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?

[Scott Hubbard]

Originally posted by Karen Sheets:

The owner doesn't have the right to let someone market their property on their behalf if they are taking a fee unless they are licensed. Don't you think that's a fine line given the investor takes a fee when they close...and sometimes upfront from the owner?

Karen: I do not think it is a fine line AT ALL! Legislators, attorneys, and brokers want you to believe there is a fine line because there knowledge and power are based in the fuzziness of the "gray area". There is right and wrong, black and white! Do not complicate this anyomore than it needs to be.

First, Investors do not charge a fee; professionals, licencees, servicers, charge fees. A fee, is defined in many ways depending on the context, but inherently the fee is predetermined (fixed) and based on costs and some measure for margin or profit. Our profit is determined by the market place. We absorb carying costs and assume risk when we close. We stand to lose a lot of money. Whereas a REALTOR and Broker simply markets a property and is paid if successful. There is no assumption of great risk since they never acquire the property to induce the sale. Commissions are purely fee based.

Secondly, our profit is NOT paid by the seller directly since they are underwater. The profit is paid by the lender which agrees, independently, with full disclosure, to assume those costs. On th HUD, there will be no mention of fees or commissions.

Thirdly, in my case, if current market conditions do not allow me to sell the option for a profit, or the lender does not agree to sell to the property to me at the purchase price, then I have the same listing agent keep marketing the property on behalf of the seller at the counter price the lender made plus commissions. I will then keep working the short sale when a new buyer makes an offer and do so without profit or compensation.

I know of no agent or broker who will step aside and continue to assist the seller without compensation.

Lastly, in my contracts, we put in a contingency whereby we (as buyers) agree to negotiate the loan balance to be considered zero and waive all rights to pursue the loss post-sale and to waive any rights to a deficiency jusdgment. If the we cannot obtain this in writing, the seller has the right to void the contract.

I am confident that there are very few REALTORS practicing this policy.

There is a principal in law called intent. If any investor were to be charged with practicing Real Estate without a license, there would be a burden for the plaintiffs to provide evidence that the defendant intended to circumvent the law and that act had some dire consequence to an individual or an entity.

I am confident in my business model because I simply get much better results then REALTORS do! Less 2 out of 7 short sales listed on the MLS are closing in our market. My success rate is much better and we are not profiting from every successful close.

Bottom line, you are bound by your DRE and your Broker's mandates. Most investors are independent and unlicensed thus are able to be more creative.

Instead of criticizing what we are doing and questioning it's legality, perhaps you should use your energies more wisely and find out which brokers and under which parameters you can help your clients. I have agents and brokers who are receiving business through my current model and are helping sellers and buyers to either sell their homes and stay out of foreclosure, or are helping buyer's get into a home under market value. In other words, they are good stewards of the their market by understanding where they can be creative yet maintain compliance .

Getting paid is nice, getting paid to do the right thing a AWESOME!