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December 18, 2014

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Nevada to investigate short sale flipping

The state will examine short sale practices in Nevada after concerns were raised by a Reno Gazette-Journal investigation published Sunday.

The Nevada Department of Business and Industry is forming a team to see whether dual agency — a practice in which the same agent or entity represents the seller and buyer in a sale — is being used to take advantage of distressed homeowners in order to reap higher profits, said Bruce Breslow, director of the department.

Breslow's agency oversees the Nevada Real Estate Division, which is in charge of investigating matters involving real estate. An investigator with the Nevada Consumer Affairs Division will join the team as well.

"It's always a concern if someone can manipulate a system for their own personal gain at the expense of someone else," Breslow said. "It's important that consumers have legal and proper representation in real estate transactions."

A Reno Gazette-Journal analysis of thousands of records from Washoe County and the Northern Nevada Regional Multiple Listing Service found that dual-agency short sales involving a prearranged cash buyer accounted for more than 10 percent of single-family home sales last year.

The transactions allowed the same real estate agent or entity to collect commissions from both the seller and the buyer, sometimes collecting a third or even fourth commission on the resale of the property.

Many of the properties also were sold below market value, allowing investors to see a larger appreciation when the properties were resold. Five-figure gains were the norm for such transactions, with some posting more than $100,000 in appreciation after being resold just a few months later. In some cases, the resale price was higher than the short seller's original mortgage.

These types of transactions are not illegal under state law. Dual agency, for example, is legal in Nevada, provided all parties involved are informed of it. For some in the real estate industry, dual agency is seen as a valuable tool. Breslow, however, noted that it also comes with challenges.

"It may not be illegal, but I see problems with having a buyer on one hand and approaching a homeowner to short sale their home and represent them as well," Breslow said. "If the seller is more concerned about a quick sale and is not focused on the price, the buyer gets the advantage of a great deal and the one who loses is the original lender."

Breslow also expressed concern about short sales that are listed with a pending offer. The practice favors a prearranged buyer and makes it harder for other prospective buyers to submit a fair market offer for the property.

The state investigation was welcomed by the Northern Nevada Regional MLS. The group has heard concerns from its member agents about such short sales for some time, said Bob Getto, NNRMLS president.

"It's about time," Getto said. "Some say that once the market changes to where sellers have equity once again, the problems will go away. But real estate goes up and down, so there will be short sales in the future, and this needs to be repaired now."

The Reno-Sparks Association of Realtors welcomed the state investigation as well. Although the group stressed that any wrongdoing has yet to be proven, it is also important to look into any issues involving the industry and its relationship with its clients, said Mark Ashworth, RSAR president. The association will wait for any findings from the state investigation before taking any action, Ashworth added.

"Any time a situation of this nature comes forth, we are all affected," Ashworth said. "It's important for us to discover if there has indeed been a violation of our code of ethics and consumer trust. We want to ensure that everything is being done to properly to benefit our clients."

One concern raised by those in the industry is whether the state has the resources to fulfill its oversight responsibilities. The real estate division, for example, only has one part-time investigator for Northern Nevada. The division saw deep cuts during the administration of former Nevada Gov. Jim Gibbons, including the loss of several positions and closure of its licensing section in Northern Nevada.

Breslow admitted that cuts have had an impact on the agency but also said the investigation will move forward. If any wrongdoing is found, expect changes in the law, he said.

"If the current system is not working fairly as it was designed, (the real estate division) will have an opportunity to propose new statutes or regulations to help maintain a fair market," Breslow said.

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