Seattle Real Estate Blog by David Monroe

Is Your Real Estate Agent Breaking The Law?

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

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

If a real estate agent uses a third party company to negotiate a loan modification or short sale, and that company isn't properly licensed to negotiate on behalf of a borrower, they may be practicing law without a license according to Washington State law. The Washington State Supreme Court adopted General Rule (GR) 24 in 2001, defining the practice of law, which includes negotiation of legal rights or responsibilities on behalf of another entity or person(s). Anyone negotiating with the borrower’s lender on their behalf is negotiating the legal rights and responsibilities on the borrower’s original loan agreement with the bank, which would fall under the Supreme Court definition of the practice of law.

Some real estate agents use third-party short sale services to negotiate short sales on behalf of their clients. Under the same rules, the third-party short sale service would need to use negotiators with real estate licenses or who are appropriately licensed by the Washington Department of Financial Institutions.  Many don't.

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

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

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


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Authored by David Monroe, Realtor and Pre-Foreclosure and Short Sale Specialist.
Access Seattle area short sale help and foreclosure resources including selling in foreclosure, and 8 Ways to Avoid or Stop Foreclosure.

Copyright (c) 2009 by David Monroe (Home4Investment Team at Keller Williams Seattle Metro West).
Is Your Real Estate Agent Breaking The Law?

Comment balloon 0 commentsDavid Monroe • March 25 2009 06:23PM

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