Ohio Division of Real Estate's take on option contracts

[Karen Sheets]

Hello everyone, this is my first post. Glad to be here. As an agent, I've handled several short sale closings. After several painful deals, I came across a local investor who wanted to partner up. Her expertise was also in short sales and she used the option contract to double close. The lure of sharing leads, having an offer up front, and farming out the negotiations was VERY tempting.

However, after running the option contract and notice of option by the chief legal counsel and chief investigator at The Ohio Division of Real Estate & Professional Licensing (they go after both licensed and unlicensed people in the state), I was told the following:

Yes, double closings are legal so long as they are separately funded.

No, option contracts are not considered equitable title for the investor to act as the seller on an end transaction until the option is exercised (ie. property is purchased or buyer goes into purchase contract). Purchase contracts, however, ARE considered equitable title.

No, I am not doing my fiduciary duty to represent the seller if the bank will go after them for a deficiency as so often happens on junior liens. Another pitfall regarding fiduciary duty is if the investor rejects an offer because it doesn't give enough of a spread and the home ends up foreclosing.

No, it is not legal for an unlicensed person to take a fee for negotiating on the HUD. (The logic is that taking a fee for an activity that only gets paid out when real estate sells is illegal unless you're the seller or a licensee. To me this makes little sense as that is how a title person or mortgage lender gets paid and they are not licensees, either.)

Long story short they advised me to stay away unless this investor was willing to use a purchase contract and ultimately buy the property whether there's an end buyer or not. I asked this investor her thoughts and she decided to continue using her option contracts and find an agent more comfortable with these transactions.

Even though everyone seems to have an opinion on the legality and validity of these transactions, there's no case law to define the line.

They advised me the major problem was unlicensed activity. They said the fee for violation was $1000/day/transaction. Activities requiring equitable title or a real estate license include marketing, signing as the seller, and/or getting paid for negotiating on the HUD.

It's too bad there doesn't seem to be a clean way to do short sales. The problem I run into working these deals without an investor's backing is either 1) an offer doesn't come in time to postpone the foreclosure or 2) the ready, willing, and able buyer walked while waiting. The beauty of the investor was having the offer up front to get the ball rolling and even stall the foreclosure.

So that's my sad, sad story. Now I'm hoping to find an investor who will make a low ball offer on all my short sales so I can get the paperwork started before listing the properties for sale. I would still like to hire out the negotiations if possible but it sounds like I have to pay a set fee whether it closes or not. Any thoughts on my long rant?