BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
LOANING MONEY TO YOUR SELLERS
Q: I am a listing agent on a property that has been on the market at $1,250,000 for nine months without an offer. My sellers are almost out of cash. Several months ago they got a letter from their lender that they were behind in their payments and foreclosure was looming. The house needed staging to look good, so I solicited a bid from a stager for $2,000. Sellers asked me for a loan of $4,000 to make a monthly payment, and to front the staging costs. I agreed, provided they give me an extension of 4 months on the listing. Now, that extension is about to expire, sellers are even more broke and, get this, want another loan. I have a lot of marketing expenses and time in this home, in addition to my $6,000 loan to sellers. I didn’t ask for a promissory note because I didn’t want to offend them by making them feel that I didn’t trust them. The home is listed below market and, if we reduce the price any further, the sellers will be short of cash to close. Should I make this new loan?
A: Reality check: If the home were listed “below market”, you would have sold it already. The “market” price is what a willing buyer will pay for the home TODAY. You need to re-calibrate your sense of the market based on today’s realities – not what it was worth months ago.
Your plight exemplifies the perils of becoming financially entwined with your client. Now, you are faced with either giving the sellers more money (basically good money after bad), or walking away from this listing and trying to recover your loans from people who appear to be broke. Neither choice is appealing. But, making a further loan at this point makes no sense.
PRACTICE TIPS:
1. Remember, THEY are the sellers, not you. THEY need to solve THEIR problems. You are their counselor, facilitator and negotiator. You are not their savior.
2. If you are tempted to loan a seller money, discuss it with your manager first. Get the opinion of a disinterested party.
3. If you choose to loan sellers money, get a promissory note from them. Escrow companies may have a promissory note form. But, ask yourself: if sellers don’t pay the note when due, are you (personally, not the broker) willing to hire an attorney to sue sellers to collect? Most agents can’t answer “Yes” to that question. If you can’t answer “Yes”, then you are not making a loan – you are making a gift to the sellers.
4. Be aware that if you were to take a note secured by a deed of trust on the property (so that you have some assurance of being paid at close of escrow):
A. You now have a “financial interest” in the property which must be disclosed to the buyer in the contract.
B. You must check your E & O policy. Many E & O policies limit coverage on “Agent-Owned” properties; and define “Agent Owned” as any ownership or financial interest. If that is the case, make sure you follow company policy, and E & O insurance policy requirements, in the handling of this listing.
C. Some E & O policies deny coverage unless you (with a financial interest in the property) are not the listing agent. So, if you cannot continue to list the property, then what was the point of making the loan? Maybe you just like being a lender?
D. If the property is a 1-4 residence which is the owner’s principal residence and there is a Notice of Default against the property, then loans can only be made if:
1. The loan is of the real estate broker’s own funds;
2. The loan is secured by a deed of trust on the property in foreclosure;
3. The real estate broker makes a good faith attempt to assign the note and deed of trust to a lender for an amount at least sufficient to cure the default to cure the default on a recorded Notice of Default.
For more information, see CAR Legal Guide to Foreclosure Related Transactions at:
http://www.car.org/library/media/papers/pdf/CARLegalReport2_final.pdf
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