Distressed Property Law
Jillayne Schlicke on 06 2, 2008
There has been a lot of confusion, anger and fear surrounding the new Distressed Property Law. I’m not going to jump on the bandwagon and do a critical analysis of the law, tearing apart each section. The WA Assoc of Realtors has put their educational seminar online for free here for all of us. Instead of all the ranting and raving taking place on other blogs attacking this law, feel free to pause and re-live these foreclosure rescue scam case studies from 2004, 2005, 2006 and 2007 which may help us better understand the reasons why we have this new law.
At the height of the bubble run up in 2005, there were hundreds of people attending foreclosure auctions, planning on making millions in real estate, usually after attending a get-rich-quick seminar. Even today, the get-rich-quick hucksters are still luring in the same type of person who thinks there’s a magic diet pill that will help you lose those last ten pounds, and who thinks there’s still a way to make six figures with no experience, or in the case of this company, $2,000 per hour.
Readers on this blog and elsewhere have been highly critical of our state lawmakers for being reactionary and passing laws only after they would have done any good. In this case, our legislature has tried to be pro-active and place boundaries around “distressed property transactions.” Yes, the law as passed has some flaws. Yes, there are parts that could be re-drafted for clarity. However, we’re stuck with it until the next legislative session so we might as well learn how to live with it.
This law should have come as no surprise to anyone, especially our state Realtor association, WAR. Governor Gregoire’s task force recommended passage of this legislation and Attorney General Rob McKenna put “foreclosure rescue scam legislation” on his agenda for 2008. Even so, Realtors and real estate agents were caught off guard. They’ve been swept into the definition of being a “distressed home consultant” by way of not being excluded.
The highest risk transaction under the new law is when a homebuyer purchases a distressed home from a distressed homeowner and is allowing the homeowner to rent the home back, and is also offering to share any equity upon a future sale. As of June 12, 2008, taking part in a distressed home transaction such as this will become enormously risky. I recommend that get-rich-quick investors put some of their profits into hiring an attorney to be on retainer and available to you 24/7. Critics of the new law say that this means homeowners who might have otherwise been helped by the “rescue” crowd will now end up going into foreclosure. Critics have miraculously turned themselves into victims and state that there are only a few bad apples, only a few scammers and the rest of them are above-board, honest and honorable yet this website devotes an entire section on exposing a long list of his possible scammer colleagues.
If it is true that the foreclosure rescue angels have floated from the heavens down to the earth and now can be seen wandering the streets of Seattle wearing a baseball cap and a jean jacket with the slogan “I buy homes in foreclosure call me” on the back like the guy who was in front of me at the Sprint store this week, then Realtors should be pro-actively seeking out angel rescuers and bringing them together with homeowners in financial distress. However, I believe the opposite to be true.
Instead, I believe most the rescue guys and gals never met a Realtor they liked nor do they have any intention of coming anywhere near a Realtor, (because they want to keep the commission for themselves, as part of their riches) are in it for the cash, couldn’t give a rip about the homeowner, and are taught how to embody the caring compassionate stance of someone who does care in order to use the homeowner’s trust against them to “get rich quick.”
I believe that this law, no matter how flawed, has more good consequences than bad.
Real estate agents and Realtors are on the front lines when the homeowner comes out of denial and starts looking at their options.
For those real estate agents and Realtors who say, “Well, this law is so confusing that I’m not going to work with any distressed homeowners.” First, that’s going to rule out a whole lot of your market area in the next several years and second, would you answer the question differently if you were the one who sold them the home?
It is possible that fear will drive Realtors to not take these listings, although I don’t think that will happen because there are still way too many hungry Realtors out there who will take a listing at the drop of a hat. If the law does scare Realtors away, this means we’ll see more foreclosures in Washington State. Get-rich-quick buyers can still buy the home at the trustee sale or directly from the lender after foreclosure; neither of these types of transactions is affected by the new law.
I have heard people say “this law will be repealed the next legislative session.” I’m not so sure about that, nor am I sure that Realtors will automatically be “exempt” from being a “distressed home consultant.”
It’s time we acknowledge that distressed home transactions are becoming more and more specialized. The topic of foreclosure is not taught in real estate pre-licensing classes. It’s time to admit that a real estate agent with ZERO training on foreclosures and short sales is doing a home seller a grave disservice by taking that listing. More harm could be done in this instance than good, and it appears as though our legislature understands this. Unfortunately, the get-rich-quick investors probably know more about foreclosure laws than your average real estate agent. Average real estate agents, you have some work to do.
Real estate agents ARE distressed home consultants when they take a home that’s in pre-foreclosure or a home that has short sale terms. Exempting real estate agents from this law will not happen, nor should it.
Real estate agents should embrace this new law. Some might decide that distressed property is going to be their new market niche. Commercial real estate, property management, multifamily homes, resort and vacation homes, all are specialty areas. It’s time that the real estate industry creates a new specialty area for distressed property transactions. Perhaps all “get rich quick” investors will be required, at the very least, to have a real estate license or some other sort of professional license (oh boy, what will my friend Brian Brady say about that?) and all real estate licensees who want to become purchasers of distressed homes will now be taking part in a high risk transaction with elevated duties. There are other ways for real estate agents to buy homes for investment purpose. Maybe this option should only be for those with the capital to cushion the risk, the willingness and ability to consider the homeowner’s interests, and the education to feel secure in their actions.
Realtors, becoming a fiduciary of a distressed homeowner is not a human rights violation.
My advice is to embrace the new law. An alternative choice, from the perspective of a distressed home seller, would be to hire an attorney to do the job Realtors claim to know how to do. Very soon, distressed home sellers in Washington State will find out exactly who those Realtors are.
About the Author: Jillayne Schlicke
- Author's website: http://www.ceforward.com
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110 Responses to “Distressed Property Law”
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I think you’re missing a lot.
First, the legislation that everyone liked and wanted is different than what was passed. No one has problems with the “equity skimming” or “distressed home conveyance” provisions. It’s the “distressed home consultant” provisions that were added at the last minute that are causing the issues.
Second, it’s not just agents that will be afraid, it’s brokers, and brokers control what agents can do.
Third, just listing a property in foreclosure will not make you a “distressed home consultant.” You need something more. So basically a limited service broker probably has little to worry about here. It’s only the agents that might want to do something more, like verify a client’s claim that a foreclosure date has been continued–they’ll be hit. And why? For trying to help?
Fourth, you don’t address at all the effect on buyers who happen to close within 20 days of a foreclosure sale–they are distressed homeowner consultants” too. They are fiduciaries of the seller! Absurd.
Fifth, it’s not just being a fiduciary that is an issue, it’s being a fiduciary that has to put the seller’s interests ahead of their own. That is a bizarre standard, and the problem is, no one can tell you what it means.
Sixth, minor point, but the highest risk transaction isn’t the one you mentioned. It’s equity skimming, which is a felony. But both the one you mentioned and equity skimming were subject to attack prior, so it’s really nothing new other than a new tool.
So basically this legislation won’t cause any issues if: (1) Brokers allow agents to continue to take the listings; (2) Agents do nothing to help a seller sell other than enter the listing on the MLS; and (3) Buyers ignore the additional liability they have buying a house in foreclosure.
BTW, I agree with you on the blanket exception thing. I think the blanket exception should go away for attorneys and others too. There should be a list of what people can and cannot do, rather than just be lazy and say they are fiduciaries, unless they are certain protected classes. That makes no sense.
Finally, I’m glad to see this forum taking up the topic, because people in financial distress need to know their situation just got a lot worse, and buyers need to know to consult an attorney prior to even making an offer on a house in foreclosure.
BTW, if you look at your link to the AG’s legislative agenda, it only mentions legislation that would deal with the “distressed home conveyance”–the transaction you mentioned being most risky. No mention is made at all of the controversial “distressed home consultant” provisions. Do you have any reason to believe the AG supported the changes?
Ah, Kary. Right on schedule. Brokers will take the listings. Agents will become “distressed home consultants” by what it is agents “do” and there will be buyers who will take the risk and buy a home in preforeclosure, even with the additional liability.
I don’t necessarily believe people in financial distress will be in a worse off situation after June 12th.
From my vantage point, it has always been BETTER for a distressed home seller to be receiving legal counsel.
It’s really too bad that Realtors and their brokers have to be motivated by fear of this new law to make sure the distressed homeowner has what the distressed homeowner SHOULD HAVE had all along.
There are some Realtors in market areas who specialize in short sales and pre-foreclosures. They’ve successfully closed countless transactions and are very comfortable doing the job of a “distressed home consultant.”
I say those agents can, should and will pick up these listings and turn this whole law into lemonade.
Hi Kary,
In regards to the law being called “a law dealing with distressed home conveyances” I agree, that could have been made more clear from the outset.
I would love to read the minutes of the committee meeting when they were toying with the definition of “distressed home consultant” and who received exemptions….and who didn’t.
This might tell us whether or not Realtors can expect the legislature to exempt agents in the future.
Jilayne, the agents doing short sales haven’t before faced liability under a fiduciary standard that is probably stricter than that applied to anyone else. And no one else faces treble damages up to $100,000. So those agents doing them today will face more risk. That means they’re less likely to do them. I don’t know how you can dispute that.
