MEMO ON THE LEGALITY OF DOUBLE ESCROW IN NEVADA

Dear Yonas,

We wholeheartedly thank you for assigning this project to us.

As per our understanding of the issue, you want to know the legal
compliances to be followed, steps to be taken and the issues to be taken
into consideration while having a double escrow in Nevada.

In this memo we are detailing you on the subject matter with the Land
Mark Nevada cases dealing with the issue of double escrow inclusive of
legal provisions and case laws whereby the legality of the double escrow
is mentioned in detail. We have also included additional disclosure
provisions and Fannie Mae’s publication of Mortgage Fraud News
pertaining to Pre-foreclosure Sales Abuse which can be helpful for you in
your real estate profession.

I. DOUBLE ESCROWS

Double escrow is a real estate transaction involving two contracts at two

different prices, with two different buyers, on the same property, closing
escrow on the same day. Whereas assigning a contract uses one
purchase contract whose closing name and "taking title as" identification
is identified by the closing attorney or escrow officer, a double escrow
 often uses a straw buyer whose name goes onto the chain of title where
the assigned contract "bird dog" does not.

At close of escrow, all participants, lenders, sellers, buyers and brokers

are informed of all parties involved and all monies that change hands.
Double escrows are totally legal and all processes within them must be
disclosed by either the originator of the "deal" or by the closing escrow
officer.

A popular transaction these days is to have an investor "save" a

defaulting homeowner by purchasing a home in a non-MLS short sale
and then listing the property in MLS as a non-short sale resale, in the
hopes of having a simultaneous closing. Double escrows may be legal,
but should only be done with an abundance of caution and well-drafted
written disclosures to the lenders, the seller and the second buyer,
particularly when the short sale buyer's agent is the resale seller's listing
agent.

II. LANDMARK CASES:

1. (Holland Realty Investment Co. v. State, 84 Nev. 91, 436 P.2d 422
(1968)

In 1968, the Nevada Supreme Court decided a case involving a double

escrow where the Real Estate Commission had revoked the broker's
license. Although Nevada has several new statutes today with updated
wording, the basic lesson is the same i.e.; a licensee owes a duty to fully
disclose material facts of the transaction.
 The facts of the Holland case were mostly undisputed. In a double
escrow transaction, the Broker purchased a residence from the Seller for
$ 3,500 and sold the same home to the Buyers for $ 4,500, retaining for
himself the $ 1,000 difference in price, less escrow costs (about $ 120).
The escrows were opened within a day of each other; it appears that the
Broker offered to purchase the residence after he had contacted Buyers
and discussed the $ 4,500 purchase price. Both escrows closed
simultaneously, with the Buyers' money being used to fund Broker's
purchase from Seller.

The Broker admitted that:

 He did not tell the Buyers that he was the owner of the property, or who
the owner was.

 He failed to tell the Buyers that he was making a simultaneous purchase

of the property from Seller for $ 3,500 or that he was using Buyers'
money to make the purchase.

 He failed to tell the Buyers that he was making a profit on the

transaction.

 He did not tell the Buyers that they could purchase the property for $
3,500 or tell Seller that the Buyers had offered to pay $ 4,500 for it.

On appeal, the Supreme Court agreed that the Commission acted within
its powers: "The very practice of double escrowing is fraught with
deception, and one who engages in it cannot do so with the candor and
 honesty demanded of a duly licensed real estate broker without violating
and breaching the basic fiduciary trust which is expected of him."

“The case specifically mentions to fulfill the fiduciary duty of disclosure

while double escrowing.”

2. Alley v. Nevada Real Estate Division, 575 P. 2d 1334 (1978)

This was an appeal from the district court order affirming the decision of
the Nevada Real Estate Division and its Advisory Commission to
permanently revoke the real estate broker's license held by Jerry L. Alley.

In the case, the record of the administrative proceedings established,

inter alia, that Alley had received a secret profit of $ 2000 for himself,
and others, by utilizing a "double escrow" scheme.

