Eckley & Associates Video Article SHORT-SALE MALPRACTICE:

Real Estate and Construction Attorney
December 1, 2011

Current Circulation: 75,004 per Month


It’s no secret that the real estate climate from 2006 until today has no longer been “our father’s kind of real estate business.” In “Pop’s day” a “mod” was a home improvement project and a “short sale” was a “2-pairs-for-the-price-of-one” bargain on jockey shorts at Sears. Transforming from the traditional real estate licensee roles as salesperson and marketer to one as combined “family crisis manager, move out artist, bank hammer and public therapist” that the recent economy has recast for the licensee has been an Odyssey for those professionals in and of itself. And by no means a pleasant one. Sorting through the wreckage of the marketplace and giving half-futile triage to the financially injured and last rites to the economically dead amid the endless devastation has been spiritually draining and not particularly profitable, to say the least. But the travails get worse.


Everyone is about ready to get sued for it, too. Here’s the rub. As licensees stumbled through a real estate collapse unseen in history and tried to improvise solutions with no regulatory leadership and inadequate Bank and government so-called “recovery” programs, mistakes were inevitably made. One of the biggest boo-boos by far has been the NON-DISCLOSURE OF ADVERSE WORKOUT RAMIFICATIONS and that is presently poised to predicate a decade or more of malpractice lawsuits against them by past customers, clients and others.

In every state of the Union, the real estate licensee and other professionals owe a fiduciary duty to their clients to religiously look out for their interests, to keep them from harm and the duty to treat all principals—client or not--fairly and openly, which specifically includes detecting and disclosing “matters which may tend to affect the consideration to be paid or received by the parties or their decision to do the deal.” In all states of the Union, the real estate licensee must also maintain a level of “moral turpitude” by not engaging in any kind of conduct that would tend to violate the law or perpetrate economic or other harm to anyone, whether or not the other is a client, customer or even in a real estate deal. Licensee Non-Disclosures and Mis-Disclosures or just plain misinformation in the areas of modifications, short sales, deeds-in-lieu, foreclosures and the rest can do some real harm to people in all of these victim-categories and most of that harm is clearly actionable as a malpractice claim to the licensure authorities, in the courts, or both.

The Discovery and Disclosure shortfalls have gotten egregious and dangerous enough for licensees that the National Association of Realtors® (“NAR”) has run quite a series of articles warning of it and enumerating the greater mistakes. An NAR committee was even developed and it reported last year on it. Between that committee report and my experience in handling over 3700 of these over the last 5 years (and thousands more in my 33-year career as lawyer and recovering real estate licensee), these are the general failures that have been the most haunting and which have been producing the largest liability exposures.

In the remainder of this article, I am for the most part talking about the typical residential modifications, short sales and other workouts that have recently dominated the marketplace. The same admonitions can be discussed for business, commercial and investment property workouts, as well, but that is the subject for another article. I use an entirely separate disclosure and Advisory for those deals.


The “Big Ones” for consumer-owned residential properties are typically:

 Adverse Post-Work Out Continuing Loan or Collection Liabilities for the Borrower
 Adverse Post-Work Out Credit, Occupational and Other Ramifications for the Borrower
 Adverse Post-Work Out Tax Ramifications for the Borrower
 Adverse Post-Work Out Immigration/Naturalization Risks for the Borrower
 Judgment-Proof Status of Insolvent Seller to Meet Post-Sale Contract Obligations to Buyer
 Failure to Know or Raise Defenses Available to Seller for Adverse Lender Practices which Could Have a Bearing on Borrower’s Loan Liability
 Failure to Advise Borrower of Better Available Programs or Mis-Stating Programs
 Rendering Inaccurate/Incomplete/Unlicensed Accounting and Legal Advice - Failure to Send Parties to Attorneys and Accountants
 Agency Defects
 Direct or Indirect Licensee Interests and Profits
 Permitting or Advising Borrower to Sign Unlawful Documents, Pay Monies or to Use or Forfeit Protected Assets When Wrongfully Demanded by Banks
 Non-Advising or Misadvising Borrowers About Continuing HOA, Tax, Waste, and Other Post-Closing Debt Exposures
 Non-Advising or Misadvising Borrowers About Civil and Criminal Liability for Rent-Skimming
 Non-Advising or Misadvising Borrowers About Risks for Uninsured Losses on Non-Payment