Also, how can you say that the sellers in foreclosure won’t be worse off given buyers will need to consult an attorney, and that attorney will tell them: “I don’t know what your exposure is buying this property, but it will be $1,000 to draft the purchase and sale agreement you’ll need to complete the transaction.” That’s a huge chilling effect on selling while in foreclosure. Add that to Form 22-SS, where the selling agent is basically told they might not get their commission, and the fact that the selling agent is being advised to get their own attorney. Oh, and the new buyer’s agency agreement that says that the selling agent doesn’t even need to show such properties. How can that not have a chilling effect on the ability of a seller to sell?
Prior to this change doing a short sale was really for the very special, because they had to tolerate the banks. Now they have to do that and consult an attorney to draft forms, and face risk of lawsuits. You’d have to be pretty hungry to want to do that.
This legislation had good intentions, but it will have disastrous results, at least for some of the people it was intended to help. They will end up either in bankruptcy or actually have their homes foreclosed because of this. Maybe that will be 5 people a month, or maybe it will be 50, but it will be a number larger than zero.
Jillayne wrote: “In regards to the law being called “a law dealing with distressed home conveyances” I agree, that could have been made more clear from the outset.”
I believe if you look, it wasn’t even contemplated at the outset. That was added within 7 days of it being enacted.
Jillayne, you wrote, “I believe that this law, no matter how flawed, has more good consequences than bad. ”
I couldn’t disagree more. Kary did great job outlining the major flaws and consequences.
This little “consumer protection” legislation WILL cause the consumer harm, and apparently the AG agrees. The whole issue should be corrected quickly in the new session.
This was sloppy, sloppy work that has caused many unintended consequences. It should have never been signed in its severly flawed form.
Hi Greg,
Here’s a press release from Rob McKenna dated today. There’s nothing in here about the law causing harm to consumers.
http://www.atg.wa.gov/pressrelease.aspx?id=19896
Would you mind citing a source?
Greg and Kary,
Could it be possible that there just might be an opportunity for real estate agents to turn this law to their advantage?
I can think of at least 10 ideas Can you think of a few?
And “opportunistic lawyers suing Realtors” doesn’t count.
Dugald’s first piece on this was called something like: “A fiduciary for everything?” The point is legislators are getting lazy. Remedy a problem just by making people fiduciaries. Here they made agents some sort of super-fiduciary.
Did they say what agents can do? Not really. They said what they might do that would make them a fiduciary, like offering to contact a bank or deed of trust trustee. But they didn’t say what activities were bad, and what were good. It’s lazy.
Add that to the really poor drafting. Look for example as section 3, part (2), where it gives the fiduciary the duty: “To disclose to the distressed homeowner all material facts of which the distressed home consultant has knowledge that might reasonable affect the distressed homewoner’s rights, interests, or ability to receive the distressed homeowner’s intended benefit from the residential mortgage loan;”
Newsflash legislators: You exempted financial insitutions, credit counseling services, mortgage brokers, and mortgage loan servicers. When you pull language from somewhere else, you should at least edit it so that it’s applicable to at least one person you didn’t exempt!.
Jillayne: Buyers are not going to want to make an offer within about 60-50 days of foreclosure, because they’ll close within 20 days unless they’re a cash buyer. Can you not see harm in a homeowner effectively cutting off 60 days of opportunity to sell their home?
Oh and BTW, they cannot simply get a continuance of the sale to solve the problem. The geniuses that wrote this thing make the language read so that it’s 20 days before and after any foreclosure date, whether it’s a current foreclosure date or not. So a 30 day continuance (common) would leave no gap period.
Apparently the words “20 days before any currently pending foreclosure date” were too hard for them to come up with. It’s amateur hour in Olympia.
In my 20 years as an attorney I tried to pick apart a lot of legislation. I’ve never seen anything as poorly drafted as this statute.
Rather obviously what they were trying to do was stop those people that would come in at the last minute with cash, and negotiate a good price. What they did was get virtually everyone that comes in within 2 months, whether or not they know of the foreclosure. And in the case of a “distressed home conveyance” they set a percentage of fair market value (82%), that gives the scam artist a safe harbor. With this, which gets everyone, no safe harbor. Again absurd.
You really need to break this out into the three parts and re-read it. Equity scamming: Good. Distressed home conveyance: Good. Distressed home consultant: Bad. And only the third part was added at the last minute.
Jillayne wrote: “Could it be possible that there just might be an opportunity for real estate agents to turn this law to their advantage? I can think of at least 10 ideas Can you think of a few?”
Perhaps you should list them. The only one I can think of is there will be less competition for those that participate in this area. Many will have gotten out. And those that get out won’t necessarily be the bad ones.
So does this mean you’ll officially no longer be participating in any distressed property sales or purchases?
If the answer is yes, then who will you refer your former clients to, when they call, needing to list, and they just happen to be distressed homeowners?
I will cancel any property listings that become distressed. And that includes non-resident owners, since I don’t agree with the NWMLS interpretation of the statute.
I am very risk adverse. I will also use Form 22-NFW on all my purchase and sales (which is already mandatory for every agent in our office.) Actually, I will use my own version of 22-NFW, because the NWMLS form is horrible. I will also do my own search to see if the property is in foreclosure prior t writing up a purchase and sale (something I used to do anyway). Buyer clients will have to sign the portion of the buyer’s agency agreement allowing me not to show distressed properties (I don’t use such agreements normally, but I want that language, so I’ll cross out the commission stuff).
I’m not exactly sure what our office will do. It will most likely be not allow any distressed home listings, or allow only 3-5 agents to do them. If the latter, I will not opt to be one of them. I didn’t even do short sales before this came into place, or before form 22-SS. This just makes them less appealing.
The best referral might very well be to a bankruptcy attorney, given the slight chance of sale. This would be especially true if the Notice of Trustee’s sale had not been sent yet, because there would be no within 20 days of foreclosure issues–which would greatly benefit the homeowner, but at the cost of a bankruptcy.. The bankruptcy attorney could then deal with the bank issues, which would let an agent list the property without being a distressed home consultant.
Also, once in foreclosure, I’ll consider even non-resident owner SFR properties to be distressed, because I don’t agree with the NWMLS interpretation of the law.
I’m still struggling with condos. I don’t see any way the statute applies to condos in a building with more than four units, but I can see that a judge would struggle to make it apply. Another example of how poorly drafted this legislation is.
I’m with Kary in that this is a very poorly drafted piece of legislation and one of the items I really don’t like is that it makes the REALTOR still liable for all of these duties even if the homeowner does not reveal to them that they are in a distressed situation. While the law is written to stop equity skimming the definition(s) of who the requirement for preparing the additional paperwork for is a large blanket of people that might be in default, or how might go into default, and who don’t know yet if their home might fit into a short sale (currently seems to have equity if sold at a certain price).
“A “Distressed Home” is a dwelling occupied by the owner as the owner’s primary residence in a single, duplex, triplex, or four-unit residential building that is (1) in the process of foreclosure or in danger of foreclosure because (a) seller has defaulted on a mortgage; (b) seller is at least thirty days delinquent on a loan secured by the Property; or (c) seller believes that seller is likely to default on such mortgage or loan within four months due to a lack of funds; or (2) at risk of loss due to nonpayment of taxes. A “Distressed Homeowner” is the owner of a Distressed Home.”
I’ve got someone I’m working with right now that this applies to and we are taking steps to make sure we follow the rules even though the property should have enough equity to cover the outstanding debt that is now in default. It makes being in this profession even more risky than just being self-employed and the regular worries we might have of a miffed client or other party suing. I was just saying the other day to a client that in his regular line of work he doesn’t have to worry every day whether or not someone might sue him – just for doing his job. I do, and it drives many decisions in my business about who I’ll work with, how we operate our business, and the way we interact in the public and private domain. This just adds one more thing. But, I’d rather be on the proactive side of becoming as educated as possible about the law and adhering to its tenets than to just walk away and not have the opportunity to help people in a difficult time.
Although I will say that I believe those agents that have wrapped up this kind of business in the past will certainly be able to rise higher up in the rankings, if they lost any market share in the past to all the people that ran into real estate to go after this kind of business.
Well, it’s a ways outside of my expertise, (residential lending) but any logical person would have to be disturbed by the mind reading and clairvoyance requirement.
According to WAR, a distressed homeowner is defined as someone who MIGHT fall behind in their payments (whether the homeowner knows this or not, or conveys that knowledge to the RE), and the RE is supposed to know this, before it happens?
If RE’s have those special powers, shouldn’t they just invest in oil futures (short or long), and skip the hassle?
This is another example of legislation running too fast in every direction, causing too much uncertainty for people trying to engage in rational ethical business, for the benefit of all.
It’s too bad.
Thanks for trying to help us sort it out, and getting the word out. Funny, I thought to come to RCG first, when I heard about this.
Hey Jillayne,
If a seller is behind in his payments, but owns ten other properties with substantial equity in them, has lots of income, but CHOSE not to make payments on this property because it was upside down as to value…is that seller a distressed owner worthy of the government’s protection?
“Distressed Property” does not always equate to “distressed owner/seller”.
Ardell,
That is an interesting perspective, probably one which most of the legislators never even thought of.
Clearly, this is a convoluted mess. I will be taking a class in about a week with Windermere’s lawyers. Hopefully, some sense can be made of this. Everyone practicing real estate needs to take a class from an attorney before diving into this new law.
Debra,
In my experience MANY short sales HAVE BEEN property specific and not a distressed seller. Not really. Not long term. Maybe they can pay today…but they are young enough and have a high enough income to make up the shortfall over time.
