CNBC real estate reporter Diana Olick broke a story on Jan. 15 about some piggyback lenders – or second lien holders – committing alleged short sale fraud by demanding a cash payment to release their lien in order for a short sale to take place.

Basically, because so many homeowners have taken equity out of their homes, it is not unusual to find two lien holders on a short sale. Of course, for a short sale to go forward, the second lien holder must release the lien, basically in exchange for….nothing. They don’t get paid.

However, just because they’re second lien holders doesn’t mean they are second-class lenders…we’re talking Chase, Citi, Bank of America here. They are going to find a way to get their money.

Olick was alerted to this story by the head of a company that connects short sale agents, investors and sellers. He told her that over 200 of his agents have complained that second lien holders are asking for – and in many cases, getting – a cash settlement to drop their liens in an “under the table” transaction that never shows up as part of the sales paperwork.

And that, they say, is a violation of RESPA, the 2008 law that requires full disclosure on real estate transactions as a consumer protection measure.

We say: maybe.

Like flakes of snow, every transaction is different. If the second lien holder is able to work a deal before the first lien holder does – and the second’s deal has nothing to do with the first’s deal – then it should pass the sniff test as a legal transaction.

By now, if you don’t know that REO stands for Real Estate Opportunities, you’ve been living under a rock.

For agents and brokers in California, REO (bank parlance for foreclosed properties which are now, to them, “Real Estate Owned” assets) properties ARE the market. After all, with home values plummeting nearly 50% in some areas, who in their right mind wants to sell a property if they don’t have to?

Brokers and agents still need to make a living; banks haven’t a clue as to how to market and sell residential real estate, so who else are they going to turn to? It’s a match made in heaven. But banks being banks, this particular heaven can turn into a living hell for an unsuspecting broker/agent. You need to know how to navigate through the traps and pitfalls, and still make a living.

First, buying an REO asset is not the same as buying at a non-judicial foreclosure sale (“Foreclosure”). A Foreclosure is a legal process where non-performing loans are auctioned off by the trustee in a deed of trust. While the bank (or person) who lent the money is the first bidder, and the property could go to them, it doesn’t always happen that way. Sometimes, a third party bids at that sale and buys the property. That third party (those who have been doing this for a long time are called “professional bidders”) generally re-sells the property almost immediately – but that sale is NOT a REO sale. The distinction is critical – especially when it comes to disclosure obligations. So remember, REOs are “bank owned” properties.

When a broker gets sued, we step in: as the hand-picked attorneys for the broker – all at the insurance carrier’s expense. A broker is generally sued for negligence and some form of intentional misconduct. Why? Because plaintiffs want “punitive damages” and they can’t get that from a ‘negligence’ claim.

That’s a problem for the broker, because E&O (errors and omissions) insurance doesn’t cover ‘intentional misconduct’ claims. E&O insurance, however, will pay for defending both claims, if they are brought in the same lawsuit, but the carriers also reserve their right to not pay punitive damages. When that happens – a conflict exists between the insurance carrier and the broker.

That’s when we step in: as the handpicked attorneys for the broker. Insurance companies don’t generally tell a broker (or an agent) that they have the right to pick their own lawyer to defend them – and have that lawyer paid for by the E&O Carrier.

Why? Because E&O Carriers can restrict the aggressiveness of the defense provided by their handpicked “panel counsel” when defending claims, by forcing panel counsel to enter into “Litigation Management” Agreements that place limits on the activities of those panel lawyers.

HLF clients have chosen us to defend them, when the circumstances allow for it (and they generally do!) because of our expertise in real estate law (after all, many of us were, or are, brokers too), and the aggressive way we defend claims. All claims.

Wave goodbye? Not!

Lease or contract provisions commonly state: “In the event of litigation between them, the parties hereto expressly waive trial by jury.”

Now, three years later, there is a dispute, and you want a jury. Are you stuck with that waiver? Nope.

The California Supreme Court has ruled that: “…pre-contract jury waivers are unenforceable.”