Obviously, there are also the more pedestrian professional errors and omissions that can be committed and in the loan work-out, short-sale areas the three tiger traps that snap at the heels of licensees again and again are (1) exceeding licensure (real estate licensee engaging in work as a “negotiator, representative, moderator, or modification consultant” in a fashion that goes beyond real estate licensure and ventures into mortgage origination or brokerage or law practice without a license for that, (2) violations of relevant general short sale regulations and laws (such as bumping into MARS, MIR, DFA, Safe Act, RESPA, etc.) and, (3) due diligence failures (such as failing to realize the essential “as is” nature of most short-sale buys in which Sellers are typically not financially sound enough to back up a dime’s worth of any promises or non-disclosure liabilities for any lies or adverse conditions found after the sale, meaning the licensees become the “insurers of the deal” when they fail on both sides to accordingly make deeper and better pre-closing due diligence inquiries and disclosures). There is a host of additional places to plummet through the thin ice, but these have been the ones taking the largest professional dunkings. Seven of them have been identified by NAR and it's still counting. Some are even criminal. I think my office has seen all of them, included in the greater enumerations, above.


The solution to the above pratfalls is not to make them in the first place and that goes back to knowing what you are doing, what you are talking about, to conduct a far more thorough due diligence than what would normally be conducted for the reasons noted above, the generation of a full and complete WRITTEN DISCLOSURE and, for the love of Mike, to get the general marketing plan, the deal and the players to properly licensed people for tax, mortgage, accounting, inspection and legal questions and decisions…or at least get the advice of those professionals in front of them. Officially, it’s called “being a professional.” Unofficially, it’s being called “spreading the risk.”

As a friend of mine, the great agency expert and ABR co-founder Curtis Hall still says in his classes when he talks about the benefits of liberally referring the heavy-lifting out to others who are best equipped for it,“. . .be the source of the source, but never the source.” There is a huge liability difference in this distinction. So tell them in writing, tell them correctly and completely…and then send them off to the people with the right licenses—the “sources”--to do what else is needed to finish due diligence and to bless what you have said and done. Or something very much like this level of thoroughness, in effect.


This article does not pretend to enumerate all of the ruts in the professional loan work-out road and surely cannot even pretend to exhaust all of the evasive maneuvers. What it can do is give some practice and procedure ideas in the handling of them so that the general method and theme can be understood and then adapted by the readers to their own applications.

First, as noted, above, assure that your entire short sale program, from advertising to paperwork and process to practice, has been vetted by an experienced attorney. There are all kinds of regulatory and legal mistakes that could make you liable for a “technical violation” that has nothing to do with failures in talent or integrity, but still has you coughing up big dollars to compensate. Do not trust the “short sale designation” vendors and their forms packages to be entirely accurate on information, advice and disclosure of modification and short sale ramifications. One popular “designation vendor” still misquotes the mortgage and tax law in its “suggested client information package” and its package “client information form” is seen by some of the Regulators as more of an improper sales pitch to steer the short sale seller client away from a non-commissioned process (such as a more rehabilitative seller bankruptcy) to divert the client detrimentally towards a commissionedsolution (one actually more financially destructive to the short-seller who then has no place to live, tens of thousands of dollars of other debts still pending and cannot even qualify for a lease). Get your professional vehicle tuned up by the right legal mechanics before embarking on these dangerous self-serving sales trips.