I think the travesty in all this is the whole “walk away” even if you can pay five years from now issue. The “being forgiven” cause you can’t pay it right now, but could over time.
Personally I think the shortfall should be an automatic judgment, not an automatic “OK;WalkAway”
Right now I see that this may be creating a separate class of sellers who, while being offered protections under this new legistration, may find themselves being ostracized, because of all the additional liabilities, from a pool of brokers willing to list the properties, and from buyers who under other circumstances, would have bought the house. That is very unfortunate (BAD) news for distressed home sellers.
Proccuring the best buyer, or in some cases, ANY buyer, it is best to offer the home to the largest pool of potential buyers. This legistration is now limiting the pool of buyers to those and their agents who are willing to take on the aditional liabilites.
If I am representing, lets say a first time homebuyer, are they going to want to add to the stress of buying their first home the addtional liability of possibly becoming the fiduciary to the seller? What about having to pay out of pocket for an attorney to draw up the additional (original ) paperwork for documents that no organization (NWMLS, SKCAR, or Washington State) has even provided an outline for? How is my first time homebuyer expected to agree to all this? What is the incentive to buy this house, with all these additional potential issues? Wouldn’t it be easier to just not even consider distressed homes?
If the above scenario becomes the norm, then how is limiting the buyer pool a good thing for distressed home sellers?
Jillayne:
Can you confirm that a short sale is not covered under this? I heard if the borrower does not have equity (and a short sale presumes that), these regulations are not in effect.
Hi Roger,
I cannot confirm that.
A large percentage of short sales homes are in pre-foreclosure or are in danger of default, which would bring the transaction into the wide circle of definitions inside the law.
Hi Deborah,
What happens when a large percentage of the homes that buyers want to buy are…..distressed properties?
Even today, before this law takes effect, there will be some buyers who can’t consider a short sale listing because of the unknown amount of time it might take for the lender to approve the short sale. Yes, there will always be some buyers who chose not to buy a particular piece of property because of various timing reasons or other liability reasons.
Roger, I know of no reason that a short sale would not be covered. And given what an agent has to do to handle a short sale, they would be a distressed property consultant almost 100% for sure.
Hi Ardell,
Regarding comment #20:
“Personally I think the shortfall should be an automatic judgment, not an automatic “OK;WalkAway”
I agree with you in principle. I believe banks should be asking those that CAN pay back the shortfall to pay it back. We’re already seeing banks take massive write-downs and we’re only halfway through 2008.
ON the other hand, I also believe there’s some truth in the voices we hear who have been highly critical of the massive corporate greed. Corporations paying their top staff exhorbitant salaries and bonuses and stock options all while running their companies into the ground. There are some people who believe “walking away” is a calculated business decision that MIRRORS how corporations make decisions.
I’m sort of responsible for this, but I was hoping this blog would focus more on the consumer issues. How will this affect sellers, and how will it affect buyers. How it affects agents has been beaten to death elsewhere (and again, I’m partially responsible for that too.)
So, Jillayne and others, how do you see this not affecting sellers (or buyers) adversely?
In comment 18, Ardell asks, “If a seller is behind in his payments, but owns ten other properties with substantial equity in them, has lots of income, but CHOSE not to make payments on this property because it was upside down as to value…is that seller a distressed owner worthy of the government’s protection?”
As Kary has pointed out over and over again, unfortunately, the law was poorly drafted. But we must work with it. On page 6, I find this definition of “homeowner”
(10) “Homeowner” means a person who owns and occupies a dwelling as his or her primary residence, whether or not his or her ownership interest is encumbered by a mortgage, deed of trust, or other lien.
So first I would ask if the subject property was a rental or the borrower’s primary residence.
Whether or not a person is worthy is, unfortunately not included in this draft of the law. Perhaps when Kary joins the state committee to redraft the law, he can define exactly who is worthy and who is not.
In comment 17, Roger asks, “a distressed homeowner is defined as someone who MIGHT fall behind in their payments (whether the homeowner knows this or not, or conveys that knowledge to the RE), and the RE is supposed to know this, before it happens?”
Yes. This means the real estate agent will have to set aside more time to have a full conversation about the homeowner’s current and future financial situation. This will require the homeowners to put an enormous amount of trust into their relationship with their Realtor, also known now as their Distressed Home Consultant, and I don’t recommend shortening that to DHC or your clients may think you’re a drug dealer (Dihydrocodeine) or a FEMA Disaster Housing Checkwriter, or a West Point graduate (Duty, Honor, Country.)
Kary asks, “So, Jillayne and others, how do you see this not affecting sellers (or buyers) adversely?”
1) by attracting the right buyers for these homes through more honest marketing. Right now, a homebuyer could fall in love with a home, make an offer, and then, if the offer was much lower than the list price, the listing agent could counter back with, “oh, the offer has been accepted but because it’s so low, it’s now a short sale…….” and now the homebuyer has fallen in love with a home that might not meet their closing time expectations.
By being UP FRONT with home buyers as to exactly the risks involved, including that the lender may not ever say “yes” to the short sale, the home buyer can make a more informed decision.
2) Home sellers that would have been taken advantage of by foreclosure rescue scammers now have better protection and more recourse.
3) Real estate agents who are not educated in what is now fast becoming a specialty area: homes in foreclosure, have been almost forced, by way of this new law, to get up to speed.
Many, many, many, many Realtors blog here and elsewhere about part time agents or agents with very little broker supervision. This law may have an unintended good consequence of seeing those transactions referred out to agents who are prepared, willing and open to taking the higher risks. To me this seems like a win for the home seller who absolutely does need an agent who WANTS their “distressed home” listing, and who is capable of taking it on.
If I were a distressed homeowner, I would definitely NOT list with an agent who was whining about this law, who was afraid of the liability, who was mad as hell about the higher consumer protection, and who wanted to charge me more because of it.
4) Realtors and real estate agents continue to tell us all how valuable they are. Well surely this law will bring some transparency to that statement.
Personally, I believe Realtors hold enormous value and I would not chose to sell or buy a home without one.
I challenge our Realtor readers to find YOUR value in helping your buyer and seller “distressed home” clients.
If Realtors fail to see any value in taking on these listings, then stop wasting everyone’s time and just refer all your distressed home seller clients to list their home with an attorney.
At that point, the consumer is helped, Kary, because that particular Realtors true value has been exposed.
From what I have read, not all short sales are distressed homes and subject to the new law. This is what the NWMLS has to say:
“For example, if a seller is not in default on the mortgage and is perfectly capable of making the payments, but the loan on the property exceeds the value of the property, the sale is short, but the property is not a Distressed Home.”
So the home owner who is selling for other reasons than they cannot afford the mortgage payments, and the current market value that a buyer is willing to pay is less than the loan amount, and if that seller is able to pay the difference…then they are not a distress seller.
Jillayne,
I fail to see how this law or any law changes how I do business. Maybe I’m missing something. I’ve had “distressed” home sellers and I rarely sell a home without knowing the full story from my clients. They have most always confided in me. Not always the day I meet them, but most always before a buyer is in the picture. In fact, the minute I find a seller lying to me I almost always hand back the listing. I have to protect their interest, but I also pass on some info as they present it to me regarding home disclosures. So if a seller lies to me, they either learn not to lie to me real fast…or I leave.
I don’t understand why agents are worried about the “will be in distress” portion. My clients clearly tell me their timeframe for getting a home sold, and often that translates into “I can make X more payments” before I’m in trouble.
I HAVE to know and always have had to know if a client is near the end of their rope, and when that will happen. I have to take that into consideration when pricing the property and advising the client.
I don’t intend to do business differently. When the situation calls for it, an attorney will be involved. No change there. Doesn’t happen often, but when I need an attorney involved…one gets involved.
What am I missing? Where’s the hard part?
Maybe I am missing something here, but just why would these get-rich-quick foreclosure scammers be interested in buying distressed properties that are under water (i.e. that are worth less than the mortgage)? It’s not like they could re-sell the property for a profit, and I gather that these aren’t scammers aren’t doing “short” sales (otherwise there would be no equity/rent deal with the existing owner).
If these foreclosure artists are only interested in buying distressed properties that are NOT under-water, I don’t see how they could possibly make much money since these types of properties are as rare as the coelacanth (i.e. extremely hard to find).
Sniglet,
Say the owner owes $400,000. The middleman enters into a purchase agreement with the seller for $250,000 with “and or assigns” as “the buyer” in the contract. Then he works a deal with the bank to take the $250,000 purchase price on his contract. Then he finds a buyer at $300,000 (still under market value) and pockets the $50,000. Until recently they did that without closing on the first sale and so without transfer taxes. Many escrow companies began refusing to do these without a “double close” so the middle-man’s expenses got higher.
The bank is talked into taking a MUCH lower payoff than what is owed, so there is still room to sell it for profit at market value or slightly less than market value.
The smart ones do something TO the property first to make it look like their improvements were what caused the higher price on resale.
Hi Jillayne,
Regarding #20, yes I agree that there will always be buyers looking for extra good deals on properties that have challenges due to adding another party, the lender(s) to the negotiation process who may or may not cooperate.
I am just wondering if the new distressed homes law will actually shrink the number of potential buyers, the by product of fewer buyers is lower prices, or no buyer at all….a guaranteed foreclosure. Only time will tell.
