Legal Question in Real Estate Law in California

I love how you posted earlier, and now have changed some of your story. Let me get even harsher with you, and break it down into legal terms.

THERE IS ABSOLUTELY NO REASON TO SHORT SALE PROPERTY ENCUMBERED BY DEEDS OF TRUST IF THE LENDER IS NOT GOING TO WAIVE A DEFICIENCY!!!! I'm sure you told him some BS that he was going to ruin his credit if he allowed the lender to foreclose, and that a short sale would protect his credit. But allowing a lender to take the property, and get a deficiency judgment against him is not going to help his credit either. All you cared about, and seem to still care about in this transaction is getting a commission, without realizing that you owe a fiduciary duty to this borrower. You have walked him into an illusory procedure that he doesn't agree with, because he is not protected.

You cannot practice law simply because you have a real estate broker's license. The determination of whether something is a purchase money mortgage is best left to a competent attorney. Even assuming for the sake of argument that none of the loans securing the property are purchase money mortgages, he has other protections. If the senior forecloses, Code of Civil Procedure section 580d prevents the senior from suing for a deficiency. Although the junior trust deed holder may then claim he is a sold out junior lienholder, and can sue directly on the note, this will not aid him if the junior and senior liens are held by the same lender.

The fact that a deed of trust is junior to another deed of trust, does not mean it is not a purchase money mortgage within the meaning of Code of Civil Procedure section 580b. The entire transaction must be analyzed, by a competent attorney familiar with secured land transactions in California.

Additionally, you shouldn't assume that a lender would only waive the deficiency in a purchase money mortgage situation. The lender may have other reasons, especially if they are getting some cash from the transaction, for waiving a future deficiency.

If he is upside down, he needs to consult with an attorney, and consider bankruptcy protection.

If you work for a large, national real estate company, you should be running this question through your corporate counsel. If you do not have access, I can tell you that I counsel clients all day long not to accept a short-sale unless they, 1) can obtain a waiver from both lenders, or 2) are better-off financial (in terms of what they will owe after the short-sale) than they would in a foreclosure. If, however, as is the case for many Sellers these day, they will owe more by closing a short-sale without a waiver than they would just walking away and letting it foreclose, why would they go through with the short-sale?

You need to review the listing agreement - does it contain a provision which indicates that they will not accept a short-sale offer UNLESS they receive a full waiver from the lenders? Probably not. As such, the seller may owe you a commission even though he chose to cancel the sale. Also read carefully the CAR short-sale addendum. You may be surprised to find that in some versions, the default language is that the offer is actually contingent upon receipt of the waiver of future liability on both loans. If that provision is in the addendum, your ship may be sunk. The Seller, in that case, may have the absolute right to cancel this deal.

Finally, in terms of trying to talk your Seller down, analyze the situation for them. If the home goes to foreclosure, the Seller will be liable for the full amount owed on the second mortgage, as you indicate it is not purchase money. Alternatively, if the Seller accepts the short sale, how much are they short of the balances on the two loans? What will their potential exposure be on the two loans after close of escrow, assuming that both lenders will come after him for the "short." Ignore the "purchase money/non-purchase" money distinction - that has only to do with foreclosures, and is not applicable in short-sales. In a short-sale, few lenders are giving full waivers of liability these days - most reserve the right to pursue the borrower post close of escrow.

Do not tell your client that there is any chance that the lender will not come after him for the "short" without a full waiver - they do it all day long! Figure out if the short-sale is economically better for him. Short-sales are also (as I have been told by many loan brokers) much better for your credit than a foreclosure. There is little chance that he can re-list the home, get an offer, and get an approval with a waiver before October 28, 2010, so his options realistically now are accept the deal in front of him, or let it go to foreclosure. If he's better off with a short-sale, perhaps you can salvage the sale. If not, read your contracts to see if he has the right to cancel, or if he is in breach of the agreement by cancelling. In the later case, he may also get sued by the Buyer for pulling out so late. I would not in any way agree to cancel your listing agreement, only cancel the escrow if he has the right to under the contract.

Please understand - this is not a formal, legal opinion as I have not reviewed any documents related to this transaction. I am only telling you where to look for some possible answers. Also understand that this is not, in any way intended to be a legal opinion for your client. You need your own independent legal counsel at this point, as does your client.

I would strongly suggest you review this with an attorney - the CAR forms have been revised so many times in the last couple of years because of the short-sale/foreclosure mess, you really need to know absolutely for sure if he has the right to cancel or not - that's the first step in the process. Good luck - this is happening a lot these days.

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To answer your question, instead of pontificate as the prior attorneys have, if you have a listing agreement, you have the right to require the seller comply with the agreement, or cancel it on mutually acceptable terms. If he refuses to sign your form cancellation, then the listing agreement remains in effect until it expires by its terms.

The Department of Real Estate may have staff, including attorneys, providing a hot line service to licensees on legal/ethical issues. There may be a conflict here between your contract and your fiduciary duty to look out for your client's best interests.