Second, do far better and more extensive “physical” due diligence than what one might refer to as “traditional.” By “physical due diligence” I mean those real-world issues bearing on the asset, itself, such as issues of vicinity and condition. I distinguish that from “post-sale ramification due diligence” which is a disclosure of the negative effects of the hardship transaction on the seller, which is the far greater professional risk which I cover in the next paragraph, below. As stated above, the long and short of these deals are that they are not “happy ones” and they are definitely not “normal.” They represent the tragic collapse of real estate and the loss of trillions of dollars in community real estate value…and are utter disasters in the sellers’ lives. Consequently, in matters of physical due diligence, sellers have little if any skin the short-sale deal that donates such a wonderful deal to a buyer, pays the licensees a nice commission, but leaves the seller and family with little more than a bus ticket out of town after closing. The sellers are not going to be inclined to be as careful in seller “physical condition and past repair” disclosures and they and you both know they haven’t a three-pence to back up any contract warranties or promises they have made and so self-disclosures and promises from sellers are essentially worthless, anyway.

The buyer, on the other hand, is expecting a “smoking deal” from you as “short sale expert” and when he gets one where the only “smoke” about it is coming from the burnt out A/C compressor at the site or the billows that issue into the bedroom every night from the outside barbeque restaurant two blocks up-wind, his patience for your failure to catch that is likely to go up in the same smoke. Get deeply involved in ferreting out every potential issue yourself and through the best inspectors and in verifying all information with sources far more reliable than the seller’s mouth or pen.

Third and last, I cover the “post-sale ramification due diligence” issues—the disclosure ones having nothing to do with the actual physical condition of the property or vicinity and everything to do with that happens to the parties’ post-sale lives by reason of doing a short sale. These disclosure failures are where the big malpractice dollars are going to be paid and they are what NAR, a lot of Regulators and I have been warning about. These are those “usual suspects” in that ”lineup” I gave, above. Most can be solved by comprehensive and accurate written advice or disclosures. But because many of the topics are legal ones and could at least constitute the practice of law in the actual act of giving them, it is recommended that the written advice or disclosure or “Advisory” come from an attorney.

This professional duty to get the seller/borrower critical information (ranging from post-sale negative tax, credit, job, immigration risks to the likelihood of post-closing continuing short-fall collection attempts by the Bank) is not “discharged” as a licensee duty by simply suggesting that they “go to an attorney” when, in fact, you know they will not or you close the deal knowing that they did not go and did not in fact get this information. The information is far too critical to be “waived” by the seller and thus getting it cannot be “foregone” without assuming a fiduciary liability for any undisclosed damage it does to the seller.

There is a practical solution for the seller with big risks and no money to hire counsel to be nonetheless properly advised of them: Pay an attorney to generate an office Omnibus Supplemental Disclosure form for your modification, short-sale and work-out deals in which the attorney gives legal counsel about the risks and ramifications of such deals. One that accurately discloses all of the common “adverse material matters” and, since it was prepared by an attorney, meets at least a written “advice of an attorney” standard which is the “best runner up” to meeting with an attorney in person, a luxury which might be otherwise unaffordable and unlikely due to the constrained economics of the principal. The form should also cover uniform MARS (it will come back someday soon under DFA), MIR, DFA, RESPA, Safe Act issues by the information and disclosures set forth by those laws and standards. Use the form as part of every deal, with a copy to the file each time. In such a way, the client gets actual legal advice, gets it cheap or even free to him, the legal advice is given by a licensed attorney, it is documented, thorough and you are “the source of the source and not the source” of it. It’s win-win.


Let’s turn to some of those “usual suspect” items, above, and see how an attorney might cover them in that Omnibus Supplemental Disclosure form suggested, above.

How should the form look? Well, how about heading it something like this:










This Advisory is given to you because you are about to engage in a debt modification or workout or to engage in financing that uses debt instruments or assumes legal obligations which your real estate licensee wants to assure that you understand. The following Advisory was prepared by ________________________, attorneys, to advise you of the legal and other effects—some of which could be adverse to you—of what you are about to do . On the behalf of your real estate licensees, title and escrow services and ourselves, we sincerely hope this Advisory helps in a very difficult and sometimes confusing and even painful decision–making process. If you have any questions after reading this, call the above attorneys at _______________________.


