We had some really outstanding calls for our members with real estate attorney Austin Bosarge over this last month.  The first was a California-specific call to help our California members understand all of the laws and regulations that are in place there and how to stay compliant.  The second was a general call for all members to ask their general legal questions about short sales and other deals.  Austin was awesome and we had some great questions from our members.

For all members who weren’t able to get on the calls, they are posted on the archives page of www.Members.TheAgentMagnet.com

I just wanted to briefly run over some points from the calls that keep coming up.

Fraud is defined in law as any intentional misrepresentation of facts that might otherwise change the outcome of a transaction, sometimes called “material” facts.  This includes telling an out and out lie about some aspect of a deal, or simply failing to reveal some known item about a property or owner.

There is some level of disclosure needed at all levels in a transaction, but the exact information that needs to be revealed depends on the relationship of that individual or entity to you.  For example, a Seller’s Agent must reveal every offer made on the property to the Seller and they must make sure that the Seller has prepared and signed off on a disclosure form that covers all material concerns about the property that the Seller knows to the best of their ability.

That same Seller’s Agent does not have the obligation to reveal each and every offer to the Seller’s Lender, who may, in fact, be in legal opposition to the Seller.  In fact, an Agent who ends up working against the Seller’s interest by revealing too much information to a hostile Lender may be in jeopardy of their license for not keeping privileged information and not working in the best interests of the Seller, who is their client.

The disclosures that the Seller is obligated to reveal may be structural aspects of the home, such as whether and when a roof, heat and air conditioning systems and other major structural items and appliances were replaced, whether there are liens against the property, easements, whether there is termite, water damage or black mold, whether there has been an inspection for radon or carbon monoxide, and similar major concerns.  In some states the Seller must also reveal non-physical concerns that may reflect on whether the property is going to be wanted by a Buyer, including whether a violent crime was committed in the home and whether a major road widening is about to happen that will take part of the yard or sidewalk.

There are a number of other disclosures that the Short Sale Investor should make to the Seller in an “Affidavit of Understanding,” to accompany their contract, including that the Investor is not obligated to buy the property and that the sale is contingent on several things, including finding an end Buyer.  If you are using an option contract, it needs to have a specific ending date so as not to tie up the property indefinitely if the Investor is never able to find that end Buyer.  Courts have determined that Option Contracts without an end date are fraudulent.

In a Short Sale, the Buyer should declare to the Seller, the Lender and any Agent involved if they intend to resell to an end Buyer immediately.  While not revealing this type of information may not be considered fraud in some states, it can derail a closing unless the Lender, the Seller and the Seller’s Agent fully understand what is going on with title documents and is ok with back to back closings.

Many financial institutions consider using the proceeds from an A to B closing for the B to C transaction in a simultaneous closing to be evidence of fraud and will require “wet” funds unrelated to the first transaction in order to close the second portion of the deal.  These “wet” funds may be from the Investor’s own bank account, or from a private investor, and more and more frequently, these transactional (or very short term) funds are from a transactional Lender such as the funding we have available for our students at www.BobFundsDeals.com.

Finally, the transaction to the end Buyer must be “arms-length” from the original Seller.  It should not be a family member of the Short Sale Seller.  That Seller is also not to receive ANY funds from the transaction.  Since part of their mortgage is being forgiven in the Short Sale, the Seller is not allowed to benefit in any other respect from the transaction.

Don’t run the risk of a visit from the FBI looking for your records in a Short Sale deal.  Follow all disclosures required by both federal and state laws and you’ll be rewarded many times over with successful Short Sales and peace of mind.