Watch for Legal Traps in Distressed Sales

Short sales and bank-owned properties represent one of the best opportunities to grow your business today. Yet they can expose you to serious legal liability if you’re not careful, legal experts said Wednesday at the 2009 REALTORS® Midyear Legislative Meetings in Washington, D.C.

Here are their tips for steering clear of trouble:

* Be wary of calling yourself an expert. Almost overnight, companies have sprung up offering you the chance to become “certified” as a specialist in short sales or REOs. Although some of the programs might provide good training, you can invite trouble if you go overboard and market yourself as an expert,” said Chuck Kasky, director of legal affairs for the Maryland Association of REALTORS®.

* Read the fine print. Some certification companies have an indemnification clause that puts legal costs on your shoulder if they’re included in any lawsuit against you. “Read their disclaimers,” Kasky said.

* Don't engage in unauthorized practice of law. Other increasingly common practices, such as broker price opinions, negotiations with lenders in short sales, and giving advice to homeowners about seeking a loan modification before they try a short sale, are all practices that might be challenged as either unauthorized practice of law or otherwise outside the scope of sales associates’ license. Even accepting a fee for broker price opinions—in states where they’re allowed—might raise trouble for sales associates who accept fees directly rather than through their broker, Kasky said.

* Check your E&O coverage. If you help home owners navigate a loan modification, be aware that your E&O policy might not cover your actions if you’re sued, said Michelle Lind, general counsel of the Arizona Association of REALTORS®. Providing such help is considered the business of housing counseling agencies, not brokerages, she said. Similarly, if you handle REOs for a lender, be sure your E&O policy covers property management activity, she said. Many of your tasks in selling REO properties are property management functions: getting utilities turned on, keeping the property secure if it’s vacant, even evicting people.

* Watch out for flippers. Be on the lookout for the growing practice of investors buying short sales and then flipping them, she said. Depending on how they’re structured, the transactions might raise legal issues, and sellers might look to you if they’re unhappy with what they got for their property.

—Robert Freedman, REALTOR® Magazine