Engaging in an undisclosed double escrow transaction is a breach of the

licensee’s absolute fidelity to the client. The Nevada Supreme Court
Justice McDaniel, in this case, defined Double Escrow and then went on
to explain the law's denunciation of such schemes and found it illegal
when the broker or salesman purchases a principal’s property in the first
escrow, and sells it to a third party at a profit in a second escrow without
a full disclosure to both the principal and the third party. The escrows
close at the same time and the broker or salesman thereby uses the
proceeds from the sale in the second escrow to purchase his principal's
property. The broker or salesman receives a commission on the sale in
the first escrow and a secret profit on the closing in the second escrow.
 The court stated that such schemes were denounced in Holland Rlty. v.
Nev. Real Est. Comm'n, 84 Nev. 91, 98, 436 P.2d 422, 426 (1968),
where the court stated the following:

 A broker when pursuing his own interest cannot ignore those of his
principal and will not "be permitted to enjoy the fruits of an advantage
taken of a fiduciary relationship, whose dominant characteristic is the
confidence reposed by one in another."

 The law does not allow the agent who also has a right to purchase to wait
until someone makes an offer of an amount in excess of the agreed
purchase price and then elect to purchase the property at the lesser
price without informing the owner of the higher offer, and, after the agent
has obtained the consent from the owner to buy the property, then
immediately sell it for the higher price as his own property.

 The administrative determination to permanently revoke Alley's license

finds ample support in the record; thus, we perceive neither an abuse of
discretion nor conduct that could be considered arbitrary or capricious.
Accordingly the order of the district court was affirmed.

“The case notifies that any anticipated interest must be disclosed even if it
is only a pass-through interest. For example, a licensee must disclose
when the licensee takes title, however briefly, during a ‘double escrow’.”

3. Goldstein v. Hanna, 97 Nev. 559, 635 P.2d 290 (1981)

 In this case, Callahan was the listing agent for a condominium owned by
Hanna. Goldstein and Hanna signed a lease with option to purchase to
close by December 9, “unless exercised prior thereto.” During the lease
period, Goldstein exercised the option and signed a purchase agreement
with another buyer using a double escrow. Both closing dates were set
for August 29. Prior to the closing, the ultimate buyer backed out.
Goldstein contacted Callahan who advised him the option was still good
until December 9. This was both a misstatement of the law and beyond
Callahan’s authority. Goldstein, justifiably relying on Callahan’s
statement, did not close on August 29. The seller then cancelled the
escrow and attempted to get the property back. Goldstein sued Hanna for
specific performance citing his reliance on Callahan’s statement. Though
the court’s decision was split as Justices Mowbray and Manoukian
dissented. Hanna eventually lost the property.

III. LEGAL PROVISIONS & CASELAWS

The following are the legal provisions to be complied with while double
escrowing, inclusive of other real estate transactions.

DISCLOSURE OF LICENSEE’S INTEREST

o A licensee must disclose in writing to the parties whenever the

licensee has a personal interest in either the transaction or the
property. Such disclosure ensures everyone is aware of the
licensee’s potential conflicting loyalties. (NRS 645.252 (1) (b) & (c);
NRS 645.633 (1) (g); NAC 645.605 (4); NAC 645.610 (1) (b) (1-2);
NAC 645.637 and NAC 645.640).
 o The licensee should be aware that some laws prohibit certain acts
even if the licensee’s interest is disclosed. As an example, a
salesperson may not receive compensation from anyone other than
his or her broker: taking such payment is illegal whether or not it
is disclosed. (NRS 645.280)

a. Interest in the transaction:

Any time the licensee has an interest in the transaction, that interest
must be disclosed in writing. An “interest in the transaction” occurs
when:

1. Compensation:

 The licensee receives, or expects to receive, compensation from more

than one party; NAC 645.605 (4) (e)

 The licensee is under an affirmative duty to disclose to each party to the

real estate transaction each “source” from which the licensee will receive
compensation. (NRS 645.252 (1) (b))

 The statute does not require the licensee to disclose the amount of the
compensation, only its source - the identity of the person or company
giving the compensation. (NAC 645.605 (4))

 Compensation includes referral fees and other payment such as fees

received from vendors to be on a broker’s list of service providers. Even
though the broker may give a service provider list to a client without
charge, the broker must disclose if a vendor paid to be on that list.
 (Excerpts from Judy bendure, “Preferred Vendor Lists,” Real Estate
Division Open House, vol. 25, issue 1, winter 2000, at p. 4. The Open
House is the Real Estate Division’s information bulletin.)

