Beware Legal Pitfalls With Foreclosures, Short Sales

September 26, 2011

Short sale and foreclosure transactions can be fraught with potential legal problems for real estate professionals. And as the number of these transactions continues to skyrocket, agents need to be careful, Stella Ling, managing senior counsel of the California Association of REALTORS®, told a crowd at CAR’s REALTOR® Expo last week. 

Short sales success rate is only about 50 percent, Ling said, so "the best thing to do is to prescreen the short-sale listings.” For example, she encouraged agents to look for home owners who have refinanced in the mid-2000s and to avoid listings where a second trustee lender can come back for a deficiency through a judicial foreclosure or might not agree to a short sale. Ling also recommends checking to see if the seller has considered a bankruptcy. 

Another danger she points to is “reverse staging.” With reverse staging, sellers trash the property in order to devalue the property. Ling says real estate professionals should ensure sellers don’t do any damage and if they suspect any, they should reconsider proceeding with the transaction. 

"If a seller does reverse staging, destroying their own home, what else are they going to do? What other misrepresentations are they going to make?" Ling told the crowd of real estate professionals. 

Ling also suggests when handling REO transactions that real estate professionals read the REO addendum carefully that lenders often add to the purchase contracts. Oftentimes, these addendums make buyers give up a lot of their rights, she notes. 

Source: “Avoiding the Legal Pitfalls of Distressed Real Estate,” Inman News (Sept. 23, 2011)

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