Short Sale Advertising
Copyright© 2007, California Association of Realtors
Member Legal Services
February 2, 2005
Introduction
Soliciting prospective clients is essential for all real estate professionals. Since institutional third parties and loan guarantee agencies, such as the Department of Veterans' Affairs (VA) and the Department of Housing and Urban Development (HUD), implement guidelines for approving short sales, licensees have identified a new potential client base - homeowners with financial difficulties and negative equity in their homes. While it is lawful to solicit these potential customers, licensees should take care to avoid making false and misleading claims in their advertisements.
Q 1. What is the source of the prohibition against false and misleading advertising?
A Real estate licensees have both a legal and ethical obligation to be truthful when advertising property or services. Legally, licensees may be held liable for fraud, intentional misrepresentation, or negligent misrepresentation if they make material false statements or material omissions in any medium of advertising. In addition, licensees may face discipline from the Department of Real Estate. Furthermore, licensees who place listings in a Multiple Listing Service in expectation of compensation are responsible for the truth of all representations in such listings of which the licensees had knowledge or reasonably should have had knowledge to anyone injured by their falseness or inaccuracy.
Similarly, REALTORS® have an ethical duty to avoid false advertising. For example, Article 12 of the NAR REALTOR® Code of Ethics states "REALTORS® shall be careful at all times to present a true picture in their advertising and representations to the public ..." Additionally, most MLS rules incorporate the provisions of Article 12, so MLS-only participants are also bound by its provisions.
Q 2. What penalties does a real estate licensee face from the Department of Real Estate if he/she engages in false or misleading advertising?
A According to the Business and Professions Code, a violator is subject to an injunction and/or penalties as high as $2,500 per violation. A licensee may also face suspension or revocation of his/her license.
Q 3. Does the DRE have any guidelines or descriptions of what is prohibited false or misleading advertising?
A Not exactly, but the Department has published a few general principles:
- Avoid any advertising in which the advertisement can be interpreted a number of different ways. In other words, if a licensee is not willing to stand behind or live with all possible interpretations, he/she should not use the ad.
- Avoid "half truths" or inflated claims. Courts have consistently held that half truths are equivalent to lies, and licensees should be prepared to defend in court any claim made in their advertising.
- Licensees should set forth clearly any limitations intended to be imposed on offers made in their advertising. For example, if a licensee advertises a $500 rebate to the seller for listing with the licensee, but intends to pay the full $500 only if the licensee also represents the buyer in the transaction, this limitation must be specified in the advertisement.
Q 4. Has the DRE provided any specific examples, such as case studies, of false or misleading advertising?
A Yes. For example, in one edition of the DRE Bulletin, the Department described a case where a brokerage company advertised that it sold $500,000 worth of property, when in fact the value of the property had only been $250,000. The reason the firm had arrived at the figure of $500,000 was that it had employed both the listing and selling agents in the transaction and claimed that it was standard practice to count both the listing and selling ends of the transaction. The Department held this to be a false and misleading advertisement because, while it may be common practice for both the listing and selling agents to count the sale toward their volume, that would be true only if those agents were separate companies.
Q 5. Specific to short sale solicitations, what sort of statements should I avoid making?
A Perhaps the foremost concern with solicitation of short sale sellers is to refrain from making promises concerning the outcome of your short sale marketing and lender negotiation efforts.
Q 6. When targeting distressed sellers, can I safely advertise that I can sell their home with no out-of-pocket expenses?
A Making such claims in an advertisement without qualification is probably overbroad and therefore misleading. Occasionally distressed sellers are asked by lenders to share in the expenses of a short sale. Also, many lenders are unwilling to discharge the homeowner's full debt. For example, the VA frequently requests borrowers to sign a promissory note for some portion of the loan shortage before approving a short sale In addition, many homeowners cannot successfully complete a short sale without the cooperation of junior leinholders. These creditors are free to impose their own conditions upon a seller seeking a short sale. They may ask the seller for full or partial payment of the obligation, or require the seller to sign a promissory note.
Q 7. Many clients prefer a short sale as an alternative to foreclosure because they want to preserve their good credit. In my ad, is it safe to claim that a short sale will not damage my client's credit?
A Once again, such claims without some qualifying language are potentially misleading and perhaps even false. While many lenders do not report short sales to credit reporting agencies, they are not prevented from doing so. In fact, although the VA has no formal requirement, it encourages loan servicers to report VA compromised sales to credit reporting agencies.
Q 8. How then can I safely advertise the potential benefits of a short sale?
A Because short sales can present an extremely beneficial alternative to foreclosure for some homeowners, it makes great marketing sense to highlight this fact. Prudent licensees should ensure that their ads present the true picture - that these are potential benefits available to many but not all homeowners.
Before making short sale advertising claims, licensees should check out the facts. REALTORS® may contact regional Fannie Mae and Freddie Mac offices as well as local FHA and VA field offices to determine short sale eligibility criteria and possible seller costs associated with short sale programs. REALTORS® may also refer to the following websites for additional information:
Q 9. Where can I obtain additional information?
A Be sure to review the legal memorandum, Home Equity Sales Contracts, if you represent an investor in a short payoff situation where the lender has filed a notice of default. Special rules apply and a special purchase agreement must be used.
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