CSI Blogs about Insurance in Real Estate

Why “Outside of Escrow” Generally Means “Outside the Law”

admin — Wed, 02 Jun 2010 23:13:15 +0000

By Eric R. Ginder, Esq.

Short sales are a large part of the current market, and therefore a large part of most brokerages’ business. In last month’s article, attorney Michael Spilger addressed many of the challenges associated with the modern short sale. In this month’s article, I want to focus in on one of those challenges that nearly every broker, salesperson, seller or buyer in a short sale has faced: payments outside of escrow, and therefore off the HUD-1 statement.

Today’s lenders are seeking revenue from any and all sources. Senior lienholders are not eager to share the sale’s proceeds with the junior lienholders; the juniors are not eager to take what the senior offers them and release liability, especially for recourse loans.

The Sold-Out Junior

The junior lienholder’s reluctance to cooperate during a short sale often stems from the fact that many juniors hold “recourse” promissory notes, meaning that they can seek a deficiency judgment against the borrower/seller. Since their loans are secured by junior trust deeds recorded against real property, California law states that they must generally look first to the security (i.e., the real property) to satisfy the debt. This means that they must foreclose their lien against the property before they can seek the borrower’s unpledged assets to satisfy a deficiency. Foreclosing, however, means that the junior takes the property subject to the senior lien.

If the senior lienholder forecloses, the foreclosure sale generally “wipes out” the junior liens. Before you shed too many tears for junior, realize that this means the “sold-out junior” can now sue the seller/borrower for standard breach of contract and seek a judgment against the seller/borrower’s assets (e.g., personal property, wages, etc.). In a real estate market where 1) most properties are encumbered by at least two liens; 2) many of the liens secure recourse debt; and 3) most properties lack equity sufficient to satisfy even the first lien (i.e, are “upside-down”), being a sold-out junior has its advantages.

Thus, it comes as no surprise when a junior lienholder declines the few thousand dollars that most senior lienholders offer. Unfortunately, it is also no surprise when some juniors consent to the short sale only if the seller agrees to pay the junior an additional sum (or sign a new promissory note), outside of escrow and off the HUD-1 statement, so the senior doesn’t know about it. Sometimes the buyer is asked to make the payment. What the senior lienholder doesn’t know won’t hurt it, right? Wrong.

Remember, borrowers/sellers need the senior lienholders to consent to the short sale, and this consent must be obtained legally and with full disclosure. Sellers approach their senior lienholders with purchase offers in one hand and hardship letters in the other. When the senior lienholders make their decision and offer their terms, they do so with the understanding that the offer is the highest the buyer is willing to pay and that the seller is incapable of contributing anything else towards the outstanding loan balance; this understanding is based upon the representations that the borrower/seller makes to them.

If these representations are false, because the seller is capable of paying more money to the junior lienholder (or willing to sign a new promissory note with them), this fact must be disclosed to the senior lienholder in writing and the senior must consent to it, again in writing. Similarly, if the buyer is willing to pay more for the property, by paying an additional amount to the junior, this too should be disclosed to the senior lienholder, in writing, and their written consent to it must be obtained. Both facts may affect 1) the senior’s decision to consent to the short sale, and 2) the terms the senior is willing to offer the borrower/seller.

Failure to disclose to the senior means that the senior’s consent was not legally obtained; this could be construed as fraud against a federally insured lending institution. If you don’t believe me, read the California Department of Real Estate’s recent article wherein they described such payments as “a sure sign of fraud, “and “likely illegal.”[1]

Finally, if a senior lienholder agrees to a short sale, premised upon the junior lienholders receiving a certain amount and the transaction closes with the senior believing those terms were honored, there can be serious consequences when the senior finds out that money was paid to the junior outside of escrow. Some senior lienholders are reinstating their security interests and taking the position that any release of personal deficiency liability was invalidated because of the fraud.

A related twist on this issue are those that do add the payment to the HUD-1 form and then leave it up to the senior lienholder to discover the payment and object. This practice is really no better than what I have described above. In order to obtain meaningful legal consent, the senior lienholder must be made aware of the payment and must consent to it, in writing.

Closing a short sale isn’t worth losing your real estate license and certainly isn’t worth a criminal conviction. If the junior lienholders won’t play ball without undisclosed payments made to them without the senior’s knowledge and written consent, let the deal go; it wasn’t meant to happen.

