Real estate agents and investors in Washington state are preparing for law changes next month that will place additional responsibilities on those who work with distressed property sales.

The legislation, House Bill 2791, is intended to protect consumers from foreclosure rescue scams in which sellers are tricked into transferring ownership of their homes by those offering to save them from the prospect of foreclosure.

On June 12, when the new law takes effect, investors who work to purchase pre-foreclosure properties from homeowners will face new fiduciary responsibilities to sellers, "which is something that is sort of an anomaly," said Doug N. Owens, a lawyer who has studied the legislation.

Owens is also a member of the Real Estate Association of Puget Sound, a group supporting real estate investors.

"It’s going to put significant new burdens on investors to participant in that market if they want to continue the way they have in the past. If they want to try to avoid becoming a fiduciary, they need to change the ay they do business," he said.

Those investors who seek to buy properties at public foreclosure auctions or purchase bank-owned foreclosure properties are unaffected by the legislation, he said, which focuses on pre-foreclosure properties.

The Washington Association of Realtors trade group has organized dozens of training sessions and produced a video to help prepare its members for the law change.

Also, Realtors will receive new listing agreement forms to use in transactions and must re-list all currently listed properties to make sure they are in compliance with the new law, said Phil Harlan, past chairman of a legislative division for the Realtor group.

The revised listing-agreement forms will be available to members on June 5, he said.

"We’re going to have to sit down with our sellers and explain the new law and go over the new listing agreement and explain to them the information that we need to determine if the law affects them or not," Harlan said.

"Every (real estate) office is going to handle it differently. Our role as … is to educate, educate, educate."

The association is supportive of consumer protections, Harlan said, and the association will continue to work with the state’s attorney general and other shareholder groups to ensure that the legislation doesn’t have "unintended effects on a normal real estate transaction."

One of those unintended consequences, as detailed at the Washington Association of Realtors Web site, is that there is the "potential for dramatically increasing the duties owed by a real estate agent to a distressed homeowner."

The law defines a "distressed home consultant" as anyone who seeks to offer services to a distressed homeowner by working to sell the home prior to foreclosure, for example. And the Realtor group points out that based on the language in the legislation, the listing agent, buyer’s agent and the buyer could all be considered distressed home consultants under certain circumstances.

"The new law increases the duties owed by agent to seller by creating a fiduciary obligation from home consultant to the seller," according to the Web site. The Realtor group also advises that "at no point should a real estate agent be in the position of trying to explain the law to a client," and that agents should instead provide literature prepared by the Attorney General’s Office.

The New York Times has reported that several states have also passed laws designed to stamp out foreclosure rescue scams.

Jillayne Schlicke, a Washington real estate and mortgage educator who founded The National Association of Mortgage Fiduciaries, said the new law, passed in March, was born out of a task force formed by state Gov. Chris Gregoire.

"For as long as I can remember in this industry, we always complain about how our government is not proactive," Schlicke said. In this case, the government acted quickly to get a law in place to address a real estate-related scam.

"Surely there are many critics out there saying the law is poorly drafted," she said, though "there have been foreclosure rescue scams that have happened here. It does happen here."

For now, the new law is a reality and it can’t be amended until the Legislature reconvenes next year, she noted. Real estate agents "can live with this law — they’re going to have to fill out some extra forms. They are going to be OK — they are just going to have to follow what the law says to do. I don’t think it will increase costs for agents."

"This law is proactive. And yes, there are some flaws but I believe we can live with it. I believe the positives — the good consequences — outweigh the bad."

Those investors who specialize in pre-foreclosures will face new liabilities as a result of the legislation but can still participate in purchases during other phases of the foreclosure process without being subject to the new requirements posed by the law, she said.

Paul Galasso, a real estate investor in Washington who is a licensed agent and a member of the Puget Sound association for investors, said he believes the fiduciary duties are overly stringent in the new law, and there is a need to amend the law because he anticipates that there will be lawsuits.

"The one group that benefits from this law is the trial lawyers," he said, because of the new liabilities associated with the law.

Some investors will choose not to pursue sales of pre-foreclosure properties, he said, which could have a chilling effect on the market and will lead more properties to be repurchased by banks following a foreclosure process.

"It will absolutely impact the number of houses that go back to the bank. It will impact the ability of banks to lend in the future. It will impact the real estate industry in general," Galasso said, as REO sales can bring down overall market prices.

"If they were to just change the law by saying that if I bought the property and I leased it back to the original homeowner then I had a fiduciary responsibility — then I could live with that," Galasso said.

Though he said he now fears that investors will largely retreat "because they do not want to have the appearance of impropriety as well as the fiduciary responsibility for the seller. I know of many real estate investors who are just not going to buy and sell houses anymore."

Existing state law, he said, already makes the practice of "equity skimming" illegal.


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