Short Sale Legal Issues Affecting Real Estate Agents Part #3


Here is Drew Sygit’s Series Part 3 of Short Sale Legal Issues Affecting Real Estate Agents.


Via Drew Sygit (The Lending Edge) Real Estate Financing Expert (The Lending Edge):

Short Sale Legal Issues Affecting Real Estate Agents Part #3

The previous posts in this Short Sale Legal & Tax Issues series were on 04/23/10 & 04/28/10.

This series of posts is meant to assist real estate agents in recognizing:

  1. Legal & Tax Issues their clients are exposed to through a short sale.
  2. The legal liabilities agents may expose themselves to when representing short sale sellers.

Disclaimer:  This series is not intended to advocate the hiring of attorneys for short sales, but rather that agents should fully research and be aware of the potential legal liabilities. 


Lawsuits & Short Sales

Real estate agents create a potential future lawsuit for themselves, and their broker, on each and every short sale transaction where they directly communicate with a seller’s lender and/or give a seller advice on issues other than the sale of their property.

Now I know many agents are immediately going to disagree with that statement.  Before dismissing that statement entirely, I encourage them to patiently read on.

Here’s the crux of the matter – who will get sued if a seller receives a 1099-C or 1099-A at the end of the year or gets served with a deficiency judgment by their lender(s) at some point in the future?

How are the real estate agent and their broker going to avoid being named in such a lawsuit? 

Do you communicate with your short sale clients via email?  Do you give them advice or tell them what to do in these emails?  Have you ever considered how those emails could be used against you in a lawsuit?

I know an agent that told their short sale client that they didn’t have to worry about a deficiency judgment as the agent was able to get the lender to waive it.  I reviewed the letter from the lender the agent claimed waived any future deficiency claims.  I saw only vague language concerning the deficiency and immediately recommended the agent have an attorney review it.  The review attorney stated that the letter in no way waived any future deficiency claim.  Unfortunately for the agent, they had told their seller via email that they had gotten the lender to waive the deficiency! 

Nothing’s happened yet, but how is this agent going to fight a lawsuit from their client if & when the lender decides to “surprise” the client and pursue the deficiency?

Now many agents I’ve talked to about short sales, tell me they have a legal disclaimer they have sellers sign to protect themselves.  Sounds great until I ask them who wrote it – and they tell me they did. 

Even if you have a great Short Sale Legal & Tax Issues disclaimer written by an attorney and have your client sign it, you can invalidate it and expose yourself to liability if you somehow contradict it in an email.

The National Association of Realtor’s Position on Short Sales

NAR currently offers a Short Sale Certification for agents, but at the same time publishes articles in their official magazine, REALTORMag, that warn agents about the legal and tax issues of dealing with short sales.

NAR also addresses Short Sale Legal & Tax Issues by referring agents to two Articles of the Realtors’ Pledge of Performance & Service:

      Article 11         REALTORS® are knowledgeable and competent in the fields of practice in which they engage or they get assistance from a knowledgeable professional, or disclose any lack of expertise to their client.

      Article 13         REALTORS® do not engage in the unauthorized practice of law.

It appears NAR really doesn’t have a clear cut position on what their members should and shouldn’t do in short sale transactions.  How can they leave their members in such a murky position?

Insurance Coverage for Agents on Short Sales

Still not convinced real estate agents are not leaving themselves open to lawsuits and they’ve got nothing to fear? 

Consider this recent NAR statement about Errors & Omissions insurance right from their website:

There has been a significant decrease in the rate of E&O insurance provided by firms: Only 13% of all REALTORS® received it in 2008, down 10% from the prior year.

E&O coverage is more common in non-franchised subsidiaries: In 2008, 17% of REALTORS® in non-franchised subsidiaries of national or regional corporations received E&O insurance as a benefit, compared to 13% in franchised subsidiary companies.

There are also some questions as to if an E&O policy would even cover an agent charged with the unauthorized practice of law.


Stay tuned for the next post in this series on Tuesday, May 4th


NOTE: if you’re the impatient type and don’t want to wait to read the series as it’s published, I’ll send you the complete whitepaper for the series when you do ALL of the following: 

  1. Post a constructive comment on one of the posts in the series
  2. Reblog one of the posts in the series
  3. Make me an associate of yours on ActiveRain
  4. Join my Fanpage @ and send me a message there requesting the whitepaper with your email address. 

If you’re a Michigan agent, I’d also very much appreciate you joining a new AR group specifically for Michigan real estate professionals willing to share marketing and social media ideas with each other.


Thanks for reading and I hope you spread the word.


If you enjoyed my blog post,
I invite you to connect with me on the social networks below & subscribe to my blog! 

facebook   linkedin   twitter   rss

“Referrals are Sending Someone You Care about, to Someone You Trust!”
So, forward this blog post to someone that’ll appreciate it!


Drew Sygit: CMPS, CMC, CRMS, CMLO, CALO, MBA, NAMB/MAMP Instructor & Speaker
The most Certified Mortgage Expert in the Midwest

Contact him for The Lending Edge
P: 248-356-3739 • F: 866-215-3755 •

This entry was posted in Active Rain and tagged , , . Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *