do not know what you have or
will disclose to sellers lender(s). We trust,
unless informed otherwise, that you have fully
and timely disclosed this full arrangement to
both seller and sellers lender(s).
21
4. PRACTICE TIPS BROKER/MANAGERS (a) It is a
good idea to prepare a list of approved SSNs
after having properly vetted them, so that each
agent is not forced to make the decision.  (b)
Decide whether it is even a good idea to have
SSNs who engage in the above practices to make
presentations to your agents. Do your due
diligence before allowing SSNs to present their
program to your agents. (c) Insist that all
agents who are planning on hiring a SSN (who is
not on a company-approved list) get prior
management approval. (d)  It may also be a good
idea to identify agents in your office who are
experienced at negotiating with lenders.  This
approach allows for more control by the broker
over the quality of the process, and a fair
allocation of the fees for the services.  The
fees for this in-house SSN should be paid out of
the listing portion of the commission. Attempts
to charge seller extra for this fee could be
considered to be an unearned fee under RESPA, and
should not be passed on to the buyers agent or
buyer, as discussed above. B. SHORT SALES WITH
MORE THAN ONE LENDER When there is more than one
lender on a property, it is not unusual for the
first lender to allow only a limited payment to
the second lender (for example, 3,000). It is
also not unusual for the second to demand a
payment in an amount greater than the first
lender will allow. When this happens,
occasionally the listing agent, the SSN, or even
the second lender will suggest that a payment be
made to the second either outside of escrow, or
through escrow and further suggests that since
this payment will appear on the HUD-1, it is okay
to do so. The money to the second may be
requested from the buyer, or from the agent or
agents. Such practice is NOT acceptable. There
are two issues here 1. Payments Outside of
Escrow Rule of Thumb If you hear the words
lender and outside of escrow in the same
sentence, RUN!!! Lenders are entitled to know
the whole transaction. If the holder of the
first were to find out about the payment to the
holder of the second outside of escrow, that
first lender could allege that they were entitled
to that money, and that their escrow instructions
were violated. This can result in civil damages
in favor of the lender, and also be a violation
of federal law. 2. Adequate Notice to the First
Lender of the Payment to the Second HUD-1 IS
NOT ENOUGH. Many agents, SSNs and some escrow
officers believe that if the payment to the
second is greater than allowed by the first
lender and is identified as such in a HUD-1 which
the first lender sees prior to COE, then that is
sufficient notice to the first lender of that
payment from the buyer (or from agents
commissions) to the second lender. That
practice is not allowed by lenders, who view such
payments to the second as violations of their
escrow instructions as set forth in the Term
Sheet authorizing the allowable payoffs in
escrow. More than one escrow company has found
this out the hard way by having to reimburse the
first lenders for such payments. Worse, that
liability can splash back on the agents involved
as well. Listing agents have a duty to tell the
seller of such arrangements. And, sellers have
the duty of honesty and fair dealing to their
lender (because of their contract the
promissory note with the lender) to inform the
lender of the transaction in its entirety.
22
PRACTICE TIPS (a) All dealings with lenders in
short sales must be done honestly, above board
and with the full knowledge of all parties. (b)
Dont allow yourself to be drawn into a scheme to
make payments outside of escrow, just to make a
short sale work. Its not worth it. The deal
may die. But, thats better than the
alternative. (c) Do not engage in such practices
even if the negotiator for the junior lienholder
tells you it is okay, and may even tell you how
to get the money to them. (d) Work hard to try
to get the lenders to compromise pointing out
that they will almost certainly be worse off if
there is a foreclosure. (e) ALL payments to all
lenders MUST be disclosed to ALL lenders. This
means that the first lender must approve, IN
WRITING, any payments to junior lienholders.
Placing such payments in a HUD-1 is not
sufficient. (f) In one variation, the holder of
the second will demand that the agents give up a
portion of their commissions to the second.
Again, this can only be done with the written
permission of the first lender. (g) In yet
another variation, the listing agent will tell
the buyers agent (usually late in the escrow)
that the seller has other debts that must be paid
or they will stop the transaction (such as a
mechanics lien or abstract of judgment which is
about to be filed). Listing agent will demand
that buyer pay some money, allegedly to pay off
these sellers debts, outside of escrow. These
ploys are usually scams to get some money to the
seller itself a violation of the Term
Sheet/escrow instructions. For all of the above
reasons do not participate in such a scheme. (h)
When in doubt, talk to your manager or broker.
