3 Ways to Avoid Legal Trouble With REOs
January 7, 2011
REO and short-sale transactions are expected to continue to make up a big part of the real estate landscape in 2011. Real estate coach and trainer Bernice Ross offers some of the following tips to avoiding common pitfalls when working with distressed properties.
1. Make sure you have the training. If you lack the experience in handling REOs, short sales, or foreclosures, you need to disclose that fact to your clients. You’re better off not taking on a transaction if you lack the proper training in navigating these complex deals. Instead, a smarter and safer business approach: Refer the business to another agent and take a referral fee, Ross says.
2. Determine if it’s a recourse or nonrecourse loan. You need to determine how many loans the owner of a distressed property has on the property and whether those loans are “recourse” or “nonrecourse” loans, Ross says. With a recourse loan, if a lender forecloses or grants a short sale, the lender can still seize other assets belonging to the defaulting home owner to cover the lender’s loss. With a nonrecourse loan, the lender's only option is to foreclose on the property and they will not be able to seek such a deficiency judgment. It’s possible for an owner to have both recourse and nonrecourse loans on the same property.
Also, make sure your clients are fully informed about any tax ramifications prior to committing to any type of transaction, Ross notes, suggesting you have clients consult a tax professional before making any final decisions.
3. Have an attorney on call. Many lenders use language in their listings and sales contracts that note a “blanket indemnification of the lender." That means if there’s a lawsuit you’ll have to defend yourself and the lender. Have an attorney review all lender listing agreements so that you can remove any blanket indemnification language, Ross says.
Source: “5 Pitfalls of Distress Real Estate Listings,” Inman News (Jan. 6, 2011)
Updated: January 24, 2022