Eric R. Ginder is an experienced civil litigator and transactional attorney with more than nine years of trial experience specializing in the area of real estate broker defense, construction defect and insurance coverage litigation. He sits on the San Diego Association of REALTORS^® Risk Management Committee as well the California Association of REALTORS^® Legal Affairs Forum.

[1] Short Sales — An Overview and Warning to Real Estate Licensees Re: Fraud, and Legal and Ethical Minefields by Wayne Bell and Mark Tutera

Earthquake Preparedness

admin — Mon, 05 Apr 2010 21:53:31 +0000

It seems of late that places all over the world are moving and shaking and yesterday’s 7.2 earthquake in Mexico was a little too close to our own backyards for comfort. Being in one of the most active areas of the country for earthquakes, we wanted to take a moment to address this important subject.

While homeowners insurers are required to offer earthquake insurance every couple years, commercial insurers have no such duty. Commercial earthquake insurance is costly in California and the Pacific Northwest and, for many of our clients, the deductible you would have on a policy would be as high if not higher than the value of your property.

While we are happy to provide quotes for earthquake insurance if you should wish to analyze the coverage in relation to the costs, you should look first and foremost toward risk mitigation to avoid the potential for serious losses following an earthquake.

There are companies in California that sell EQ safety products, such as fasteners for securing large pieces of furniture and equipment. One such company is Q-Safety products in Southern California. The vast array of products for office and home are intended to protect your property from damage, as well as your staff from injury due to falling objects .

We encourage all our clients and blog readers to embrace a pro-active, risk mitigation plan and do whatever is possible to prevent loss that at this point is not insured. For most companies, the costs involved to secure your property via products available are most certainly going to be less than purchasing an insurance policy.

The protection of your assets and safety of your employees is important to us. If you have any questions or wish to discuss earthquake disaster planning in greater detail, please contact us. We are here to serve you.

Blog and Social Media Best Practice Tips

admin — Wed, 17 Mar 2010 15:18:53 +0000

Realtors® – don’t forget to stop, pause and take a deep breath - before you publish your next “tweet”! As social media and blogging gains widespread popularity, it is easy to forget – once you publish on FaceBook, YouTube or Twitter, the information is out there for all of the world see. Click Here to get the full article “BEST PRACTICE TIPS” from Kathy Mehringher and Bill Jansen, before you hit the “send” button.

CSI January Retreat

admin — Tue, 02 Feb 2010 21:58:25 +0000

CSI just finished another successful January retreat last Friday. It was held at the Lodge at Tiburon in Marin County. Our fabulous team gathered for a day of programming that included presentations from different deparments in the company, coupled with discussions about The No Complaining Rule by Jon Gordon. Here are a few pictures from our day:

Q&A Regarding Handling Loan Modifications

admin — Tue, 02 Feb 2010 21:44:10 +0000

Question: I am a licensed real estate broker. Our clients have asked if I can assist them with regard to applying for a loan modification. Can I assist them? If so, how much assistance can I provide?

Answer: Yes, you may assist your clients in applying for a loan modification. You can assist them in assembling paperwork and preparing applications. You can also communicate with the bank on their behalf. However, it is recommended that a real estate agent refrain from reviewing and analyzing amended loan documents from the lender. These actions would constitute practicing law and can lead to liability. If a client believes that a loan is being modified and they are being given certain terms, if the documents do not reflect those terms, the client could assert a claim against the agent for mishandling of the loan modification. It is best to refer the amended loan documents to an attorney for review.

Question: Can I accept a retainer or prepayment for these services?
Answer: No. The Legislature recently passed Senate Bill 94 effective October 11, 2009, which prohibits real estate professionals, including real estate agents and attorneys, from accepting retainers to perform services relating to loan modifications. In addition, agents cannot accept money for services, which have not been rendered unless they have received pre-approval from the California Department of Real Estate and have a separate client trust account. If agents are inclined to accept retainers for work, they are strongly advised to review the DRE regulations as this is a highly regulated area.

Shannon B Jones, is a partner at Shannon B. Jones Law Group. The Law Group currently represents over 5,000 real estate agents in Northern California. Ms. Jones is a member of the California Association of REALTORS® Strategic Defense Panel and is endorsed by the California Association of REALTORS®. She also is the author of the best-selling real estate book, “A Real Estate Agent’s Practical Guide to Avoiding Litigation”.

The information herein is not intended to offer legal or financial advice. Please consult with author or another appropriate professional for specific and/or more information. The information below provides varying degrees of perspective and may vary with market conditions. While some are legal points, many of the guidelines are marketing or practical points.