23
C. SHORT SALE FLIPPERS There has been an
increase in the number of Short Sale Flippers
fueled, partly, by the long timeframes for short
sales to close, the desperation of sellers, and
the chance for opportunists to make money. In
this type of transaction, there is the current
property owner/seller (Seller), the original
listing agent (Listing Agent), the short sale
flipper (Flipper), the buyers agent
representing the Flipper (Flipper Buyer Agent),
the Flippers listing agent (Flipper Listing
Agent), the ultimate buyer (Buyer) and that
buyers agent (Buyer Agent). What is a
Flipper? As discussed here, a Flipper is a
person or entity who intends to enter into a
contract to purchase the property and immediately
sell it, perhaps in a double escrow, without any
improvements to the property. If a buyer intends
to buy a short sale property, close on the sale,
improve the property, and then sell it, that
buyer is not considered a Flipper for purposes
of this discussion. 1. Listing Agent If you
are the listing agent on a short sale (a) Do
not interact with a Flipper in a way to solicit,
promote or encourage a Flipper to write an offer
on your short sale listing. (b) If the Flipper
is represented by a Flipper Buyer Agent, advise
that Buyer Agent to submit the offer for your
Sellers consideration. Advise your Seller of
the intent of this purchaser. This is important
information for the Seller to know because the
Flipper is seeking a low (perhaps artificially
low) price so as to make a profit by re-selling
the property. While the Seller may not seem to
care at this time, Seller will care if the lender
seeks to recover from Seller the money the lender
lost on the short sale. (c) DO NOT also
represent (or allow any agents in your office to
represent) a Flipper on the purchase of your
listing. This can compromise you and your
companys fiduciary duty to the Seller to get the
best price. This is because the Flipper is
going to try to sell the property for a profit.
If the Sellers lender reserves the right to hold
Seller liable for the amounts they lost on the
short sale, the Sellers potential obligation to
that lender is arguably increased by the
difference between the sale price to the Flipper
and the final price to the ultimate Buyer. (d)
If the Listing Agent is the one dealing with the
sellers lender trying to convince that lender to
accept a Flippers offer as the highest and
best, without telling the lender that there is
another Buyer out there willing to pay more, that
is fraud.  (e) Even if the Listing Agent is not
dealing directly with the bank, the Listing Agent
owes the Seller a fiduciary duty, and the Listing
Agents knowledge is imputed to the Seller.  The
Seller has a duty of honesty and fair dealing
with the bank because of their contract with the
bank (the Promissory Note).  The Listing Agent
can easily be pulled in on a conspiracy theory
with the Seller, or a derivative action by the
Seller, for not being truthful with Sellers
lender. (f) The Listing Agent has a fiduciary
duty to tell his client that the Flipper has
re-sold the property at a higher price.  If the
Listing Agent does not so inform the Seller and
recommend to his Seller that the Seller inform
the short sale lender of the Flippers
transaction, the Listing Agent could be liable to
the bank on a conspiracy theory when the Seller
does not make the disclosure.
24
(g) A contract with a Flipper can also be
dangerous because, if the Flipper is unsuccessful
in finding a buyer to pay more, the Flipper may
just cancel the contract with Seller. The Seller
thus has lost considerable time within which a
foreclosure could be filed, or an existing
foreclosure action could proceed closer to a
foreclosure sale. (h) The thrust of recent laws
has been to protect the consumer.  In dealing
with short sales, we must always ask, Is this
the best deal for the client?  Did we fulfill
our duty of the highest level of trust, care and
confidence to the Seller, putting the Sellers
interests ahead of the agents interests?  Will
the Seller be happy when the lender tries to
recover the amount they lost in the short sale
and they find out that the agents made two
commissions and the Flipper made a profit?  The
Seller may think he/she is happy just to get rid
of the problem property, but that will be short
lived when the bank knocks on the door seeking
their money. 2. Flipper Some real estate
agents think it is a good idea to become a
Flipper. Individual agents can, unless
prohibited or limited by their brokers policy,
purchase property for their own account. However,
even if the brokers policy allows agents to buy
short sale properties, no agent who intends to be
a Flipper should attempt to purchase a property
that is listed by their own brokerage company.
The problem is obvious The Listing Agent,
Flipper and Flippers Agent are all the same
company -- and that opens the claim that the
brokerage conspired to sell Sellers property at
a low price in order to make a profit and two
commissions. But, again, if the Seller has a
contingent liability to the lender for the
shortfall, that Seller may be looking for someone
to blame. Such a case would be hard to
defend. And remember, if a DRE licensee is
purchasing property for their own account, they
are held to the same standards as an agent
representing a client. 3. Flipper Buyer Agent
(a) There are a number of persons and
organizations acting as Flippers soliciting
agents to work with them (including listing
agents) to secure many properties to purchase and
flip. Many of these require the Seller to allow
the Flipper to negotiate with the Sellers
lender. It is dangerous to work with these
Flippers because you, as the Buyer Agent for the
Flipper, have no control over what the Flipper
tells the Sellers lender in order to induce the
lender to take the lower price sufficient for the
Flipper to turn around and sell the property for
a profit. And, you are, or become, aware of
their practices making it hard to later claim you
didnt know what they were doing.
25
(b) Even for Flippers who are not volume
purchasers, and s