A capable and aggressive attorney will be glad to generate this “Advisory” and let you circulate his or her name and phone number in this fashion. It’s great advertising for them. A great service and protection for you.

Taking another chronic hit-point from the malpractice “line up” list above, how does this Advisory form address “adverse post-work out continuing loan or collection liabilities for the Borrower(?)” Well, I suppose the first question is “what the heck does that mean?” It means “what happens to the seller on this debt AFTER this deal is closed?” Does he or she still get sued by the lender, pursued by creditor? That varies by state. In California and Arizona, for instance, where some loans have no deficiencies and some do, it is conditioned by loan type and use. But classifications and explanations of that risk and what to do about it to a borrower are clearly the practice of lawthe real estate licensee has a duty to see that the advice is obtained but is also barred from giving it himself or herself, even if he or she knows the answers, unless he or she is also a licensed attorney. HE OR SHE IS NOT BARRED, HOWEVER, FROM GIVING THAT INFORMATION AND ADVICE IN AN ADVISORY FORM WRITTEN BY AN ATTORNEY. Not a form out of a “designation vendor form book” with your name on it as the one giving the advice and not a “designation vendor’s” form that has no licensed attorney’s name on it, as this unlicensed, unaccredited information amounts to the same malpractice. Here in blue once again is a sample clause for the attorney Advisory one might want the client or customer or prospect to get for a property in Arizona:



If your debt is secured by commercial or business property, a tri-plex or greater, bare land or an asset other than land, it is one upon which Arizona law would normally allow a deficiency if it was forcibly collected by the Bank and the Bank recovered, after sale of the property, less than the amount of the loan, unless the loan itself contained a clause that stated that it was “without recourse.” Anti-deficiency laws limit this Bank right and can eliminate it entirely for a residential loan secured by real property that: (1) consists of 2 1/2 acres or less; (2) and is restricted to and utilized for a single-family or dual-family dwelling, and (3) the proceeds of the loan had to be used to pay all or part of the purchase price of the property (better that all of it was). These antideficiency laws may include any refinances of such a loan. WARNING: Your Bank may wrongfully try to assert otherwise and attempt, in closing, to collect additional money from you, demand that you sign a promissory note for the difference or other concessions, all of which are barred in Arizona by the Arizona Supreme Court case of Baker v. Gardner, 160 Ariz. 98, 770 P.2d 766 (1988). If this occurs, you should work through your broker to correct the Bank and if it refuses, you may contact this office at_____________________….


The above could be changed to fit the law for any state. A list of the debt laws for California, Arizona, Oregon, Hawaii, Nevada, New Mexico, Washington and Colorado that would fit the same point may be found at under “FAQs.”

Often, the borrower may not be in the property. He may be renting it out to another. In all states, it is against the law to be defaulting on the underlying loan against the property and at the same time still collect the rents. And unlawful for the licensee to be aiding or abetting it or allowing their client to violate the law. The client MUST be told this and given the legal advice pertaining to it, but the real estate licensee cannot give legal advice unless he or she is also a lawyer. Hence the Advisory can get the job done the right way, get the borrower heading down the right path and the licensee off the hook by saying:


The following rules apply to debts secured by all real properties:

     A. General Rule: If the property produces rents and a deposit and you as a landlord keep those without paying the mortgage on the property, you can be liable for that amount as "rent skimming," which can also be a crime. In addition, you could be liable to the tenant for multiple damages for taking their money and leaving them "high and dry" in a foreclosure. Recent state and Federal legislation requires landlords (and the creditor) to notify a tenant in writing of the pendency of a default or foreclosure in the underlying finance (the foreclosure notice is not itself the landlord’s notice. Real estate agents are required to give that notice to all affected parties under agency and disclosure rules and there is risk to managing the property and collecting rents when the property is in default.). Federal law requires the creditor to honor the term balance of an innocent tenant’s lease or grant tenant an additional 90 days’ occupancy after the foreclosure sale, whichever is longer. Lenders or buyers at foreclosure sales who are in violation can be claimed against for injunctive relief and damages. Landlord violations are treated as violations of the state residential Landlord-Tenant Act, exposing the landlord to damages claims