Q&A Regarding Junior Leinholder’s Demand for Compensation

admin — Fri, 22 Jan 2010 23:05:58 +0000

Question: I am a listing agent on a short sale with two (2) loans secured against the property. The senior lender has issued an approval of the short sale and specified the amount the senior lienholder is requiring that it be paid. It has also specified the amount which may be paid to the junior lienholder. The junior lienholder is requiring additional amounts be paid to it without notice to the senior lienholder. Is this legal? Does it expose the seller or me to liability? How do I handle this situation? Can I force the junior lienholder to accept less money and close the transaction?

Answer: A short sale is a voluntary process on the part of the lenders to accept less money than the amounts of the loans. You cannot force any lender to accept a short sale. When a senior lienholder issues an offer to accept a short sale and specifies the terms, those terms must be complied with or there is a breach of contract. If payments are made to the junior lienholder without notice to the senior lienholder, the agents as well as the seller may be exposed to liability for defrauding the senior lienholder. In addition, the title company, to the extent the title company was aware of the payments, also may be held liable to the senior lienholder for not following proper escrow instructions. In order to facilitate a short sale without liability, the senior lender needs to be notified of the amounts paid to the junior and approve those amounts. In addition, all payments to all parties relating to a short sale must be disclosed on the HUD-1 approved by the lenders.

AUTHOR: Shannon B Jones, is a partner at Shannon B. Jones Law Group. The Law Group currently represents over 5,000 real estate agents in Northern California. Ms. Jones is a member of the California Association of REALTORS® Strategic Defense Panel and is endorsed by the California Association of REALTORS®. She also is the author of the best-selling real estate book, “A Real Estate Agent’s Practical Guide to Avoiding Litigation”.

Pros & Cons of a Seller Obtaining a Home Inspection Pre-Listing

admin — Wed, 20 Jan 2010 17:34:40 +0000

Purchasers of residential property routinely will obtain a third-party home inspection report. However, sellers and listing agents have called us asking about the usefulness of the seller obtaining such a report.

PROS of Obtaining an Inspection BEFORE the Seller Puts a Home on the Market

Gathering an inspection report before may avoid the situation of the seller having to negotiate repairs 30 days (or so) into the escrow; and therefore placing the seller in a weak negotiating position. This can be less of a problem with a market turnaround often giving rise to multiple offers.
Before accepting an offer, the seller is in a stronger negotiating position. Before a contract is entered into is the time for the seller to let the buyer know what the seller will fix and will not fix. Once the seller accepts an offer and is then subsequently presented with the buyer’s “wish list” of repairs or replacements, the seller is then in a weaker position to negotiate.
By having the inspection done up front, the number of surprises or latent problems are reduced, both to the buyer and the seller. Less surprises means less opportunity for disagreement and therefore less likelihood that the transaction will fall apart.

CONS of Obtaining an Inspection BEFORE the Seller Puts a Home on the Market

The listing agent could unwittingly open himself up to liability by interpreting the findings of the home inspection to his principal. Where the listing agent helps the seller “figure out” or interpret the inspection report (e.g., what is major vs. minor); the listing agent may have opened himself up to a potential breach of fiduciary duty claim by the seller.
If the seller obtains a pre-listing inspection, but decided to replace something in his home with less expensive materials or had a handyman do the work in a “temporary fix” manner, you may have a disgruntled buyer on your hands who, after closing, will pursue a claim against the seller, and/or both agents involved in the transaction.
The belief that by simply obtaining an inspection up front will somehow fulfill a seller’s duties to disclose could be a comfortable trap for the seller. It may falsely minimize or dilute his true legal disclosure requirements (i.e., the Transfer Disclosure Statement, matters of actual knowledge, etc.)

