Everyone familiar with real estate knows that a real estate transaction
in 2009 is very different from the typical real estate transaction just a few years back. REO sales and short sale transactions
dominate the market. Standardized purchase agreements are not used or recognized by the seller in the REO transaction.
Short sale approvals are not getting quicker and the lenders decisions continue to make little sense.
An unfortunate by-product to these non-traditional
transactions is that in an attempt to avoid problems or to simply get the transaction done, ethical and legal rules are being
routinely violated. The following are the top three violations that we see in todays market.
Oral
Agreements and/or Understandings Problem
Many deals today are complex and/or
involve non-standard purchase agreements. The temptation to make the complex deal sound simple for the seller and/or
buyer or to rely on written promises that don't appear in the purchase agreement or where the purchase agreement states the
opposite is strong. Buyers especially are facing many no n-traditional transactions that are totally foreign to them
with risks that they have not faced before. Making the complex sound simple in any cases is accomplished by skipping
over or down playing the risks. "Don't worry about that, it sounds worse than it is and everyone agrees to it."
An example of this type of situation comes up in an REO transaction. First, the
purchase agreement is totally one-sided in favor of the bank (the owner of the property). Second, the bank can get out
of the deal at any time for any reason. And, third, the purchase agreement requires the buyer to use a lender of the
sellers choice. In normal times, nobody would advice their clients to accept such a proposal. It puts the buyer
at total risk. The agreement is binding on them but not the seller. The agreement violates RESPA requires the
buyer to use the sellers' title company. Why do buyers accept such an agreement? Because they are told that the
seller will not change it, that the buyer is getting a great deal and it is signed all of the time with no problems. To
reassure the buyer about certain concerns the buyers' agent may talk to the REO agent to get reassurance that in spite of
what the purchase agreement says, that the buyer has no worries. An example of this is the requirement to use the title
company of the sellers choice. The buyer objects but the REO agent says, no problem even though the purchase agreement
states that the buyer does not get to chose their own title company (often in violation of RESPA), they won't object to the
buyer using a title company of their choice. Buyers concerns are now address, so the buyer sings the agreement. Of
course, down the road the buyer is informed the the Bank will not allow them to chose their own title company. The buyer
is upset and brings up the oral representation that the seller would let them pick their own title company. They are
then informed that everyone feels bad but the Bank will not budge and it is pointed out the the purchase agreement clearly
states that the buyer has to use the title company picked by the seller. The buyer is faced with going forward with
a deal that is not what they wanted or expected or the deal blowing up have time and money has been spent. Not only
is this not a way to build up a base of loyal clients but exposes the agents to an ethics complaint that they failed to put
all agrees in writing, a complaint to the Department of Commerce that they were part of a purchase agreement that violates
RESPA and a possible lawsuit if the buyer has suffered damages.
If The Client Says Jump,
I Ask How High Problem
Clients today are extremely demanding, many are under
tremendous stress and all are result oriented. Do they really care about rules, regulations and laws that make their
transaction more difficult? Sellers and buyers are result oriented and often do not care how something gets done as
long as it gets down. For the real estate professional, you have to know where to draw the line that you won't go over.
If what the seller or buyer wants requires fraud, misrepresentation, ethical violations or and other act that in the
short term looks good but in the long term puts you in jeopardy, you simply cannot go down that road, even if it costs you
a client. The natural urge is to "please the client" but if please the client puts you and0or the client you
are going down a dangerous pass. When you do ignore the rules, regulations and laws to please the client, will they
still be happy with you if it blows up in their face? Look at how many buyers got loans they couldn't afford, with artificially
inflated appraisals only to end up losing their homes because they had a loan they couldn't afford with an overvalued property?
What's worse is that their first reaction is "who is to blame for this disaster?" Not themselves, of
course, but they quickly point their finger at the real estate professionals that helped them get that home they wanted at
an inflated price with loans they couldn't afford. The real estate professionals defense is, "But that is what
they wanted and they said they would simply go to the many real estate professionals that would do the deal if they wouldn't."