Compensation includes money the broker may accept, give or charge as

a rebate or direct profit on expenditures made for the client. (NRS
645.633 (1) (g)) For example, a buyer asked the broker to have a new air
conditioning unit installed. The buyer paid for the unit in escrow. The air
conditioning manufacturer offered a $200 rebate. The broker, when he
purchased the unit, applied for and kept the rebate without disclosing it
to his buyer. This is a violation of the broker’s absolute fidelity to the
client.

2. Party in the transaction:

 When a licensee is acting as a principal, it is a material fact and must be

disclosed. (NRS 645.252 (1) (c); NAC 645.637)

 This ensures all parties to the transaction are fully aware of where the
licensee’s loyalties may lie. Moreover, the licensee may not acquire
(purchase), lease or dispose of (sell), any time-share or real property
without revealing the licensee’s licensed status. (NAC 645.640 (1)).

3. Personal relationship with one of the principals:

 The licensee must disclose whenever he or she has a personal

relationship with a principal to the transaction.
 A licensee (including permitted property managers) must disclose the
licensee’s affiliation with or financial interest in, any person or entity that
furnishes maintenance or other services related to the property. (NAC
645.605 (4) (b))

b. Interest in the Property:

 A licensee, whether acting as an agent or a principal, has an “interest in

the property” whenever the licensee has, or anticipates, an ownership
interest. (NRS 645.252 (1) (c) and NAC 645.640)

 Failure to disclose the licensee’s interest is an element in the Real Estate

Commission’s determination of whether the licensee was deceitful or
dishonest. (NAC 645.605 (4))

 In Alley v. NV Real Estate Div., 94 Nev. 123, 125, 575 P.2d 1334
(1978) , it was stated that any anticipated interest must be disclosed
even if it is only a pass-through interest. For example, a licensee must
disclose when the licensee takes title, however briefly, during a “double
escrow.”

 In the case of Tahoe village realty v. DeSmit, 95 Nev. 131, 134, 590
P.2d 1158 (1979), it was quoted that engaging in an undisclosed double
escrow transaction is a breach of the licensee’s absolute fidelity to the
client. The Nevada Supreme Court has found it illegal when, the broker
or salesman purchases a principal’s property in the first escrow, and
sells it to a third party at a profit in a second escrow without a full
 disclosure to both the principal and the third party. The broker or
salesman receives a commission on the sale in the first escrow and a
secret profit on the closing in the second escrow.

 In lemon v. landers, 81 Nev. 329, 332, 462 P.2d 648 (1965), the
court mentioned that a licensee may not take an undisclosed profit at the
expense of another party, nor may the licensee purchase or sell the
property of a client through the use of a third person without full
disclosure and the client’s consent.

DISCLOSURE IN WRITING

 Whether the licensee’s interest is in the transaction or in the property,

the disclosure must be in writing. An oral disclosure does not satisfy the
regulations. (NAC 645.637)

 When disclosing the licensee’s interest in the property, the disclosure

must state the licensee is acquiring or selling the property for him or
herself and that the licensee is a broker, broker-salesperson, or
salesperson. The Real Estate Division will recognize the disclosure if the
licensee includes the term “agent,” “licensee,” or “broker, broker-
salesperson, salesperson,” whichever designation is appropriate. (NAC
645.640 (1))

 It was stated in American fidelity fire ins. v. Adams, 97 Nev. 106,

108, 635 P.2d 88 (1981), that the disclosure must be made “as soon as
 practicable,” but not later than the date and time on which any written
document is signed by the parties. The Nevada Supreme Court has
defined “as soon as practicable” to mean “promptly” or “within a
reasonable length of time” considering the facts and circumstances of
each particular case.

 Advertising: If the licensee advertises a property, the advertisement

must identify the licensee’s licensed status. This disclosure must be
made whether the licensee is acting as an agent or as a principal. (NAC
645.640 (2))

 Accordingly, the licensee must state “for sale by owner-broker” (agent,

salesperson, etc.) (NAC 645.610 (1) (b) (1-2)) or substantially similar
words in any advertisement for the property in which the licensee is a
principal

 Facts that concern the transaction must be disclosed to the licensee’s

client. (NRS 645.254 (3) (c)) This disclosure may require the licensee to
reasonably investigate certain aspects of the transaction. These may
include, but are not limited to, facts about the escrow, relevant loan
information, or the status of other transactions (for example, contingency
sale property).