P.S. to Sniglet,
Some of these middlemen got the seller to sign the contract at a low price of $250,000 by offering them some of their profit under the table. They do that by “purchasing” some of the personal property, which gives the buyer some cash. Under the terms of a short payoff to the mortgage holder, the buyer is not to receive any money from the sale of the house. But that doesn’t necessarily preclude the seller from getting money for his boat or his furniture or his car. So there were situations where everone won except the mortgage holder, who was grossly shortchanged.
As far as marketing to help match distressed home sellers to buyers interested and willing to enter into a contract that involves another party, the lender(s) who may or may not be cooperative in the negotiation process for a short sale, the listing agent can only disclose that (and must) because it is a material fact.
But a homeowner can be distressed without it being a material fact. In that case the agent cannot disclose the sellers distress since it is a breach of fiduciary duty.
The NWMLS says this:
“Agents are not required to disclose to selling licensees and buyers that a property is a Distressed Home. In many transactions, disclosing this fact could be a breach of the listing agent’s fiduciary duties to seller because it is not in the seller’s best interest to have this fact disclosed. If a buyer knows that the property is a Distressed Home, the buyer may gain advantage over a seller in negotiations.”
So buyers can unknowningly make an offer on a distressed property, and only when (if) the property becomes a shortsale or in within 20 days of a foreclosure sale, be made aware of the fact that they are in contract with a distressed seller.
It’s the notice of a foreclosure sale in 20 days that is the potential mind field for both the seller and buyer.
The buyer once notified can withdraw from the contract, have their earnest money refunded, and the seller to reimburse the buyer any costs the buyer has incurred during the contract period. The seller loses their “get out of foreclosure card” since they are not likely to be able to find another buyer and may have to pay for the buyers inspection, etc. on top of that.
The buyer could actually become a fiduciary to the seller because of this 20 day notice of a foreclosure sale, this is why the buyer is allowed to withdraw from the contract if they choose to.
Jillayne, I think you are right because in some ways this law will be helpful, as those with expertise step in as others withdraw from this playing field. But in other ways I think it will penalize distressed sellers and possibly buyers.
Jillayne, re #28, “distressed home” does not require a homeowner. The NWMLS attorneys disagree with me, but for a house actually in foreclosure you do not need a homeowner to be a distressed home consultant.
I’m interpreting the statute as written, they’re interpreting it as they think it will be interpreted.
Jillayne, re #30, your first one doesn’t make sense. You can’t accept an offer and then disclose that the price makes it a short sale.
The rest of it I don’t buy at all, except perhaps the closer broker supervision.
But eliminating buyers is not good for sellers. That’s the bottom line. It will be less likely buyers in trouble can find someone who just wants to buy their house because they’ll become a distressed home consultant in doing so.
I think you’re failing to realize the liability here. Let’s say a buyer makes a mistake on their financing application which isn’t noticed until shortly before closing, and fails to close because they can pull out under the financing contingency, and don’t extend the closing date. No big deal right? Well, let’s assume sellers house is foreclosed and they lose $45,000 of equity. The buyer can be sued for $145,000 and attorney fees because they didn’t meet their duty of care under the act. Or lets say the inspection comes back with a number of items, and they just decide it’s too many to sort through and investigate further. Again they could be sued.
But mainly I think it’s a bit naive to think only the better agents will stay and do this work. The better agents will have better things to do than expose themselves to liability under this act.
For any loan originators out there, you are generally exempted from being designated a “Distressed Home Consultant”:
“Distressed home consultant does not mean a financial institution, a nonprofit credit
counseling service, a licensed attorney, a person subject to the mortgage loan servicing laws,
or a licensed mortgage broker who procures a nonpurchase mortgage loan for the homeowner.”
We have our own kettle of fish to fry, adapting to all of the new laws coming into effect soon.
Since I am seeing more of these distressed property issues in purchase transactions, I have a keen interest in the effects of this law.
Thanks for such an intelligent discussion of the issue.
PS, I have yet to find back-up for the exclusion of short sales, but in the interest of scholarship, I will continue to research.
Ardell, what you’re missing is the standard you’re supposed to meet. That you’re not only a fiduciary, you’re one that has to put your client’s interest ahead of your own. No one knows what that means. How can you work where you don’t know what the standard is? (BTW, I’ll remind you I’ve always considered agents fiduciaries–it’s the interests ahead of your own issue that is objectionable in a very large way!)
Oh, you’re also missing the fact that at some point your broker may not want you to handle these clients. That might be June 12, or it might be the first time they’re sued.
And arguably ordinary malpratice becomes a treble damages/attorney fee suit.
This law is a litigation magnet, and once you’re sued look for your broker to bail based on the language of the NWMLS forms, and you’ll be there yourself paying $20,000 or more in fees to defend yourself (assuming it’s a breach of fiducuary duty case–ordinary negligence they’ll still be in).
Finally, what are you missing? Have you submitted a purchase offer for a buyer in the last 30 days that didn’t address this issue? If so, you missed this law entirely and your buyer is now facing becoming a distressed home consultant without any contractual outs.
Deborah, while the short sale seller might not be currently in distress, the actions of the agent will make them a distressed home consulatant if and when something they might not know about happens. Remember the agent doesn’t have to know about any of the events that would bring the seller under the 4 month rule.
BTW, one of the things that is so absurd about the 4 month rule is generally people should see bankruptcy attorneys early–ideally at least 4 months before they might possibly need to file bankruptcy. But by doing something prudent, they can become a distressed home seller.
Ardell,
So, you are saying that most of these foreclosure artists are actually hoping to do a short-sale with the lender? That’s very interesting. I would have thought that lenders wouldn’t touch these kinds of deals with a ten foot pole. Heck, lenders rarely accept short sales anyway (usually preferring outright foreclosure), so it surprises me that there are people out there who RELY on short-sales for their business model.
Nearly everyone agrees this new foreclosure rescue law does much more harm than good.
The problem? The legislators believe losing a home to foreclosure is better than selling to an investor. After all, an investor might be a scam artist.
Equally ridiculous, they believe homeowners losing their properties at auction actually come out ahead. The sponsor of the HB 2791, Representative Pat Lantz, testified:
“. . . foreclosure would be preferable to the distressed property conveyance.”
That’s bad enough, but there’s more. She continued . . .
“Better that the homeowner receive the equity in the house through foreclosure than lose it all through the scam”. — Rep. Patricia Lantz, 26th Legislative District
Here’s the link to the video: Foreclosure is Better
This is a terrible law and an absolute embarrassment. It doesn’t help people in foreclosure. Instead, it takes away their right to freely contract and in many instances, will cause them to lose their homes.
Lawyers I’ve talked to about it think it’s a convoluted mess.
And by the way, the AG confirms there were a total of four (!) foreclosure rescue scam complaint received by their office over the last five years. FOUR.
While it’s popular today to talk about foreclosure rescue scammers, the reality is there are lots of investors who write the big checks that stop foreclosure all allow folks to move forward with dignity.
And no, it’s not a scam; it’s a service.
I have some 30 successful foreclosure rescues going today. That’s 30 families who didn’t get foreclosed on, who didn’t get evicted, who didn’t lose all their equity.
They are not “victims,” they’re homeowners who no longer face the loss of their homes. Had this new law existed back then, none of them could have been helped.
Joe Kaiser
Pushed to Shove Blog
Kary said: “But mainly I think it’s a bit naive to think only the better agents will stay and do this work. The better agents will have better things to do than expose themselves to liability under this act.”
Depends how you define “better”. Better agents act as fiduciaries all the time, so this is not much of a change for the truly “better” agents. Better at helping people achieve their highest attainable objective? Or better at lining their own pockets?
Better agents won’t chase after short sales and distressed homeowners, but when they are approached by a distressed homeowner or a buyer who wants to buy one, they won’t run away becasue it’s too much work.
Sniglet,
To the best of my knowledge they are ALL working a short sale with the lender. The middle man is technically the buyer. Lenders are looking at the offer…not who the buyer is.
A point that I haven’t seen brought up is E&O insurance. Where will the insurance company draw the line at protecting the broker or agent who finds themselves on the receiving end of a lawsuit?
Kary, you asked about how this affect the consumer. I don’t see how any buyer’s agent or buyer can be put in the position of being a fiduciary for the seller.
I can see this now…….Attorneys calling through closed distressed transactions looking for business. “Say, Mr. Distressed Seller, did the buyer, the buyer’s agent and your listing agent keep your best interests at all times?”
“Well, the buyer asked me to replace the roof from the inspection. I guess that wasn’t in MY best interest.”
“Hmmm. Looks like we might have a case here, Mr. Distressed Seller.”
Could our good buyer be facing a lawsuit?
Our Buyer, “I used to like you Mr Buyer’s agent, but now I’m in a pickle. I think this whole mess is your faulty, anyway. I’m going to sue you because the Seller is suing me because of this fiduciary thing. You should have known better than to let me get involved in this!”
Broker to E&O company, “Please, please insure us in this one, we’re getting hits from all directions”.
E&O, “Well you can plainly see that you were beyond the bounds of your fiduciary duty. We no pay….you’re on your own on this one. Sorry.”
Broker and agents, “We’ll never do that again!”
Next Distressed Seller, “Can you help me?”
NO
Is this scenario a possibility?