In order not to lose the deal, the agent jumped because the client told them only to face the consequences once the
deal turned bad. How many buyers got "bad", lost their homes, destroyed their credit rating and now blame
the real estate professionals that help put them in that position.
Many agents have talked to me over
the last few years concerned that what their client wanted them to do was unethical or illegal. When I advise them of
the risk that they are taking by going forward, their first response is "But a lose my client." If the client
is an REO they risk doing it losing a number of listings. In this economy it is tough to lose one client much less a
number of clients but when the ethic complaint, Department of Commerce complaint or lawsuit is filed your clients will not
be standing behind you, will not share in your losses.
But Everyone Else Is Doing
It Problem
When I question ethics or legality of a certain practice, I
am quite often told,"But everyone else is doing the same thing." If we learned anything from the real estate
boom, just because everyone is doing something does not make it ethical or legal. Fraud was rampant, RESPA violations
were rampant yet everyone felt comfortable participating "because everyone is doing it." Some assumed that
since nobody was doing anything to stop the activity that it must be legal while others thought that since they were "active"
participants but simply went along with it that they were in no danger. Others went ahead because they were assured
by someone that it was legal and coupled with the fact so many people are doing it they felt comfortable proceeding.
Both assumptions were wrong and the "everyone else was doing it defense" just doesn't work
as a defense. The Department of Commerce, Attorney Generals Office and County Attorneys are still going after fraud
cases from the 2002 to 2007 era. After a decade in existence the Department f Commerce decided that the First American
title affiliates violated RESPA and went after not just First American but all of the real estate professionals who
participated. Many actions today, will not be challenged until years after the fact so you have to protect yourself
today from the possible consequences down the the road. Don't rely on the "everyone is doing it" argument
to determine that it is legal and be careful who you trust when you seek advice from others as to whether the action is legal.
A common scenario which fits into this trap is the short sale fraud that is rampant
in the market today. It is marketed as "win-win" for everyone. The buyer gets to buy the property
in a reasonable time frame, the Bank gets paid something, the agents get their commission and the investor makes a profit.
The only problem is that it is fraud and everyone who participates is will have this hanging over their head. Short
sale fraud has taken many forms but in the simplest terms, an investor submits a low ball offer or purchases a nominal interest
in the property and then tires to get the sellers lender/s to approve the low ball offer. If they accept it, the investor
turns around, markets the property and attempts to flip it. If a true buyer is found within 30 days there will be a
similtaneous closing of the first and second transaction. Of course, the sellers lender that approved the short sale
was not informed that the investor knew that the offer submitted was not fair market value and that they had no intention
in buying the property unless they could immediately flip it. Deceiving the lender to get approval is fraud. The
investor will say that the lender should protect itself and besides everyone is doing it and nobody is cracking down. Sounds
erially liek the mortgage fraud during the boom. The buyer was happy, the seller was happy, the agents got paid so what
was the problem? Oh yeah, the information submitted to the lender was not accurate and/or complete. And, even
though the lenders more-or-less winked and looked the other way and the government was ignorant of the problem or did not
have the political will to crack down, when the market began to crash, the lenders screamed and the government played catch-up.
Many real estate professionals are in jail, are being investigated to day and being sued today for transactions they
participated in back during the boom. Today we are all dealing with the consequences of that era of fraud - it certainly
contributed to the fall of the real estate market by artificially increasing the values and by putting buyers into risky mortgages
so they could purchase property they could not otherwise buy and it resulted in the lose of legitimate mortgage products that
were abused and used in ways not intended and finally in the conservative lending market that we are facing today because
of the real estate implosion.
I understand that it can be tough to understand or know
if some of these new transactions are legal or are creating risks for you or your clients. We don't have have any historical
precedent to look to. But we must learn from the real estate boom: don't participate in breaking rules, regulations
or laws simply because everyone else is doing it; don't fall for the argument that it must be okay because everyone else is
doing it, don't rely on the advise of people who are profiting from these transactions and don't do something that in your
gut you know is wrong just because everyone else is doing it. If you do participate in these transactions, don't be
surprised when you face a Commerce Department complaint, a call from the FBI, a investigation by the Attorney Generals Office
or the County Attorneys Office years after the fact.
