Not a day goes by that I do not hear a story from a Realtor, loan originator or consumer about a questionable if downright bad experience with a third party short sale negotiator. We’ve reached a point in time where we ought to consider eliminating all third party short sale negotiators. At the end of this article I will provide suggestions for home sellers, home buyers, real estate brokers/Realtors, attorneys, regulators, and lenders in order to maximize good consequences and minimize bad consequences for all parties.
Yesterday I received a frantic call from a homebuyer we’ll call Maggie, who found me online via this blog post. Maggie fell in love with a short sale house but after her offer was accepted and moving toward the close of escrow, the third party short sale negotiator announced that since the lender would not pay his full fee (short sale negotiator was already being paid $3000), as the buyer, she would have to come up with an additional $7,000 at the close of escrow. Maggie was in love with the house but didn’t have the extra 7K so the third party short sale negotiator suggested she get a loan and pay him after the close of escrow.
There are so many things wrong with the above scenario I don’t even know where to begin. So let’s begin at the beginning. The growth of fee-based, third party short sale negotiators was fueled by a perfect storm:
1) Collapse of the real estate bubble and resulting growth of over-mortgaged homeowners.
2) Rapid growth in the need for real estate listing brokers who know how to negotiate a short sale.
3) Decimation of the subprime industry and resulting out-of-work loan originators and Realtors.
4) “Get rich quick” mindset of subprime LOs moving into loan mod scams and, once caught, moving into negotiating short sales for a fee.
5) “Easy fix” mindset of real estate brokers and Realtors who want to outsource the negotiation piece of a short sale.
6) There never has nor will there ever be enough regulators to find all the predators fast enough.
Historically, the real estate listing broker representing the homeowner took on the task of negotiating the short payoff from the lender as part of his or her duties. The growth of third party short sale negotiators started rising rapidly in 2008 and 2009 when it was clear that the easy money from upfront loan mod fee scams was over. Third party short sale negotiators would sell their services to Realtors by saying “We have top secret back-end phone lines that ring right at the desk of the loss mitigation manager and we can escalate your approvals.” It seemed like the perfect solution: Real estate listing brokers could take short sale listings and outsource the toughest negotiation piece and still earn a commission. Gathering all the supporting documents from the home seller and submitting the offer to the lender use to be part of how the listing broker earned his or her commission on a short sale. No more. The problem with outsourcing the most crucial part of a highly specialized transaction is that if the listing broker doesn’t know what he/she is doing in the first place, how would the listing broker know if the short sale negotiator is following the law? These guys are fast talkers, smooth charmers, and use phrases like “it’s all perfectly legal,” and “we’ve had our attorneys review this” over and over again. In the end, Realtors, home sellers, home buyers and lenders are not better served by outsourcing this piece.
Now I’m a believer in capitalism and letting free markets innovate to create business models where there’s a need, providing everyone is following the law. Apparently that was too much to ask for the loan modification scammers, and following the law is apparently too much to ask of the short sale negotiators which is why their days are numbered.
Back to that phone call from Maggie.
Fees paid out to all parties on a short sale need to show on the final HUD 1 Settlement Statement on a federally related transaction as per RESPA. A red flag for short sale fraud is if the third party negotiator is asking the buyer, seller, or Realtor to pay a fee after the close of escrow, and not show that fee on the HUD 1.
The negotiator also suggested Maggie get a loan for the additional $7,000 fee. A loan like this would have to be disclosed to Maggie’s new lender and the repayment would need to be taken into consideration by the mortgage loan underwriter.
The Realtor representing the buyer ought also consider something OTHER than his/her commission by taking a look at whether or not this buyer is possibly over paying for this house. Findwell wrote a great blog piece on this topic.
The short sale negotiator was asking Maggie to pay a total of $10,000. Just how many hours are spent working on that file? 10? 20? 30? 40? Let’s say 40. That’s $250 per hour. If the negotiator spends only 20 hours on this file, that’s $500 per hour. I assert that $10,000 is WAY TOO HIGH for the work performed.