Greg,
I’m pretty sure that Redfin made an announcement a few weeks ago that they either wouldn’t, or were considering not doing, short sales. It’s not an “online” kind of transaction, I believe, was their reasoning. So I’m sure that any Company, as a matter of policy, can direct agents NOT to get involved based on the Company’s liability and reputation.
Clearly many say the agents can’t do Property Management. Many say a Residential agent can’t do Commercial. I am positive that it is every Broker’s right to restrict agents to less than all things allowed by law via the real estate license. Any licensee can do a lot of things, unless their Broker, by policy, restricts the scope of what they can do with that license.
“Ardell, what you’re missing is the standard you’re supposed to meet. That you’re not only a fiduciary, you’re one that has to put your client’s interest ahead of your own. No one knows what that means.”
Kary! What do you mean no one knows what that means? EVERYONE “KNOWS” what that means. Some can’t DO it…but everyone knows what it MEANS. That IS what fiduciary means. To use the term Fiduciary, but not be willing “to put your client’s interest ahead of your own” is fraud! It means you will walk away with NOTHING if need be to achieve the client’s objective.
I took a vow that my commission would NEVER get between a client and their objective. A vow to myself. That IS fiduciary. If the only issue between a client getting a house or a client getting their home sold is the commission, the people achieve their objective “without regard to commission issues”. Take a private note, or a moral obligation to repay. But never let the agent “get in the way”. THAT is “fiduciary”. I KNOW what it MEANS.
How can you say no one knows what it means, and how do you get to speak on behalf of everyone else?
Ardell,
True.
And it looks like any good company, broker or agent could be working through customary parts of a transaction, such as a normal inspection response and find themselves in breach of fiduciary duties because a sale from a distressed homeowner closed within 20 days of foreclosure, which makes the buyer and the buyer’s agent is the seller’s fiduciary.
I can see where this becomes sticky. Does the buyer drop out before the 20 days? Hmm there’s a contract. If the buyer (or buyer’s agent) asks for anything in this transaction, then they may not be acting as a fiduciary for the seller.
I’m sure that E&O companies will look very hard at paying because they may see the lack of fiduciary duty as negligence.
In the meantime the buyer and buyer’s agent are not being predatory, at all, just negotiating in (what they think is)good faith.
The first brokerage to be hit with the a lawsuit could cause the whole program to fall like a house of cards.
Do realtors prefer to handle REOs or distressed sales? I wonder what the realtors in really troubled areas do (i.e. where foreclosures and REOs are 50% or more of sales)? I gather that REOs are hard to come by since lenders seem to favour only working with one realtor in a given region (i.e. leaving a single realtor with hundreds of listings), so maybe the listings of distressed homes is the only real option left for realtors looking to get listings.
It’s not as if listing non-distressed properties is much of a strategy in places like Stockton, where owner-listings languish forever, unable to compete with the REOs. It’s all well and good to have a policy of not handling distressed sales, but if a market turns, and distressed properties mushroom, it might be the only game in town.
Greg,
The bigger issue is that NO ONE can be forced into Dual Agency. Making the Buyer’s Agent a psueudo Agent for the Seller, is a big sticky point, and one that WILL be changed in due course, in this law. Though I think their intentions are accurate. I’ll have to read up on that one specific part where the Buyer and Buyer Agent are not free to represent their own interests exclusively. If that is in this law, then it can’t be enforced IMNSHO.
Sniglet,
Hands down…REO’s. No comparison. They are not even similar from an agent’s perspective.
If no one touches short sales…they all become REOs and agents can speciall in representing buyers of them vs. sellers of them.
I used to be the ONLY agent who could handle a vacant relo property under a Corporate contract. I had the CCPS (Certified Corporate Property Specialist) designation, and only one was allowed per office.
The reason these arrangements are made is that things go much much more quickly when the Relo Office (out of state) is always working with the same agent. Less communication is needed and it cuts down on their paid staff time.
Plus we had to factor in time of year, monthly hold costs of the vacant property, we had to do Buyer Profiling for “most likely to buy this house”, etc… A different and elevated skill set.
Those listings come at huge discount, so not every agent wanted them anyway. I paid a 50% referral fee to the relo company who paid 80% or so of that to the relocated owner’s employer to cover relo expenses. No one wanted my job
They didn’t want the listing with a 50% referral fee. They wanted the buyer for it at NO discounted commission.
That’s how it plays out. The Buyer Agent often gets 3% and the REO listing agent gets a much reduced rate in trade for the volume.
REO’s are still often better as if you have 5 REOs they WILL all sell vs. 5 regular homeowners who may decide not to sell at all. Plus you don’t have the emotional stuff with a vacant relo or REO. It’s all business. So the lesser commission is usually still worth it, especially when you do it all the time and there is no learning curve.
The hardest part was the 30 day reports…so I always tried to get them sold before the first report was due…and did. Without emotional sellers, it’s much easier to effect a quick sale.
Lots of factors to balance, but in the Seattle Area MANY agents prefer to work mostly or only with buyers due to the commission issues.
P.S. Almost always the Buyer Agent in an REO gets the % commission as promised in the mls. Almost always the Buyer Agent in a short sale transaction does not, especially if the Listing Agent of the short sale posts it at 3% or more vs. the 2.5% customarily allowed.
So any way you slice it, more REOs and less short sale transactions is better for everyone,,,agents, buyers and sellers…most of the time.
The point you made about investors just being in it for the money and not caring about helping people in foreclosure is not always true. I do help people out of foreclosure and I must make money to keep on doing it, but I will walk with nothing if it is in the homeowner’s best interest for me to do so.
more REOs and less short sale transactions is better for everyone,,,agents, buyers and sellers”
Really? How are REOs better for sellers? Isn’t a distressed home-owner better working out short-sale than going through outright foreclosure and losing the home to the lender?
Remember tha East Coast and West Coast are somewhat different in that regard.
On the East Coast you have “foreclosure states”. On the West Coast you more often have “trustee sales”. On the East Coast (I’m generalizing here) the mortgage secures the note. On the West Coast it is a Deed of Trust.
Supposedly the trade off is that in states that secure by Deed of Trust, they forego the opportunity to capture the shortfall, in exchange for a shorter and less complicated means of recapturing and selling the collateral.
If the owner is being asked to sign a note to repay in a Trustee based state, they may be foregoing their end of the tradeoff of having a Deed of Trust vs. a Mortgage.
This is a little over my head as to the detail, and WA seems to be different than CA for some reason, even though they are both secured by Deeds of Trust.
But this is why an attorney MUST be consulted, as there are ways an attorney can make sure the seller doesn’t give up their right to have the shortfall forgiven in a Trustee Sale. There are ways the attorney might be able to tie up the property in a bankruptcy action (saw this more on East Coast) giving the owner time to catch up and stay in their house at the same time.
These 4 month your out deals are created by the Deed of Trust and the lender gives up certain rights in order to forego what I believe is called “judicial foreclosure” which takes much much longer than 4 months.
It’s not all about the Banks and owners have secured certain rights by agreeing to the shorter timeframe. Owners agreeing to a short sale without forgiveness clearly may be better of with a foreclosure and foregiveness of debt.
The way it is working now, the bank is getting the longer end of the stick, contrary to the original agreement with the owner. The bank gets their advantage and the seller foregoes his advantage…or at least needs a legal opinion before proceeding and giving up their rights under the Trust Deed arrangement.
It’s not as simple as a consumer loan, and a Trustee Sale and a Foreclosure are really not the same thing.
Ardell,
“Greg,
The bigger issue is that NO ONE can be forced into Dual Agency. Making the Buyer’s Agent a psueudo Agent for the Seller, is a big sticky point, and one that WILL be changed in due course, in this law. Though I think their intentions are accurate. I’ll have to read up on that one specific part where the Buyer and Buyer Agent are not free to represent their own interests exclusively. If that is in this law, then it can’t be enforced IMNSHO.”
The Legislature just did! …and will be law on June 12. Law of Agency Pamphlet is changing as well as the listing agreement and P/S addendum’s.
Simply stated a Distressed Seller’s property closes within 20 days of foreclosure, not only is the Buyer’s agent a fiduciary of the Seller, and so is the BUYER!!!
From what I’m hearing, real estate agents and buyers were supposed to be exempt, but the bill made it out in it’s flawed form, which is what’s causing the turmoil.
Odds are it will be amended in the next session, but for now, the statewide forms and procedures have been completely upended.
NWMLS has a new video on the Discover site that covers the new law and the various form changes, etc.
I don’t care what the law says, Greg. NO ONE can force Dual Agency on anyone in these United States…that right supercedes the law as far as I’m concerned.
If they want to prevent buyer’s from becoming complicit in lender fraud if they pay the seller anything under the table outside of closing, that I’m OK with. But Dual Agency is not something that can be done lightly or pressured on to someone in order to buy a house.
I’m hoping I don’t get in the middle of one of these while they are figuring out this new law. But when push comes to shove, my internal ethics RULES! and not the law on this one. Looking at yourself in the mirror every night before bed is more important than many, many things in this world.
Understand, Ardell.
Give me your impression on the videos.
It seems the new law goes way beyond dual agency and straight to fiduciary for a buyers agent and BUYER for the Seller. Which means that the buyer’s agent would owe the Seller a greater duty than their own Buyer. The Buyer, incidentally will be held to that same standard. (for closings within 20 days of foreclosure.)
Nuts, isn’t it?