     B. The PTFA Rule: The Federal Protecting Tenants at Foreclosure Act of May 20, 2009 (“PTFA”) supersedes state landlord-tenant acts to the contrary (if the state law provides FEWER rights to tenants than the Act). It applies to residential tenants and provides that a tenant who, without any fault of his own suffered a foreclosure against his leasehold interest by reason of a landlord’s failure to pay superior secured indebtedness against the property, may remain in the property for not less than 90 days or for the length his remaining lease, whichever is longer. The lease must have been signed PRIOR to the filing of the foreclosure notice of sale. There is also a proviso: Some of the protective rule does not apply if the foreclosure purchaser intends to use the home as his personal residence. If the foreclosure purchaser does intend to use it as a residence, the tenant has only 90 days, regardless of lease term, if the lease term is longer. The tenant must still and in any event remit lease amounts due and otherwise perform and not permit or commit waste. These duties then shift as being due to the new owner, who then acts as landlord (and also has landlord duties). Where a written lease is present, the new owner may also have to perform as required in that lease, to which he is then considered a successor and he tenant must also perform as he has agreed in the same lease. If there is no written lease, normally the 90 day rule with apply, but there needs to be some evidence that the hold-over really is a tenant and not simply a squatter. Oral leases must pass the statute of frauds to be valid and the tenant must not be in breach of any agreement written or oral, or he may be removed by an FED action form the new owner. To qualify for PTFA protection, a lease must be “bona fide” meaning: (1) the tenant may not be the mortgagor, his child, spouse or parent (2) the lease must be a result of an arms-length transaction, and (3) the rental amount must not be substantially lower than the fair market rent. The PFTA was originally set to expire December 31, 2012; the Dodd-Frank Act extended it to December 31, 2014.


Easy and done—in writing—by an attorney! This should be in ever disclosure.

How about taxes, another one of the “status disclosure failures” noted by NAR? The real estate licensee has even less business talking about these than he or she does abut the law governing short-fall liability, above. But he or she has a duty to see that it is said. Remember, giving the client a form that gives advice as still AUTHORED OR SELECTED BY THE LICENSEE is still wrong, since it is then the licensee personally giving the advice, i.e. “being the source.” He or she should not be giving tax or accounting advice as a matter of liability and he or she cannot anyway by licensure law. In these areas requiring separate licenses, this is where all of the “certified designation” training programs and packets in short sales fail and actually generate traps for those using their materials. Their forms with legal and tax advice are designed to be provided by the real estate licensee as advice from the licensee, making it per se unlicensed advice (and this point does not even get to who takes the blame when it is also incorrect legal and tax advice, which a lot of it is). Here’s a sample clause in the Advisory for tax:


Your transaction may be one that provides “debt relief” in a fashion that could be taxable under the U.S. Internal Revenue Code section IRC 108. IRC 108 of the Code usually taxes debt that is forgiven such as by modification, short-sale, foreclosure, a deed-in-lieu or other write-down or write-off by the lender. There are some regular exceptions to that rule when no gains are deemed recognized to the taxpayer, such as if the taxpayer is insolvent or in bankruptcy at the time of the debt relief. Debt relief on a debt for which there is no personal liability is also excluded as taxable gain under IRS 108. An example of that would be debt relief from a short sale on a residential trust deed or mortgage in a state which prohibits deficiencies on those instruments and their underlying debt. Losses of some properties to debt by the taxpayer can also generate tax-recognized losses to the particular taxpayer, but in most cases that applies to debt accounted for as a business or investment. For those residential debt write-offs for which the taxpayer is personally liable on the debt, including HELOCs where the loan proceeds were not reinvested in the home, IRC 108 applies, but it has some temporary exceptions provided by Congress for the current crises. Congress has suspended IRC 108 applicability for discharged primary-home residential debt (and secured loans that were used to reinvest in the property) under $2 million from 2008 until the end of 2012. If any losses are going to be realized, they ought to be before that conclusion date. Note: You do not get the $2 million moratorium protection unless you file a special form claiming it with the returns for the year you realized the loss. See IRS Publications on the application of IRC 108 for details on that calculation. In addition, not every state or local revenue department follows the Federal Rule IRC 108 and the application of the rule will vary by the tax residency of the taxpayer, not necessarily where the property is located. Check with the Revenue Department for the state and, if applicable, city you file income taxes in. Section 108 "phantom income" will be reported to IRS and other revenue authorities by the lender through a 1099-A or 1099-C. However the creditor couches it in the 1099 can, if wrong, be contested on the debtor’s final returns as being ”mis-cast.” IRS Form 982 must be filed to claim any relief from phantom income for which the taxpayer might be eligible, in addition to other normal tax offsets where that relief is not available. These rules, form numbers and other applications are subject to change. In most commercial short sales, capital losses can also usually be taken by the borrower, though in most cases they will be long-term capital loss and without long term capital gain to net them they will be limited to $3,000 ordinary loss per year until recovered. SEE YOUR CPA or call the attorney who prepared this Advisory, above, before concluding any deal…