For $250-500 per hour, why aren’t Realtors recommending the seller hire an attorney to do the negotiating? Now the seller has legal representation as well as a person with a law degree negotiating the terms of a legal contract.
I see absolutely no reason for any home buyer or home seller or lender to pay these high fees to a short sale negotiator. Okay, maybe someone is going to comment that there’s this really good negotiator who is worth a high fee.
Really.
I disagree. If a negotiator is that good, then doesn’t part of being good mean you can get the file approved in an efficient manner? Doesn’t that mean it will only take 10 hours instead of 40? Wouldn’t this efficient person then charge a whole lot less and be able to do a whole lot more work? Maybe I’m too idealistic.
Solutions for Sellers
A great choice for home buyers and sellers is where the listing broker is experienced in successfully listing, selling and closing short sales, negotiates the short sale himself/herself OR employs a team member who negotiates the short sale for no more than a typical Realtor commission.
Listing brokers without short sale experience can obtain experience by co-listing 10 short sales with an experienced broker in his/her same office. Don’t worry about the number “10.” We will have short sales in all markets of the U.S. for the next decade.
Another great option for home sellers is to hire a lawyer to do the negotiation piece. One way to pay the attorney fee is to take a look at the typical seller’s side real estate commission (2.0 to 3%) and compare that to the example in the previous paragraph. A home seller COULD choose a full-short-sale-service real estate team that negotiates for 3%. A Realtor that does not negotiate short sales could take that listing for 1.5% with the second 1.5% being earmarked for the attorney fees.
Sellers, do NOT allow your favorite Realtor to “refer you” to another experienced real estate broker. Why? Because the first Realtor might be secretly collecting a referral fee when referring your short sale to an experienced Realtor. Now you’re indirectly paying the first Realtor for doing little if no work. Instead take some responsibility for making a good choice and pre-screen real estate brokers over the phone or online before making an appointment. Don’t believe me? Check this out: “Realtors! Generate Passive income…” by referring your short sales to us!
Passive income to me means earning a fee for doing no work. Isn’t that another way of saying “Section 8 RESPA violation?” Let’s revisit RESPA Sec 8: “Section 8 of RESPA prohibits anyone from giving or accepting a fee, kickback or anything of value in exchange for referrals of settlement service business involving a federally related mortgage loan. In addition, RESPA prohibits fee splitting and receiving unearned fees for services not actually performed.” So if I’m a Realtor and I refer all my short sales to Agent X and receive X% in referral fees for doing nothing but sending over the short sale client, wouldn’t that referral fee be subject to challenge if the homeowner were not well served? Realtors, who wants to volunteer to be the first test case on this?
This local real estate company looks experienced.
Here’s another real estate team that doesn’t refer out to third party short sale negotiators but they do all the work within their real estate team. THIS IS THE FUTURE for short sale success.
Solutions for Attorneys
In Washington State, DOL and DFI have decided that if a person wants to earn a fee negotiating short sales, he/she must hold a loan originator license. Unfortunately some short sale negotiators can’t get this license because of prior felony convictions or not being able to pass the LO licensing exam, yet companies are letting these people work unlicensed.
Some third party short sale negotiators try to fly under the wire by saying that they’re “a division of such-and-such law firm.” Wait, what does that mean? Is the attorney around all day long, accessible to the employees, and overseeing all activity? There have been countless cases across the United States about these types of arrangements and none of them has ended well. Attorneys: Avoid getting involved with these business arrangements.
Washington State Bar Association, just who is the attorney backing this short sale negotiator? What’s his name? Is he actively licensed by your organization in WA State? Isn’t there some sort of rule that says your members have to prominently display who they are on websites? I had to call this company to get the attorney’s name and when it was given to me, it looks like he had previously been dis-barred but then re-instated. Can anyone visualize a scenario where this ends well for consumers?