Ardell wrote: “Depends how you define “better”. Better agents act as fiduciaries all the time, so this is not much of a change for the truly “better” agents. Better at helping people achieve their highest attainable objective? Or better at lining their own pockets?”
First, it’s not the fiduciary that’s objectionable, it’s the super-fiduciary standard of the statute. No one knows what that means.
Second, you said you don’t see how this would affect you. Connect it up to our debate on the roof and the inspection. Do that with a seller within 20 days of foreclosure, and you’ll get sued after the fact for 3x everything you negotiate over the 20%, and possibly the 20% too. And attorney fees. And once they sue you, they’ll try to find if you did that to anyone else in foreclosure, and contact them to see if they want to sue you too. That’s how it will affect you!
Ardell wrote: “Kary! What do you mean no one knows what that means? EVERYONE “KNOWS” what that means. Some can’t DO it…but everyone knows what it MEANS”
No one knows what it means until the courts interpret it. It goes beyond being a mere fiduciary.
Kary,
I’m just going to go about my business doing the best I can for my clients. Someone wants to sue me for that…let em.
Ardell, if you feel that way it just means you’re not risk adverse. The example I give is Emerald Downs. Some people bet on long shots (not risk adverse) and some on favorites (risk adverse). You don’t know who is right until the end, but generally not being risk adverse opens up more options and can make you more money.
But in this case, it’s more like poker, and betting on losing hands.
But you stated you don’t see how this affects your business. Your last statement again shows how it affects your business. If your client happens to be buying a property within 20 days of foreclosure, I guess technically you should still be doing “the best you can for your client,” but that very well may mean doing the very best you can do for the seller (non-client). For an offer closing within 20 days the world is turned upsidedown-and for no reason. On a listed property where the buyer doesn’t even know of the foreclosure, there’s no need for such a rule. This again is just the result of poor drafting.
[...] Both of the articles and the resulting commentary are worth a read. Jillayne Schlicke over on raincityguide.com had another [...]
Any new State Statue that’s spawns this much debate and confusion is obviously poorly written and confusing. All the dialog that has just appeared here however is very good, and many good points have been made. Washington State has created a Beast and now we as professional Realtors, have to figure out how to tame the Beast!
We’ve been Realtors in Seattle for almost 20 years and pride ourselves on giving our clients expert advise and helping them make intelligent well-informed buying or selling decisions. We must have been doing some of this correctly as we have been voted the 5 Star Best in Client Satisfaction Award by Seattle Magazine for 4 consecutive years, so at least some of our clients like what we do for them. They do relay on what we tell them so we make sure what we tell them is correct and well thought out information about a lot of things, from building quality, locations, schools, resale potentials, etc.
We believe that Realtors should be held to a higher standard than what we presently are however, and that Realtors should be required to take education classes that actually help them be better real estate agents (not just Feng Shui experts) and able to be much more than a facilitator of a transaction. We had our office meeting last week with one of the best real estate attorneys in Washington State and he was absolutely disgusted with the new law, but we have to work with it the best we can until it’s revised…and we believe that it needs major revisions.
Distressed Home Sellers need Realtors that know what they are doing. Who else is going to sell their homes. We are the only people that will give them the best chance of selling their homes and keeping it from foreclosure. When we read the new law and started reading the blogs this past couple of weeks we were frankly “freaked out” about it. We have sat down with our Broker and outlined what we want to do and we are having our attorney draft some addendum’s that will spell out very clearly what we will and won’t do and what a seller or buyer needs to be aware of. We plan to work with Distressed Home Sellers and we know we’ll be Distressed Home Consultants.
My father always told me if I were going to do something do it right. Our business philosophy has always been to help our clients get what they want or need and to make make well informed and intelligent decisions. But knowing that we are going to step into this arena, even just typing this, gives me a big pit in my stomach because of this vague, poorly written law and that some attorneys may be just looking for anything to sue about. What do you think the chances of that are?
We think that sellers and buyers will be hurt by this law. We think we’ll all be on edge until the law is changed or the first court case is settled. We believe that many agents and brokers will choose to not get involved and while that may be good in the long run, a lot of distressed homeowners will be left out. What we have learned about sellers going into foreclosure is that many of them just put their heads in the sand and hope it all goes away. They don’t spend a lot of time looking for ways to be helped until it gets almost too late in the process. And a buyer has to be nuts to buy a distressed home that closed 20 days before foreclosure.
Maybe WAR could create a new designation for us “DHC”…I need the clock hours anyway and it would be more useful than a class on home staging right now. Anyone out there know how we could get this done?
Wish us all luck!
Hi Karen,
Good luck!
I’ll be holding an event in either August or September where a cache of my clock hour classes will be held back to back, allowing agents to earn a designation. Short Sales, Foreclosures, REOs, Distressed Property Law, and Advanced Case Studies….all for clock hours…with attorneys too! I’m working with the Seattle King Co Assoc of Realtors on this event.
[...] Property Law. My question is, SHOULD mortgage brokers and loan originators be exempt? Please read this blog post and share your opinion. I know that no brokers or loan originator is going to automatically jump [...]
This looks like an interesting court case to follow: “Massachusetts AG Wins $1.8 Million Foreclosure Assistance Scam Settlement From Lenders, Servicers”
From housingwire:
http://www.housingwire.com/2008/06/18/massachusetts-ag-wins-18-million-foreclosure-assistance-scam-settlement-from-lenders-servicers/
Jillayne,
Can you put us on a list to notify us when such RE Educations classes will be held?
Just in time….real estate “guru” Robert “Nothing Down” Allen is coming to town June 29th – July 2nd to show Washingtonians how to Get Rich Quick (GRQ) buying foreclosed properties.
Saaahweet!
I wonder if anyone sent him a copy of the new distressed property law.
Washington Realtors has a video of the Attorney General (Rob McKenna) calling for the repeal of the language added by the Senate. If the link works, you can see it here:
http://www.warealtor.org/dp/ag.asp
I hope Mr. McKenna is successful dealing with Olympia.
Hi Kary,
The link works fine. I’m watching the video now.
I am impressed with WAR basically saying that they were responsible for looking out for legislation like this and that they will be on top of it now. Not quite an apology, however, I respect the honesty.
“On July 15 the AG’s Office, Consumer Protection Division, has invited REALTORS® to participate in a work group to address ways to correct the Distressed Property Law in the 2009 legislative session.”
You should try to make that meeting, Kary. You have a lot of valuable input and good suggestions on how to fix the legislation.
But my suggestions weren’t as good as merely repealing all the bad language. I was actually trying to think of ways to fix the mess!
Jillayne, I tried to attend, but it was a closed meeting.
As to the meeting, apparently someone was there from the Democratic Caucus, which means they are at least listening. That was my big concern.
Oh, I almost forgot. Because I couldn’t get into the meeting, I went to lunch with one of my attorney friends. He always has an interesting way of looking at things, and the same is true here.
As to the part that we almost all agree is good (buyer swooping in at last minute offering 70% on the dollar with a bogus lease/option), his comment was perhaps that’s better for the homeowner than the alternative. At that point their only other option is likely to be losing the equity through foreclosure, which would not only mean the same loss of equity (if not worse), but also having a foreclosure on their record forever.
It’s sort of a cold way of looking at things, but to a great extent it’s true. Perhaps rather than offering sellers who are within 20 days of foreclosure additional protections, the protection should end when they’re within 20 days. Let them get something rather than getting nothing and a foreclosure on their record. And let the bank(s) avoid a foreclosure. These people want to take these last minute deals for some reason, and not all the possible reasons are wrong, but the legislature wants to take away their choice!
Very well written, and incredibly well said. You definitely see the broader picture and understand what the law is intended to correct at the tactical level. As real estate agents, it’s our responsibility to educate ourselves on the nuances of the law, dot our “i”s and cross our “t”s as should always be the case in any transaction.
That said, I also understand this Bill’s broad sweep for saddling well-intended, talented and ethical agents will untenous liabilities is, indeed, of great concern. The Bill will likely — and hopefully — undergo future refinements to clearly delineate what constitutes tortious behavior from the unactionable.
The issue of concern, in my view, stems from this Bills birthing of vague, fiduciary boundaries. In turn, while this imperfect, but apparently well-intended Bill matures, the potential for spurious lawsuits against unwitting agents gives our industry reasonable pause.
Many of the cries we are hearing (or at least I am hearing) from agents rise in protest to the malignant slap even the most benevolent agent behaviors may receive in the interim.
Please continue to write on this subject — yours is one of the few responses to this Bill that is dead on.
Very Best -
Blake Voorhees
Windermere – Sand Point
Seattle, WA
Good article from The Weekly:
http://www.seattleweekly.com/2008-07-23/news/mckenna-distressed-over-one-of-his-bills
Two interesting facts. An attorney I know apparently admits being the “craftsman” of the act. And Weinstein apparently isn’t seeking reelection.
What’s amazing is both the attorney and Weinstein still claim that the act won’t be interpreted by the courts as everyone else thinks it will be. The attorney once offered to send me something explaining that position, but I never received anything. I sent her first my analysis of the technical flaws with the law–apparently it couldn’t be refuted.
Hi Blake,
Thanks for stopping by RCG. I’m curious to see what part of the law gets repealed next legislative session.
Hi Kary,
Well it’s been one month. I wonder……wonder, wonder if the change/slowdown in Ardell’s statistics are reflective of homebuyers being too afraid to buy homes where the homeowner is in financial distress?