     Here’s something that is missed all of the time, needs to be said and you are liable if you do not, yet you, as real estate licensee, cannot say it. But, again, you CAN provide it in an attorney “Advisory”:



If you do not occupy the premises, rent it out or deed it back, this may void any casualty insurance you have on the property, since it may be a "homeowner's" type that requires continuous personal occupancy of the home. Insurance policies and supporting law provides that homeowner's insurance (personal occupancy) is void in most cases 30 days after the homeowners are continuously not in occupancy. No losses will be covered, even if you continue to pay the premiums. Another type of insurance policy is required and can be obtained, but is has to be applied for any paid for. This is important because of there was an uninsured loss before the lender took the property back (if it does) then the borrower could still be liable for "waste"—even when the loan itself has no deficiency. The loan agreement specifies that the borrower will "keep the property insured" and that selection lands on the back of the borrower in most cases since only he actually knows the status (occupied, a tenant, unoccupied) of the site--not the lender. A policy of separate insurance (and assure that it is correct type) can be independently purchased with almost any casualty insurer when the premiums for the existing (and perhaps wrong type) policy are prepaid as part of the mortgage payment which is currently not being made (risking policy cancellation). If insurance premiums are tied up in the mortgage payments and they are not being made, one must assure that the insurance policy has not lapsed as one works through a modification or a short sale. Again, without making the whole payment, the borrower can arrange a separate short-term coverage with almost any typical casualty insurer. You should contact your insurer at once to assure that there is coverage for the property in its current status and that it is in effect.


  Here is one missed by everyone:


Some borrowers may be in the US on a given immigration status or condition which could be adversely affected by an alleged failure to maintain “financial integrity” while in the U.S. In some cases, this review is prompted by you personal status, other personal data and whether you follow a legitimate, recognized government recovery program. If you are under INS jurisdiction, you need to contact your INS representative, directly, to amend any applications you may have submitted with information which has since changed due to credit issues and to determine how the financial status change is currently viewed for your particular INS file. Even current status may be difficult to rely on in a time such as the present when immigration rules appears to be in flux.

Imagine the size of the damages claim for the client who was not advised that the short sale wiped out his pending application to become a U.S. citizen and that he is now going to be deported.

Here’s another one no one has ever included is a disclosure or Advisory, but it is mandatory:


Effectively June, 2011, HUD has announced that it will defer home purchase mortgage payments on HUD-covered loans (FHA, etc.) for up to 12 months if the borrower is a recipient of unemployment compensation. This program does not forgive the debt, but defers it for consumers. Application must be made with the lender in advance of commencing loan changes, modifications, or short sales to see if the applicant is qualified and gain the deferral. If you receive unemployment compensation, wish a deferral, but are not sure you are covered, contact your lender or UC Worker and inquire.

How happy is your client going to be when he or she finds out they could have stayed in the home for another YEAR without a dime’s more payment—and you counseled them to “hit the road and live in the park” now?