You can still lose a jury by agreeing to Alternative Dispute Resolution like mediation or arbitration. But, once litigation commences, there is an absolute right to demand a jury.

A “hot” market just means deferred litigation. For many.

We’re not the only ones that think so. Calls from brokers, buyers and sellers tell us: time in court is coming a broker’s (and agent’s) way.

The rising real estate market covered a multitude of sins, sins which are now becoming clear. In addition, 85% ( ! ) of recent licensees hold “conditional” licenses – meaning that they only completed 1 of the 3 “required” courses to get their license in the first place. (But they promised to complete the other 2 in 18 months…)

With so little experience and training, mistakes got made. Many were overlooked because of the profits that were made in the rising market. Now, it’s another story.

Nobody likes to “need” lawyers; but when you do, you want them to be the best.

In the event a claim is made, you need to designate specific legal representation in your E&O Policy. (Generally at the time of application or renewal.)

If you don’t do it right, it just wasn’t done.

A tenant with an option to extend a Lease must strictly comply with the terms of the Lease with respect to how to exercise that option right. If the Lease is silent on how, the tenant can merely call the landlord and say that the tenant is exercising the right to extend.

If, however, the Lease calls for written notice, or notice by carrier pigeon, that’s how the tenant must give the notice to the landlord.

If the tenant doesn’t, the extension right is lost forever — even (unless there are very exceptional circumstances) if the tenant stays in the space and continues to pay rent based on the extension rent rate for months, or years, after the end of the first Lease term.

It’s a simple document – that can strike fear in the heart of the most experienced owner, buyer, or broker.

A Lis Pendens (Latin for: Notice of Pending Action) is recorded to advise a potential purchaser or lender of another’s claim to ownership of the real property that is adverse to the owner of record. It kills deals.

What many don’t know is that you must follow very strict rules in recording that lis pendens, or it is invalid. And if the owner brings a motion to expunge it, and wins, the owner “shall” be awarded attorney fees. In some cases, the owner can get attorney fees, even if the lis pendens is voluntarily withdrawn before the hearing on an expungement motion.

Did the tenant surrender the lease, or abandon it? Does it matter? It does, if the landlord still wants to get that rent that’s not going to be paid now!

A tenant may “abandon” or “surrender” a lease before the lease is scheduled to end. In the first instance, an “abandonment,” all the rent remaining due for the entire lease can still be collected by a landlord. The landlord may re-rent the space abandoned, and if that is done, the tenant will get “credit” for the rent received from any “new” or “replacement” tenant. In the second instance, a “surrender,” the remaining rent obligation is waived by the landlord, and cannot be collected.

Generally, a surrender must be expressly made; but a landlord can fall into a trap by impliedly accepting a surrender and losing the right to collect otherwise due rent. How? By leasing the property to another without stating the new lease is on behalf of the old tenant, by remodeling the space so as to make it unusable by the first tenant, or by agreeing to return the security deposit upon receiving keys from the old tenant, or by taking over the tenant’s position as an “assignor” if there is already a sub-lease or assignment.

“Possession is 9/10ths of the law.” Is it really?

Can somebody buy real property without a written agreement? Generally, no. But then again, there are always exceptions.

The “Statute of Frauds” states that an agreement to buy real property must be in writing to be enforceable. One of the exceptions to the Statute of Frauds is when a buyer of real property actually moves in (thus the “possession is 9/10ths” argument) and also starts making improvements on the land. The Statute of Frauds is designed to make sure that “important” contracts, like those relating to buying real property, those that take more than one year to perform, guaranties, and those for goods more than $500, are all in writing. This protects both sides from the “but, s/he really said” arguments.

“Bona-fide purchaser for value without notice” Huh? So what?

Those words can save somebody when a 3rd person makes a claim of ownership adverse to theirs. Like the times when a seller sells the property twice. Who owns it when the first buyer didn’t record the deed yet? Generally, the second buyer if they record their deed first!

Recording laws are designed to give protection to an innocent 2nd buyer who has no notice of the 1st buyer’s claims.

As always, there are “exceptions” to the Rule.