There was A LOT of fear being perpetuated by the real estate agents and investors that the DPL would send MORE people into foreclosure and would push homebuyers away from these homes.
Any insight as to if this is happening?
Thank you!
Seattle Bubble had a piece on how June’s inventory in King County was 500 less than May’s inventory. I haven’t checked on whether that’s correct, but assuming it is, the explanation that it’s due to the distressed property law is a pretty good one. Some people were predicting a much larger drop as a result of it.
I don’t think it’s affecting volume of sales, however, because there’s more than enough inventory. For every distressed property there are several non-distressed properties. I have heard at least one agent complain that few people look at their distressed listings.
As to next session, it’s starting to look more and more like the current act will be amended rather than just repealing the “bad” parts added at the last minute. The proposed legislation apparently will be public late this year.
Link to the Seattle Bubble piece:
http://seattlebubble.com/blog/2008/07/17/thousands-of-sellers-gave-up-in-june/
In today’s “Friday Facts” sent to agents, Annie Fitzsimmons recommended that agents use Form 22NFW on all offers with owner occupied property.
Dugald has an interesting follow up piece, which suggests that the distressed property law is possibly causing more foreclosures.
http://blog.seattlepi.nwsource.com/realestate/archives/153603.asp
Seems to me the numbers suggest more lenders are choosing the option of judicial foreclosure vs. Trustee Sale because of the antideficiency provision. If it was about the distressed property law, you would have to be looking at short sales vs. Trustee sale + foreclosure, not merely Trustee Sale vs. Foreclosure. Agents have nothing to do with either of the stats in the post.
If short sale numbers declined significantly, that would suggest the distressed property law was causing agents to refrain from assisting distressed homeowners. I don’t see that comparison made in the post to which you refer.
Maybe you could quote here the stat in the post that you think refers to agent involvement vs. non-agent involvement. I didn’t see it.
The post has nothing to do with judicial foreclosures. I’m not sure what you’re seeing.
I did question whether much of the increase was due to the distressed property law, but Dugald seems to have addressed much of that in a subsequent post.
BTW, I just read a new case on non-judicial foreclosure, but I haven’t done enough with it yet. I don’t want to say anything about it until I have had more of a chance, but it’s shocking! I may pass it along to Craig to see what he thinks if it’s still shocking to me when I do what I want to do.
Here are the numbers form the post, Kary. None have anything to do with agent or the distressed property law.
Before June 12, 2008
2,670 Notices
648 Deeds
====
24.27%
After June 12, 2008 (through tonight’s online search)
2,992 Notices
1,032 Deeds
Kary, Agents have no involvement in any of these and the reason for the increase is because we as an area were not upside down as to value like the rest of the Country.
Expect increase over the next 18 months as more and more people are upside down as to equity. This trend didn’t even START in the Seattle area until after September of 2008. So increase is the expectation…distressed property law or no distressed property law.
Sorry…running out the door…will check back later.
You didn’t copy over the fact that after June 12th the percentage of those going into foreclosure increased from 24.27% to 34.49%
Agents may or may not have something to do with those. I would hope that most of those properties were put on the market, and if they were, they didn’t sell! Some undoubtedly never went on the market (FSBO or MLS). But the rest had less of a chance of selling due to the distressed property law. Absent having a buyer that could close quickly, only a naive or very risk tolerant agent would have their client make an offer on a property that was set to foreclose within 60 days. Making such an offer without having the client get attorney advice would most likely be malpractice.
That’s two months of marketing time lost to the seller, making foreclosure more likely.
I too had problems associating all that increase to the distressed property law. The real number is somewhere in between 0 and 100% of the increase being due to the new law. It’s impossible to know the real number. Does it really matter if it’s 50 or 350? Not if you’re one of those it doesn’t!
Ardell,
Agents certainly don’t make homes complete the foreclosure process, but it’s certainly interesting that distressed homeowners, having lost access to many with money (because of a buyer’s fear of being sued later), are going to the auction in record numbers – far in excess of the increase in the number of foreclosures started.
Distressed homeowners are not solving their problems.
Buyers are afraid and many agents won’t even touch a distressed property because of the liability. Some brokerages wouldn’t even take distressed listings for a period there. Some still won’t because their E&O only covers acts under the license law – not the expanded duties owed by a fiduciary…
Look at post 84 above. When Washington Realtors is advising agents to use 22 NFW on all offers on occupied property, I don’t know how you could think that the distressed property law wasn’t causing more foreclosures.
What would happen if this law were to magically disappear today?
The ideas provided at the SREP blog suggest that foreclosures would go down.
There are far too many other factors at work pushing our forclosure numbers up. If this law were to go away today, our foreclosure numbers would continue to go up.
To make an argument that this law is *directly* correlated to higher foreclosures seems somewhat manipulative.
No wonder the legislature didn’t listen to the Realtor group when they tried to get a “special session” called in order to receive a special exemption for themselves.
There are many pending sales in escrow that are short sales. I’m not a member of the MLS. Someone who is should bring those numbers to the discussion.
Jillayne,
There’s no “check box” for distressed or short sale (maybe there should be) so it’s an onerous task to search on all the possible permutations that describe that it’s short (e.g. Agent remarks containing “lender approval”, “lienholder approval”, “bank approval”, “underlying”…. & misspelled versions of these OR commission comment remarks noting the same…)
I want to clarify: no-one is suggesting that the law led to higher rates of foreclosure **filings**. It’s the rate of foreclosures going through the entire system that has increased – as a percentage of total filings (by “filing” I mean the recorded Notice of Trustee Sale.)
Before this law came into force, people were solving their problems prior to auction – whether by short sale or other means – at a higher rate than current.
…and when you look at the numbers, the increase concides with the change in the law.
[...a cynical view perhaps, but consider this: the law looks good for an election year and was sponsored by a consumer protection attorney who would potentially make more with these laws in place - suing investors.]
It should also be noted that the final 2791 was shoved through **without public comment** and at the last minute when the wording from a failed bill (SB 6695) was inserted into this bill. .. a bill that didn’t make it earlier in the same session!!!! What passed was not what the AG’s office had proposed.
The SREP post was/is intended to be manipulative in any manner. It reflects the facts.
The fact is that the legislation has taken hundreds (potentially thousands) of buyers out of the market for properties during this time of immense trouble, forcing many defaulting to the auction and removing an option for them to solve their problems with less of a hit to their credit and their future.
It’s also not good for the banks. They want these problems solved earlier and before they likely have to own the real estate.
So if buyers were not concerned about the added liability of dealing with distressed homeowners then, yes! more homes would be sold prior to the auction and the rate would not have been affected as much.
More discussion continues on SREP as well.
…that the Realtors couldn’t get an emergency session is more testament to the makeup of the legislature and the cost of an emergency session than it is to how the law has affected those in distress…
One comment I made over in P-I land bears repeating here:
I’ve been thinking about this further, and to assume the distressed property law isn’t resulting in more foreclosures is assuming agents are not doing their jobs properly.
First, buyer’s agents should be using Form 22-NFW. Second, if the situation of a closing within 20 days comes up, the agent should be sending the buyer to an attorney for advice. IMHO, that advice should include the fact that the existing P&S cannot close, because the form documents do not comply with the distressed property law, specifically RCW 61.34.050. Even ignoring whatever the attorney might advise them regarding their becoming a fiduciary to the seller, what buyer is going to want to proceed where the attorney is going to have to redraft the contract? How many red flags have to go up before the buyer says: “You know, there are a lot of other properties out there.”
Again I’d point out this fact pattern will occur with most non-cash (non-financed) offers which come in within about 60 days of a foreclosure, because most offers take about 40 days to close. There’s no way that couldn’t be increasing the number of foreclosures.
Dugald wrote: “[…a cynical view perhaps, but consider this: the law looks good for an election year and was sponsored by a consumer protection attorney who would potentially make more with these laws in place – suing investors.”
They already could sue investors in the proper case under existing laws. What the distressed property law did was add another cause of action and more defendants. More defendants mean more chances to recover something, especially where one of the defendants is a large company.
true, Kary, but triple damages plus lawyer costs is so much more appealing to contingent fee cases where the client has no money (remember, they were in distress!)
Treble damages and attorney fees are what I’ve referred to as being the litigation magnet. Do many transactions where the distressed property law is involved, and you’ll suddenly find certain attorneys have a magnetic attraction to you.
Hi Dugald,
If my memory serves me correctly, there definitely was a public comment session. There was one lone guy who is a member of the Seattle Investors group who showed up to comment. He stopped by this blog and told us all how it went.
So Kary, Dugald,
How many lawsuits do we have so far that have been filed because of the Distressed Property Law?
How many homeowners do we have who went ahead and purchased a short sale home in spite of the higher duties? In order to make your argument more valid, we would need to know how many SS transactions resulting in a closed sale.
It’s not short sales–it’s sales closing within 20 days of a foreclosure. They could have $500,000 of equity and still be protected (which is right–the ones without equity need less protection).
Quite frankly I’d say anyone who did close such a sale was ignorant, naive or at best not very risk adverse. The thing is though, suits under the act are a bit less likely to be brought in this market, since values are declining, but if they’re brought they’re likely to occur months after the sale. So a suit is more likely next year, or the year after that, for sales that occur this year.