Some of the best solutions I’ve seen out there for home sellers is to work with an attorney who is experienced representing debtors. When a homeowner is in financial distress it’s rarely just the mortgage debt that needs shorting. Debtor attorneys are perfectly situated to counsel distressed short selling homeowners.
Suggestions for Homebuyers
Absolutely positively avoid making an offer on all short sales UNLESS there are NO third party short sale negotiator fees of any kind paid by the buyer. Tell your Realtor to only show you short sales where the listing broker is negotiating for only his/her commission and the listing broker is experienced OR using a lawyer or law firm to negotiate (NO “division of XYZ law firm.”) If your Realtor does not want to take the time to figure out who is/is not experienced find another Realtor to work with because this means your Realtor is NOT a full-time career agent (full time, career agents KNOW who is/is not experienced) or your Realtor does not want to work hard. An example from Findwell:
Sale Price:
$400,000
Total commission approved by bank (6%):
$24,000
Commission paid to buyer’s agent (3%):
$12,000
Referral fee paid to original agent (30% of 3%):
$3,600
Commission paid to seller’s agent (70% of 3%):
$8,400
Short sale negotiation fee paid by buyer to short sale negotiator (1.5%):
$6,000
TOTAL COMMISSION PAID:
$30,000
The total commission paid out in this scenario is a whopping 7.5% of the sale price, or $30,000 on a $400,000 home. 6% of that is “built-in” to the sale price, and is typically what is approved by the short sale bank as part of their payoff. The additional 1.5% is being charged to the buyer directly for the services of the short sale negotiator. The seller is likely not financially able to pay the negotiator, and the seller’s agent doesn’t want to give up any of their commission, so they pass the additional cost directly to the buyer, yet the negotiator is providing a service on behalf of the seller. With four fingers in the real estate commission pie, the agents are forced to beef up the fees to make it all go around, and the buyer gets to pay the extra.
Buyers need to be fully aware of the fees that they are being asked to cover on the purchase of a short sale and need to make their determination of whether the home still represents a value with those fees tacked on.
Suggestions for Realtors and Real Estate Brokers
Do not give or receive a referral fee when no fee has been earned.
Dis-allow newly licensed or part time real estate brokers to take short sale listings.
Make it mandatory that all short selling homeowners be required to pay in advance for 2 hours of legal advice, to be used anytime during the transaction, prior to taking the listing.
New to short sales? Co-list the home with an experienced real estate broker in your same office so you can gain experience while also serving the best interests of your client by having the client represented by an experienced short sale Realtor.
Maggie decided to fall out of love with that home and to purchase a non-short sale home. How exactly was that scenario in the best interest of the short-selling homeowner? I argue that real estate brokers may be breaching their duties to their home sellers when they outsource short sales tasks to unlicensed, third parties who attempt to extort heinous fees from buyers and lenders. In my opinion the only person who should be paying a third party short sale negotiator fee is the listing broker out of his/her commission.
Regulators
DOL and DFI, the “Guidelines for Licensees” published last December is only just the start. The guidelines need to be updated on a regular basis.
DOL and DFI, please consider making the same strict guidelines that are already in place for loan modification companies apply to third party short sale negotiators as well. Both of these types of companies are Mortgage Assistance Relieve Service Providers.
How about mandatory on-site examinations which ought including interviewing homebuyers to discover any fees paid via handshake, side agreements after the close of escrow. I predict you will find a whole bunch of fee income from fines to fund your entire enforcement division for the next several years.
Then, could you please shut them all down so we can get back to work? Thank you.
That is all.
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For anyone who would like to submit a complaint about a predatory third party short sale negotiator, here are some options:
Seattle HUD OIG office (206) 220-5380
Ask for Jim Siwek or anyone on his team.
DFI.Wa.gov
360-902-8703
csenforcecomplaints@dfi.wa.gov
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