Here is yet another “legal disclosure” found in no documents I have seen out there and it is now MANDATORY to comply with MIR:


The Broker may, as a courtesy to you, pass on to you new mortgage or rate information which has been given to the Broker. The Broker has made no study of the accuracy of that mortgage information and cannot guarantee its accuracy. The mortgage data is informational, only, and no recommendations are being made to you as to which mortgage outlet to do business with, as to the availability of credit to you or the accuracy of the stated rates and terms and no guarantees are made that you would qualify for the loans contained. All such information and qualification must come strictly form the lender or their authorized representatives by going through the application process with them. Your broker is not a representative of those mortgage firms and can make no legal commitments for them. You are advised to check on those rates and terms and qualifications directly with the mortgage vendor and to shop between vendors for the rates and terms best for you.

And another:



Some employers and employment have rigorous expectations or credit rating maintenance. Bad credit can affect the debtor in those places. For instance, if the debtor is a peace officer, military officer, security officer or clergy good credit maintenance is considered part of his or her duties and a “waiver” can only be obtained by advance application with a superior, if one is granted at all. Some employers conduct routine proprietary and U.S. Homeland Security clearance screenings for employees such as in the high tech, computer and aviation industries, who consider credit rating a mark of risk level for industrial or national espionage and a bad credit rating could affect that. Credit card vendors are starting to “freelance scan” credit scores to sell “financial integrity warnings” to employers and credit vendors and this may affect employments, raise credit rates, close cards or curtain limits duties to adverse credit marks, even if you have been a good employee and paid credit cards on time. Insurance companies rate your insurance risks based upon your credit reports. Persons with certain licenses such as real estate, securities, insurance, law or medicine might have employment or licensure adversely affected by a checkered credit sore. Some religious groups consider it reprehensible not to pay debts or to incur more debt than one can pay and can sanction those who do so. A checkered financial past can disqualify a debtor from some public posts and it is always a matter for alleged disrepute. Commercial websites are now available for users to “profile” others for a small fee and unpaid debts are usually matters of record that get into these archives. These are all some “hidden” effects of failing to keep loans current or taking “hardship” workouts on them.

The client often thinks that once he or she is done with the Bank, the whole mess is over. And they might insist you told them that when, if anything, you probably did not say anything at all. Either case—mis-speaking or silence--generates liability, so it is best to address the common misnomers in the Advisory. Something like correcting this common misconception—debts which still linger--should also be in there:


A modification, short sale, foreclosure or deed-back does not usually relieve a borrower from accrued Homeowner Association liabilities and other fees and dues associated with the property such as utilities and fines unless they are paid as part of the workout. In most cases, until the title actually passes to the creditor in a deed back or a foreclosure or to a buyer in a short sale, the HOA liability continues in the name of the original borrower, indefinitely. This is true even if the home is vacant. Until another party enters title, the HOA dues accrue against the one in title; even a discharge of prior dues in a bankruptcy may not absolve the debtor from dues accumulated after the discharge and the bankruptcy does not remove the lien of those unpaid up to the bankruptcy. The debtor who has not declared bankruptcy also remains liable for accumulating utilities and fines related to the property. These dues, fees, fines and assessments can often be pursued by most HOAs and creditors as a separate debt not just against the property but personally against the borrower. The creditors may typically assign these debts to an attorney or agency for collection, sometimes long after the deed-back, modification or short sale and the collection organizations can use national “skip-tracing” archives to find the debtor and prosecute them even well after the debtor has left the property. These fees and costs can grow with late charges and collection attorney’s fees. The borrower is best advised to get these cleared up and paid as part of the current work-out.

