Fiduciary Relationship and the Short Sale

There’s the notice of default, the lender’s predefined criteria for short sale transactions, the junior liens and the rest of the red tape.  You’ve thought through all the issues and you are ready to negotiate the short sale on behalf of your client and the lender determines that it will not pay your commission.  You have prepared for this type of negotiation and so you are ready to artfully defend your commission and negotiate hard with the lender. 

You may have just bitten off more than you want to chew.

When you took on the responsibility of representing that seller who was in foreclosure you accepted and entered into a fiduciary relationship – one of placing the seller’s interests above your own.  The seller has made you privy to confidential financial facts that most likely under normal circumstances you wouldn’t have.  So what about your commission?

Are you guilty of breaching your fiduciary relationship if you negotiate with the bank over the amount of your commission?  There is a very solid legal position that says you are.  You are using that privileged information to enhance your position with the lender … putting your interests above those of your client.  Your fiduciary responsibility is just the opposite – you are required to protect the seller’s interests above your own.  Have you just stepped over the line?

I have seen a number of articles lately that discussing the potential liability for a real estate professional in these circumstances.  One summed it up this way: the bank won’t pay the commission, the agent goes back to the buyer and negotiates for a higher price, the buyer says no … the agent tells the seller that the buyer and the lender are unreasonable and you can’t get the deal done.  Fiduciary breach?

In one legal corner the opinion is that this is going to be the next wave of lawsuits against real estate agents.  And it would seem that there is a significant amount of potential evidence available to back up their case.  Ever call a lender’s mitigation department and hear the statement “this call is being recorded?”  Those recordings along with all of your notes and material can all be subpoenaed and all references to your commission along with them.

So – are you supposed to forgo your commission?   A strong position can be made that the answer is yes.  If the lender in a short sale transaction requires you to reduce your commission to zero in order to close the transaction and get the seller out of foreclosure, does your fiduciary relationship require that you agree?  It may mean that you have to go to court yourself to collect under your listing agreement after the fact.  In any event, it certainly indicates that you need some good legal advice before getting into the short sale arena as well as a sound understanding of the process before entering into that fiduciary relationship.

To learn more about the nuances of the short sale, consider taking the new online course - Certified Short-Sale Professional (CSP). To get a good understanding of negotiating and processing the Short Sale along with some solid tools and the skills necessary to be successful in this niche market visit www.cspdesignation.com to learn the details.

-Thomas M. Mitchell, Senior VP, Products & Services, RealtyU® Group, Inc.