June 3, 2008

SUBJECT: RISK MANAGEMENT ALERT To Share at This Week’s Office Meetings

THIS WARNING APPLIES TO ALL BROKERS AND LICENSEES, BOTH COMMERCIAL AND RESIDENTIAL, REGARDLESS OF WHETHER BROKER HAS A FINANCIAL INTEREST IN A TITLE COMPANY.

Effective June 12th, Washington Law provides new legal authority for state regulators to take enforcement action against real estate agents and brokers who receive or accept inducements from title insurance companies unless those inducements are authorized by state agency administrative rules. To date, state agency administrative rules have not been adopted and therefore, for the time being, the only safe practice is to decline receipt of any offer of anything of value from any title company, agent or employee.

The law was adopted in response to investigations that disclosed title insurance industry-wide violations of limits on paying inducements. The concept of this law is not new but under this new law, title insurance companies will be prosecuted for paying the inducements AND AGENTS AND BROKERS WILL BE PROSECUTED FOR RECEIVING THE INDUCEMENTS. While residential agents have always been prohibited from receiving anything of value from a title company under RESPA, a federal law, RESPA has not often applied in the context of a commercial transaction. This new state law draws no distinctions between commercial and residential practices and creates a RESPA-like prohibition against ANY agent or broker accepting ANYTHING of value from a title insurance company, agent or employee.

In addition, Brokers/Owners of real estate companies who also have a financial interest in a title company, will be prohibited from paying inducements to their own agents for the referral of business to broker’s title insurance company.

The Washington REALTORS® will be meeting with representatives of the Real Estate Program of the Department of licensing later this week to seek additional clarifications on how the new law will be implemented.

In the meantime, agents and brokers should be aware that “inducements ” to real estate agents from Brokers who have financial interests in a title company may include items such as:

Reducing and/or paying of Desk fees for referring/directing title insurance business
Reducing and/or paying of Advertising for referring/directing title insurance business
Reducing and/or paying for reimbursements or expenses for referring/directing title insurance business
Waiving, reducing and/or directing payment of any other expenses or reimbursement for referring /directing title insurance business
In addition ALL REAL ESTATE LICENSEES should be aware there are many ways they can be receivers of potential “Things of Value” from title companies. Receipt of any of these items is appropriate if agent pays value for the item but would possibly constitute a violation of the new law if agent receives the item, from a title insurance company or agent, without payment.

Shared advertisements in which agent does not pay a pro portional share of the costs based on the amount of ad space used
Payment, in whole or in part, for clock hours tuition or other related expenses
Title cancellation fees, owing from agent, that remain unpaid
Open house refreshments
Hand Outs that include anything other than the property’s last deed of record, last deed of Trust of record, a plat map and tax information. All other handouts must be purchased by agent.
Farming packages identifying names and addresses of multiple real property owners for use by an agent in soliciting business
Copies of CC&Rs
Comparable sales information
Entertainment
Gifts
Tickets to events or shows
Sponsorship of association, company or agent events
Any of the above that the title insurance company provided for a fee that has not been paid

At the height of the bubble run up in 2005, there were hundreds of people attending foreclosure auctions, encouraged to make their millions in real estate, usually after attending a get-rich-quick seminar.  As you read this blog post, the get-rich-quick hucksters are still luring in the same type of person who thinks there’s a magic diet pill that will help you lose those last ten pounds, and who thinks there’s still a way to make six figures with no experience, or in the case of this company, $2,000 per hour.

Readers on this blog and elsewhere have been highly critical of our state lawmakers for being reactionary and passing laws only after they would have done any good.  In this case, our legislature has tried to be pro-active and place boundaries around “distressed property transactions.”  Yes, the law as passed has some flaws.  Yes, there are parts that could be re-drafted for clarity.  However, we’re stuck with it until the next legislative session so we might as well learn how to live with it. 

This law should have come as no surprise to anyone in the industry.  Governor Gregoire’s task force recommended passage of this legislation and Attorney General Rob McKenna put “foreclosure rescue scam legislation” on his agenda for 2008.  But real estate agents were caught off guard. They’ve been swept into the definition of being a “distressed home consultant” by way of not being excluded. 