And here is a last piece of such an Advisory coming form a lawyer that should warm the heart of every real estate licensee as it shows some rare hubris from a lawyer….but coming from the lawyer and explaining the tough odds you are up against to serve the client can go a long way to help with your client relations:


Despite what you may have heard about workout programs, they are not fast, sure, nor easy. As you may have seen in the press recently, for the most part they have been failures for many applicants (possibly because they did not know the information contained in this advisory) and now the federal government and many states’ Attorneys Generals are suing the lending industry for the excesses noted above and for many more. This point is noted because you need to know that your real estate licensee can work very hard and competently to get your workout program in front of a lender and still through no fault of his own or your fault have a tough time getting it through or the attempt may fail, entirely. Not because the licensee is not skilled enough, but because the lenders are still very, very resistant to these workout programs and in many instances have actually and intentionally become obstacles to them. Your licensee has to work extremely hard to position your workout proposal and many times, despite all competent attempts and a lot of work, the lender will not accept the plan, offers an onerous and unacceptable counter-plan or simply ignores the application altogether. This is rarely the failure of the licensee. It is the failure of the flawed and uncooperative banking and resolution system. Have patience, but also have no false hopes. Whether a “workable” deal comes about despite the highest and best effort is often a “crap-shoot.”


Of course, there is more that needs to be disclosed to address each of the common loan work-out liability claims noted above and the Omnibus Supplemental Disclosure paragraphs above are just examples of how each on that list might be covered. The Omnibus Supplemental Disclosure form I have drafted for myself and others contains all of the above and more for the various jurisdictions I work in. A free sample of one I use can be obtained by e-mailing me and asking for it at


if you can carry any points away from this article it should be these three:

 NAR is calling this era—when real estate licensees are suddenly expected to become broker, lawyer, debt counselor and CPA all rolled into one as part of their service—the most dangerous in recent malpractice history. More to the point: NAR is warning the licensee to “stay well within the bounds and limits of real estate licensure” and that translates as don’t assume all of those other roles and surely don’t even pretend or appear to be!”

 Recent malpractice cases coming to my offices for defense are pointing to the truth of NAR’s concerns and admonitions. It usually takes about 3-5 years between the malpractice and the claims to show up and these have been dead on with that clock. The claimant alleges that several years back the licensee handled his short-sale and today he discovered that he cannot get some fidelity insurance required by a new employer and so he won’t get a great job. The claimant insists that during the listing the licensee said that he “did not need a lawyer” and after his sale and move-out that, “he was clean to start over.” It’s typically something on that “usual suspects” list, above. And it usually waits a bit to come in, so don’t think that those several hundred deals you did over the last 3 years are actually “behind you.” Today’s mail may change that assessment in a heartbeat.

 This risk can be significantly nipped in the bud by getting the client to an attorney at front of it or at least assuring that the client gets a good Omnibus Supplemental Disclosure written by an attorney as a routine transactional step provided right along with all of the other required up-front disclosures. Don’t blindly use the forms handed out by the “distress property designation” cadres out there as many are incomplete, inapplicable or are just dead wrong--unless every one of them are first vetted and passed by a good attorney deeply familiar with this area of practice and is accordingly signed by him or her as his or her professional opinion or advisory. The best bet is to have one custom-drafted by a qualified attorney to fit your practice!

Remember that “full disclosure” in the 2000s has now been expanded from the traditional disclosures about the physical aspects of the property or property vicinity. It is now includes the disclosure of “transactional ramifications” or status changes for the parties AFTER the closing. At least as to the seller, that deal is going to haunt his or her life for a long, long time afterwards. He or she needs to KNOW that up front and have it told in WRITING….and by the RIGHT PROFESSIONAL, which is in most cases NOT you, though it is YOUR responsibility to see that the advice gets to him or her. You can meet that standard by assembling a multi-licensed professional committee for the customer or client to go see—for huge and probably unaffordable professional fees--or at the very least after advising him or her that he needs to see those professionals and knowing he may not for obvious reason (he has no money to pay those fees) you can give him or her a free comprehensive Omnibus Supplemental Disclosure advisory form drafted by a competent attorney which covers the above “hot potato” areas, even when he otherwise is unable or refuses to go to one. Your client or customer then knows what he is doing and more accurately how what he is she is doing can play out for him or her in the future. Your duties are met and your conscience is then clear. No “future surprises” in the mail for him. And, importantly . . . for you!

‘Nuff said!