Avoiding Short Sale Fraud: Disclosures to the Homeowner

Question: What’s a great way for a real estate investor to get sued?

Answer: Let a homeowner believe you can always make a foreclosure go away.

Forget “location, location, location” for a minute. The buzzword for the day is “disclosure, disclosure, disclosure.” If you’re in real estate, you know that there’s a purpose behind all that fine print and legal jargon. It’s enough to make your eyeballs hurt, but it needs to be there.

Remember the definition of fraud. When you begin a short sale deal, there are material facts that you have to disclose to the various people you’re working with, and the most important disclosures have to be made to the homeowner who is in default or foreclosure. If you don’t get this right, you could be exposing yourself to accusations of fraud.

First, the disclosures need to be properly prepared ahead of time. This isn’t something you throw into your elevator speech or your verbal presentation. These disclosures need to be in writing, and they need to comply with any state law that covers the exact wording, formatting, and font size of a real estate contract.

Font size? Really?

Absolutely. Check this out. That’s just an example of the rule for some documents in my state. Rules for other documents simply say something about “a type size that is clearly readable without magnification.” Just follow the guidelines. A real estate attorney in your state will know what to do. Don’t give anyone even one reason to suggest to a court that you weren’t doing things by the book.

Review the disclosures with the homeowner, one at a time, before any paperwork is signed. An “Affidavit of Understanding” is a great way to accomplish this. (A copy of this can be found on the Strategic Real Estate Coach website. Don’t forget to run it by your attorney to make sure your state’s required disclosures have been included.)

The reason I love the Affidavit of Understanding is that, once you go over it with the homeowner, there are no illusions left about what you can and cannot do for them. They will understand what is guaranteed and what is not. They will understand what you can and cannot control. And by the end of the conversation, you will understand whether the homeowner is okay with all of that. That’s important, too.

The fact is, sometimes you’re going to get surprises. That’s life, and it’s no different in real estate. Short sales are great for surprises. What if your end buyer bails on you before the sheriff’s sale or auction date? What if the lender declines to allow a short sale at all, no matter how well you try to negotiate? It happens.

That Affidavit of Understanding will make sure that a homeowner is very clear on the fact that you can’t guarantee that you will end up buying their house. They need to know that your purchase of their house depends on several events going exactly as planned, some of which neither you nor they can control. They can say, “Oh, don’t worry about that” all they want, but emotions can run a little high when the eviction notice hits the door. Get the document signed and notarized - for everyone’s peace of mind.

An investor who is really interested in helping homeowners won’t lead them down the road with their eyes closed. (It won’t exactly build up your reputation, either.) Make the appropriate disclosures, and help them feel confident about working with you.