'Distressed property' statute distresses real estate industry

By Jeffrey P. Downer

Real estate professionals face expanded liability under a new “distressed property” law in the State of Washington that is intended to protect property owners who face foreclosure from being defrauded out of their home equity.

The new law passed Washington Legislature easily, but with little thought to how it might affect real estate professionals. It went into effect June 12, 2008. The statute imposes new duties on “distressed property consultants,” which include not only persons who claim to be helping strapped homeowners avoid foreclosure, but also real estate agents and brokers who are involved in such transactions.

The new law was intended to prevent foreclosure-rescue schemes. Typically, a scam artist trolls public records of pending property foreclosures. The scam artist approaches the homeowner and offers to help, often by buying the property and leasing the property back to the distressed homeowner. The homeowner usually is duped into thinking that the scam artist will help work out a payment plan with the lender and not realizing that the property is actually being sold.

After the sale closes, the scam artist evicts the homeowner, keeps the property, and pockets the equity in the property. The practice is sometimes called “equity skimming” or “equity stripping.”