The highest risk transaction under the new law is when a homebuyer purchases a distressed home from a distressed homeowner and is allowing the homeowner to rent the home back, and is also offering to share any equity upon a future sale.  As of June 12, 2008, taking part in a distressed home transaction such as this will become enormously risky. I recommend that get-rich-quick investors “invest” several thousand dollars to have an attorney on retainer and available to you 24/7. Critics of the new law say that this means homeowners who might have otherwise been helped by the “rescue” crowd will now end up going into foreclosure.  Critics have miraculously turned themselves into victims and state that there are only a few bad apples, only a few scammers and the rest of them are above-board, honest and honorable yet this website devotes an entire section on exposing a long list of “possible” get rich scammers, also known as the site’s competitors.

If it is true that the foreclosure rescue angels have floated from the heavens down to the earth and now can be seen wandering the streets of Seattle wearing a baseball cap and a jean jacket with the slogan “I buy homes in foreclosure call me” on the back like the guy who was in front of me at the Sprint store this week, then Realtors should be pro-actively seeking out the Larry-the-Cable-Guy angel rescuers and bringing them together with homeowners in financial distress.  However, I believe the opposite to be true.

Instead, I believe most the rescue guys and gals never met a Realtor they liked nor do they have any intention of coming anywhere near a Realtor, (because they want to keep the commission for themselves, as part of their riches) are in it for the cash, couldn’t give a rip about the homeowner, and are taught how to embody the caring compassionate stance of someone who does care in order to use the homeowner’s trust against them to “get rich quick.”

I believe that this law, no matter how flawed, has more good consequences than bad. 

Real estate agents and Realtors are on the front lines when the homeowner comes out of denial and starts looking at their options. 

For those real estate agents and Realtors who say, “Well, this law is so confusing that I’m not going to work with any distressed homeowners.” First, that’s going to rule out a whole lot of your market area in the next several years and second, would you answer the question differently if you were the one who sold them the home?

It is possible that fear will drive Realtors to not take these listings, although I don’t think that will happen because there are still way too many hungry Realtors out there who will take a listing at the drop of a hat. If the law does scare Realtors away, this means we’ll see more foreclosures in Washington State. Get-rich-quick buyers can still buy the home at the trustee sale or directly from the lender after foreclosure; neither of these types of transactions is affected by the new law. 

I have heard people say “this law will be repealed the next legislative session.”  I’m not so sure about that, nor am I sure that Realtors will automatically be “exempt” from being a “distressed home consultant.”

It’s time we acknowledge that distressed home transactions are becoming more and more specialized.  The topic of foreclosure is not taught in real estate pre-licensing classes.  It’s time to admit that a real estate agent with ZERO training on foreclosures and short sales is doing a home seller a grave disservice by taking that listing.  More harm could be done in this instance than good, and it appears as though our legislature understands this.  Unfortunately, the get-rich-quick investors probably know more about foreclosure laws than your average real estate agent. Average real estate agents, you have some work to do.

Real estate agents ARE distressed home consultants when they take a home that’s in pre-foreclosure or a home that has short sale terms.  Exempting real estate agents from this law will not happen, nor should it.

Real estate agents should embrace this new law. Some might decide that distressed property is going to be their new market niche.  Commercial real estate, property management, multifamily homes, resort and vacation homes, all are specialty areas.  It’s time that the real estate industry creates a new specialty area for distressed property transactions.  Perhaps all “get rich quick” investors will be required, at the very least, to have a real estate license (or some other sort of professional license,) and all real estate licensees who want to become purchasers of distressed homes will now be taking part in a high risk transaction with elevated duties. There are other ways for real estate agents to buy homes for investment purpose. Maybe this option should only be for those with the capital to cushion the risk, the willingness and ability to consider the homeowner’s interests, and the education to feel secure in their actions.

Becoming a fiduciary of a distressed homeowner is not a human rights violation.