THIS IS A VERY ABRIDGED VERSION OF THE ARTICLE; TO READ THE COMPLETE ARTICLE, “PROS AND CONS OF A SELLER OBTAINING A HOME INSPECTION PRE-LISTING”, PLEASE CLICK HERE OR EMAIL MR. STAVROS DIRECTLY AT mds@mrsvlaw.com

Mark D. Stavros, Esq., a partner with Maxie Rheinheimer Stephens & Vreivh, LLP, is a member of the C.A.R. Strategic Defense Panel and represents real estate brokers/agents (residential and commercial) in trial, litigation, arbitration/mediation, DRE Accusations, and other matters affecting Realtors. Mark authors articles for various publications, provides seminars and acts as panel counsel and consultant to major carriers and other insurance intermediaries. Mr. Stavros is available at (619) 515-1155, or via e-mail at mds@mrsvlaw.com

New C.A.R. Risk Management Video

admin — Mon, 18 Jan 2010 22:42:40 +0000

Check out the video below from C.A.R. It features C.A.R. Strategic Defense Counsel, Nicole Briggs Esq. and C.A.R. Strategic Defense Panel Attorney, Steven D. Spile, Esq. of Spile, Siegal, Leff and Goor LLP. The discussion centers around legal disclosure tips for agents and brokers.

C.A.R. Risk Management Video

Real Estate Agents E&O 101

admin — Mon, 07 Dec 2009 20:36:39 +0000

There are a lot of misnomers out there about Real Estate E&O insurance. A lot of our blog entries will surround answering questions and providing information to help clarify E&O policy myths. Here are a couple of frequently asked questions……that may receive frequently incorrect answers:

Per transaction insurance. This does NOT exist. What does exist (with a few insurers) is a payment plan on a per transaction basis. Because the policy is a claims made policy, you must keep paying for the insurance for coverage to apply. In addition, with the companies that offer per transaction policies, you typically need to report and pay monthly. You forget for a month and bam, you’ve lost coverage for all past transactions.

What is a “claim”? When does it need to be reported? The definition of a claim is determined by the E&O policy. Some policies define a claim as a demand for money or services. Others constrain the definition to written demands. Like the claim definition, claim reporting is also defined by the policy. Some policies require the “immediate” reporting of a claim while others require the reporting “as soon as practicable”.

How do claims impact premiums in future years? Your claim history will follow you for a 5 year period. The E&O insurers require 5 years of loss history to provide pricing. How these claims will impact future pricing will depend on the frequency and severity of claims. The more frequent or severe, the more likely it will negatively impact future premiums. In today’s environment, insurers are trying to push up deductibles, so rather than see a significant premium increase, a broker might see a substantial increase in the deductible.

What are some of the key issues to understand before purchasing an E&O Policy?

What services are covered: residential, leasing, commercial, escrow, mortgage, property management, business opportunities, expert witness services, appraisal, etc.?
What types of claims are covered: discrimination, environmental, lockbox, etc.?
Is “agent owned property” covered and if so what are the requirements?
What is the deductible, and does the policy have a deductible reduction component such as use of a home warranty policy?
What is the “retroactive date” since any transactions before that date are not covered?
Do I get to choose my attorney; is the attorney I get qualified and on my side?
How strong is the insurer: financial strength, rating, California admitted, experience?
What services are offered through the policy such as risk management?
What risk management, file management and other tools can I use to reduce risk?

Claims-Made Policies vs. Occurrence Policies

admin — Thu, 19 Nov 2009 01:21:02 +0000

As we speak across California at various offices and local REALTOR® Associations, it has come to our attention that there is great confusion about differences between policies with an occurrence-based claim trigger and those with a claims-made claim trigger. Nearly all property, general liability, auto or workers’ compensation policies are written on an occurrence basis, while the vast majority of errors & omissions (E&O), directors & officers liability and employment practices liability policies are written on a claims-made coverage form.

With an occurrence policy, the policy in effect at the time of the accident or injury (or the occurrence), is the policy that will pay the claim.

Example: A REALTOR® purchases a workers’ compensation policy on May 1, 2008 (Policy A). One of the REALTOR’S® employees falls in the parking lot on the way home on Friday, April 30, 2009. The injured employee reports the injury to their broker on Monday, May 3, 2009. The workers’ compensation just happened to renew on May 1, 2009 (Policy B).

Question: Which policy will pay the claim? Answer: Policy A, the policy in effect when the injury occurred.

With a claims made policy, the policy in effect at the time of the claim is the policy that will pay the claim.

Example: A Broker purchases their first E&O policy on March 1, 2008 (Policy A). On November 20, 2008, one of the Broker’s agents sells a home. On March 1, 2009, the Broker renews their E&O policy (Policy B). On May 15, 2009, the Broker receives a lawsuit that alleges “failure to disclose” issues related to the home sold in November, 2008.

Question: Which policy will pay for the claim? Answer: Policy B, the policy in force when the claim was made.

Stay tuned……we’ll be providing more information about these differences in the future!