 A licensee must be aware of the boundary between authorized real estate

services and unauthorized services. Often a licensee is requested by a
client to advice or act on a matter for which the licensee is not
 authorized. Sometimes however, the licensee, willingly and without
instruction, crosses this boundary.
The two areas in which a licensee is most likely to provide unauthorized
services are with legal and appraisal activities. Clients will ask a licensee
to tell them their rights under a contract, or ask what their legal options
are. Additionally, clients often ask the licensee what a property is worth
or the value of a business. Because these activities are so intricately
woven into the fabric of a real estate transaction, the licensee can easily
slip into providing unauthorized answers and services. If he or she does
so, it is a violation of not only NRS 645, but of the statutes regulating
those professions. Excerpts from the Real Estate Commission
Disciplinary Fine Report, 1/95 through 9/30/04

 A licensee must disclose to each party to the real estate transaction any
material and relevant facts, data or information which the licensee
knows, or which by the exercise of reasonable care and diligence he
should have known, relating to the property which is the subject of the
transaction. (NRS 645.252(1) (a)).

 A licensee may not attempt to sell, or offer to sell, any real property with
knowledge that the title is un-merchantable unless he notifies the
prospective purchaser of that fact before the payment of any part of the
purchase price. (NAC 645.635).

 A licensee may not offer real estate for sale or lease without the
knowledge and consent of the owner or his authorized agent. (NRS
645.635(1)).
IV. ADDITIONAL INFO:

It is of significance importance to note that the FBI has added the

practice of "flopping” (flipping a short sale) to its list of recognized real
estate and mortgage fraud.

In addition, Fannie Mae has identified fraudulent short sale schemes

for its servicers to watch for when approving a short sale and/or
approving a purchase loan on a short sale.

Fannie Mae’s publication of Mortgage Fraud News as on July 2009

pertaining to Pre-foreclosure Sales Abuse

Fannie Mae has become aware of a new variant of property flipping

involving pre-foreclosure (short) sales.

The trend Fannie Mae have observed involves a perpetrator who submits
a short sale offer to purchase a pre-foreclosure property at a price less
than the current indebtedness. This perpetrator locates a second buyer,
who may not be arms length, to purchase the property at a higher price
simultaneous with the short sale or in rapid succession, concealing the
second (higher) transaction from the lender approving the short sale.

The second transaction may involve a new loan based on an inflated

appraisal.

In some cases, the perpetrator convinces the homeowner to deed the

property into a land trust, with the perpetrator (or his accomplice) as
trustee.
 Example:

Fannie Mae has been advised of instances where the perpetrator is the
listing agent, and the agent presents his/her short sale offer as the “best”
offer, even though the agent has received other, higher, arms length
offers.

As this trend has gained momentum, some title companies have begun
to refuse to close the simultaneous transactions. As a result, a second
version of this scheme has evolved in which the closing involves only one
transaction: from the homeowner to (the perpetrator’s) ultimate
purchaser. The perpetrator is paid out through or outside of closing.
Some of the tactics observed include a second mortgage filed by the
perpetrator against the property immediately before closing, and inflated
real estate commissions.

These flips can potentially be identified and thwarted by either the pre-
foreclosure lender or the lender financing the second (inflated)
transaction.

Fannie Mae recommends the following best practices in assessing pre-

foreclosure sale activity:

 Confirm the ownership status of the property:

a) Is the title held in trust?
b) Was it an allowable transfer? (Servicing Guide, Section III,
Chapter 4)

 Review marketing efforts such as the MLS listing.

  Condition approval on disclosure of all contracts pending on the property
prior to mortgage payoff.

 Validate the purchaser’s loan approval, deposit and funds to close.

 Condition approvals for pre-foreclosure sales on review of the final HUD-

1 Settlement Statement :
a) Review the sales price and payouts against the purchase offer.

Fannie Mae recommends the following best practices to avoid financing

inappropriate property flips:

 Validate the purchaser’s deposit and funds to close.

 Use reliable appraisal valuation sources.

 Review the final HUD-1 and do not allow excessive seller concessions to
be paid to the purchaser.

 Question excessive sales commissions.

 Validate that the seller holds clear marketable title to the property.

V. CONCLUSION

Hence, from the above revealed case laws and legal provisions, we would
advise you to provide proper disclosures to the clients as acknowledged
by law to be hassle free from all the legal impediments brought on as a
result of double escrow.