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Pitfalls of acting for clients when the property is in foreclosure.

This blog post deals with some pitfalls of acting for clients when the property is in foreclosure.

A property can be in the early stages of foreclosure which means that the lender has not yet reached a point that it is in control of the process. The owner can still sell the property and then pay out the lender out of the sale proceeds. However if you are acting for the seller make sure to find out how much the seller owes the bank. You want to know for sure that the net proceeds from the sale will be enough to pay out the lender. If they are not, the bank might accept less but the time to negotiate that is before the deal is signed not later. I have seen several deals collapse at closing because there was not enough money after payment of commissions and closing costs to pay off the lender. The seller then becomes liable to the buyer for his damages. As well the buyer’s agent is looking to the seller, and ultimately you, for his commission, as it is your responsibility to have the seller pay the commission. And what do you get out of this? Probably nothing as the seller likely has no money to pay you.

While I know it is a “sin” for an agent to agree to a reduced commission, in a situation such as this you might want to consider doing so in order to make the deal work. If the deal collapses you will get nothing and to add insult to injury, the lender will then list the property with its own agent.

Also, when acting for a seller, make sure to find out if he owes anyone else money. If that creditor subsequently registers a judgment on title after the purchase agreement has been signed then the seller will have to find a way to clear that judgment. If he is already in foreclosure with the secured lender, how likely is it he will come up with money to pay another creditor?

Don’t take the seller’s word that he will “deal with” the new creditor and get it resolved. The secured lender is not going to be co-operative and take less money if a subsequent judgment creditor will also get some money to clear its judgment. The secured creditor just needs to proceed with the foreclosure and cut out the judgment creditor completely. I had just such a situation recently. The agent didn’t ask his client about other debts. After the deal was signed another bank registered a judgment, the existing secured lender then wouldn’t co-operate, the deal died and the agent received no commission.