As to your earlier comment, this legislation is so complex, and so poorly drafted, it was impossible for anyone to fully understand its impact between the time the act was amended and passed. When I go back and read my comments in Dugald’s first post, it’s pretty clear I was having trouble figuring it out (I stated that). It took me a couple of months to figure out that a sale that closes within 20 days of a foreclosure can’t be based on a NWMLS purchase and sale agreement. The reason for that–very poor drafting–there’s no way the drafters intended such a result. There’s lots of poor drafting–like the rule on buildings of only 1-4 units. Totally absurd and not what was intended.
Jillayne,
This is also why the expectation for current fair market value is not realistic. There has to be some discount for the added time, additional liability, and lack of seller engagement in the outcome from the buyer’s side of things. You never buy into a no-recourse situation at fair market value, be that a vacant relo, an estate sale or a short sale.
Jillayne, another comment regarding #99. I really think you’re looking at it the wrong way. Almost entirely backwards.
You shouldn’t be looking at either number of lawsuits filed since June 12th, or number of sales closed withing 20 days of a foreclosure.
Some people do stupid things. That they might do stupid things doesn’t mean you (or your clients) should do the same things. Some people go out and install grow lights in their homes to grow illegal plant matter. Assuming there were a blog page pertaining to such activities, would you go an ask how many people are doing it to determine it was safe? Would you ask how many people have been doing it since June 12, 2008 to try to determine what the risk was of being shut down by the sheriff? I’d hope the answer to both questions is no.
That some people still might be buying in such situations doesn’t mean it’s a good thing to do. That others aren’t doing it at all because of the distressed property law means that there are some sellers out there who are not putting deals together to save their house from foreclosure. There is simply no way that this is not having an effect. Houses get lost to foreclosure even in hot markets. Take away potential buyers and more will be lost to foreclosure.
Hi Kary,
Instead of “wrong” or “backwards” I prefer to think of it as looking at the DPL through a different lense.
We agree that the DPL could be re-written to clear up confusion in the language.
We disagree that the DPL is the SOLE cause or the primary or one of the leading causes of higher foreclosures in this state.
I interact with hundreds of agents each month. Right after June 12th….in July and August, there was mass fear surrounding these listings.
Today, (Nov 08) it is a completely different ballgame. Listing agents are taking these listings with far less fear of lawsuits, and homebuyers who fall in love with a home that happens to be a short sale are waiting it out.
I am contacted constantly…probably once a day now….by consumers who are looking to BUY short sales and pre-foreclosure properties.
I’m not saying it’s the sole cause. From the very first post responding to Dugald’s post I’ve questioned how much of the effect is due to distressed property. But it doesn’t really matter. Even 5 people state wide having been unnecessarily harmed by poorly thought through legislation is 5 people too many.
Also, that you are contacted by consumers really isn’t the point either. As I mentioned there are people that are ignorant, naive or risk adverse. When I talk to consumers, most of them haven’t even heard of the distressed property law, let alone understand how it works. Hopefully they obtain agents who are familiar with it and can protect them.
BTW, although the law is incredibly complex, the only thing buyers need to know is simple: Don’t close a sale within 20 days of a foreclosure–at least not without getting attorney advice first. For agents it’s much more complex.
Jillayne,
Regarding public comment: that one lone guy arrived to comment on the original legislation that had been proposed in January. The changed legislation had only been in place for a few hours prior to the public testimony on 2/29.
Check out http://www.tvw.org and enter 2791 into the search box to pull up the 2/29 testimony video.
To change the law so drastically (it went from 8 pages to 17 pages of law) only hours before the testimony means that there was no opportunity for detailed review or for people to travel to Olympia to make those comments to the committee. It was a slick shell game ploy.
…and I don’t know how may lawsuits have been filed. It’s the **fear of the lawsuit** that’s driving buyers away.
I want to make it clear: I’m FOR protecting the public against scam artists and those who would unjustly steal from those in distress. However, the law was badly written and all-encompassing and destroyed an avenue that those in distress had to solve their problems. You just can’t put a buyer and seller into a fiduciary relationship. It can’t work. period.
So buyers stopped talking to those in distress. …and so those in distress have fewer options in front of them to solve their problems. It’s not a good situation. For anyone.
In a Loan Modification thread here I mentioned a clock hour course taught by Dale Galvin. I attended that yesterday, and thought I would mention it in this thread, since it’s more relevant here. In addition to covering the DPL, the course also went into some detail of the foreclosure process in Washington. That could be useful information for many agents.
Dale Galvin is an attorney who does escrow work and trustee services (foreclosure). One of the services they offer as part of escrow is dealing with banks on short sales. They would also deal with deed of trust trustees in foreclosure situations. There are added fees for these services, but they are moderate (well under $1,000.00).
Mr. Galvin interprets the DPL a bit more conservatively than I do, and in some instances a bit more conservative than the NWMLS. I’m not sure that really matters much. I’ve come to the conclusion that agents should totally ignore the exceptions, and assume that any property can be a distressed property when it comes to what services they provide, and what claims they make. Thus, assume that vacant condo unit in a 100 unit building would be subject to the law, even though there are possibly two exceptions that would keep it out. The last thing an agent (and the broker) wants is to be litigating their way out of a DPL lawsuit.
Getting back to Mr. Galvin, I think attorney based escrows have a distinct advantage in two situations: (1) Short sales; and (2) Properties in foreclosure. Given the attorney exemption in the DPL, they can feel free to contact banks and deed of trust trustees without subjecting themselves to the risk of frivolous lawsuits. Not to mention, dealing with banks is hardly a pleasant activity–that someone will do that for a modest additional fee is actually a good thing! So such services make it possible (less risky) for agents to take distressed listings.
In addition, such services can also help a buyer’s agent. Within the last year or so, one of our team members had a client make an offer on a short sale property, where it was apparent from the listing that the agent didn’t know what they were doing. That became more apparent the further we went into the transaction, and it never closed (although part of that was related to the property). If you’re in that situation and the listing agent isn’t already using an attorney based escrow, you could simply specify one. Keep in mind though that the seller would still need to cooperate with the escrow in assembling the “short sale package” and that typically that requires the listing agent’s assistance.
Finally, I’ve purposefully said “attorney based escrow” several times, because I’m not certain that an ordinary escrow would have any real protection at all from the DPL, but clearly the attorney based escrow has an additional exemption because attorneys are specifically exempt. If anyone wants to correct me on the issue of escrow exemptions, that would be fine–I haven’t looked at that issue closely. Also, I’ve not personally used Mr. Galvin’s services, so I am not suggesting using his services over that of some other attorney who might provide similar services.
Hi Kary,
I read this long paragraph while sitting in the drive through at Starbucks this morning. Thanks for following up with this!
I can personally vouch for Dale Galvin having spent many, many hours with him. He is a former student of mine.
I highly recommend Dale and his team.
Someone here asked me a question privately, and I thought part of it needed to be made public.
The question was is the sale within 20 days of a foreclosure rule dependent on the property being occupied? The question was asked because I take the position that part of the distressed property applies to vacant property (which is contrary to the NWMLS position). Anyway, when asked I had to look up the answer because I wasn’t sure how my vacant property analysis fit in with the 20 day rule. Here’s what the 20 day rule (RCW 61.34.020(3)(a)(x) says:
“(ix) Purchase or obtain an option to purchase the distressed homeowner’s residence within twenty days of an advertised or docketed foreclosure sale; . . ..”
Note that the phrase used is “distressed homeowner’s residence.” This indicates two things. First, that it wouldn’t apply to vacant property, because it requires a residence. Second, that a “distressed homeowner” can be an owner of a vacant home (contrary to the NWMLS position). If the term “distressed homeowner” included only owner occupied homes then the statute quoted above wouldn’t need to say “distressed homeowner’s residence.” The word residence would be surplusage, which supports my interpretation (which BTW, is that vacant houses would be included if they were actually in foreclosure, as opposed to just being in danger of foreclosure).
Now, does that mean that if a house is vacant, that an agent shouldn’t include form 22 NFW? I’d say no, because the statute is not clear as to what point the property is occupied. What if the owner moved back in while the property was pending? If there was no 22 NFW, the buyer would probably be stuck.
Finally, I’ll again repeat my thought that agents should not rely on either the vacancy exception or the 1-4 unit building exception in determining how they act with respect to a piece of property. Assume that you’re working with a property that would be potentially covered and act accordingly. If you then get sued, you can still rely on the exception, but also rely on the fact that nothing you did would have put you under the act even if the property had been covered.
Anyway, the uncertainty here points out the need for every agent to be aware of the distressed property law, and if in doubt get their own legal advice (not rely on a blog piece) and also to act cautiously.
the reason many realtors and mortgage people have peoblem with these laws is because it limits the momement of their arms, you know, the directions they can manouver to get a client to do what they want them to do. I think this is a great law and the more the better. I am tired of seeing people who are not qualified in this industry Sh… on the rest of us by their
unprofessional conduct and their lack of knowledge of the field they are working in.
Sam, the reason real estate agents hate this law is it is poorly written.
Why are units in 4+ unit condos not covered? It’s because whoever wrote it didn’t know what they were doing.
Why are buyers at risk if their sale closes within 20 days, as opposed to making an offer to someone within 20 days? It’s because it’s poorly written.
That’s what I can think of in 10 seconds. There are other examples that would take me longer.
It was written with good intentions, but it had the opposite effect of what was intended. This law (not the portion proposed by our AG) caused hundreds of people to be foreclosed out of their homes.