Predatory Short Sale Negotiators
I received a call the other day from a consumer who was in the process of purchasing a short sale home. The homeowner has defaulted on her mortgage and the trustee sale auction has been postponed a few times now that this buyer’s firm offer has finally reached the lender’s loss mitigation decision-maker. Once the offer was accepted by the seller, the homebuyer was surprised to learn that there’s a third party involved, a “Short Sale Negotiator” who is charging an additional $9,000 fee on top of the real estate commissions paid to both the agent for the seller and the agent for the buyer. The Short Sale Negotiator is demanding that the homebuyer sign an agreement that the homebuyer will be responsible for paying the $9,000 fee. The homebuyer emailed me asking what I thought of this additional fee and could I offer some advice.
The first thing I did was to find out the name of the Short Sale Negotiator company, the owner of the company, and the person who is doing the short sale negotiating. I discovered that the negotiation company is owned by the same person who also owns the real estate firm where the listing agent works. I also ran the name of the short sale negotiator and discovered that this person IS a licensed real estate agent.
Readers please note that WA State’s regulators recently changed the real estate licensing laws and there’s a great FAQ section here that answers the question: Does a Short Sale Negotiator have to be a licensed real estate agent? The answer is yes, or a licensed loan originator or otherwise exempt from licensing such as an attorney. (Clicking through from the link, scroll down to “doing business” and see the second question.)
So we have a licensed real estate agent who is earning money as a short sale negotiator who works for a company owned by the same person who owns the listing agent’s real estate company.
There are a couple of things that come to mind here. First of all, isn’t there a bit of a conflict of interest for the real estate broker/owner of that company? Where are your duties? To the home seller, whose listing you’re charged with overseeing, or are your duties to the buyer, a client who signs the agreement to pay your other company $9K? What are the duties of disclosure to BOTH the seller and the buyer?
For example, if I’m the seller in this transaction, charging a buyer an extra $9,000 out of pocket might preclude a number of qualified buyers to make an offer….unless I hold back this information until after the buyer has emotionally fallen in love with the home and is already arranging the furniture in his/her mind. That seems manipulative. Why not tell all possible prospects up front what the short sale negotiator’s fee is: Make it mandatory to display this extra fee in the PUBLIC comment section of the multiple listing service.
You might be thinking: “Yes we could disclose this god-awful fee to the public this but that’s not in the best interest of the home seller.” Well, okay but what happens if you end up attracting a lot of buyers but they all walk when told of this high third party fee? Now the listing agent has wasted everyone’s time. It’s like if someone asks me out on a date and then later he tells me he’s married. Come on! Hey, some women might say yes and it’s nice to know up front how big of an a-hole a guy is. I say the listing agent would actually be attracting the right kind of buyer if they disclosed that their Short Sale Listing comes with baggage. It seems to work fine for the married guys who post personal ads on craigslist day after day.
More: If there is an affiliated business arrangement going on between the two companies that are owned by the same person/people, then a RESPA-required Affiliated Business Arrangement disclosure form should ALSO be required so that the home seller and home buyer are aware of the dual company ownership. Part of that AFBA disclosure form should state that the homebuyer understands that buying this home means he/she does NOT have to use this particular short sale negotiation firm and is free to select another short sale negotiation company to do the same or similar work.
For a home buyer, a big red flag would be if the listing agent demands that you use this affiliated short sale negotiator. Demanding that a buyer use a real estate broker’s affiliated company is a licensing law violation as well as a violation of federal law when those companies are a title, escrow, appraisal company, and so forth. So why not a short sale negotiations company also?
Even more: Is the listing agent receiving part of that $9,000 fee? One way of structuring this is for the owner of both companies to promise the listing agent something like this: “if the lender cuts your commission, don’t worry, I’ll give you a portion of that $9,000 negotiator fee.” Unearned fees are not allowed under RESPA.
The other logical problem that comes up for me when I see an additional fee of $9,000 is this: what work is being done for NINE THOUSAND DOLLARS? That’s an awful lot of money. I could install all new vinyl windows in my 1959 house with that kind of money. I could put this in my teenager’s college fund. I could accomplish a lot with $9,000 so why would I want to pay that kind of money to a short sale negotiator? Is this like extortion/payola in order to get that particular house for that price?
Maybe not. What is this third party negotiations company doing for their $9,000? Wait, let me go find out. I’ll read their website. Gee, there’s nothing on the website telling a consumer what their company actually does for that fee but the pictures of their team tell me they’re all good looking guys under 30. Not that there’s anything wrong with doing business with good looking guys under 30 but it should make us wonder how much experience the negotiator has at short sale negotiating. In 2009 I believe we added ten million “short sale experts” in the real estate industry.
My advice to the consumer: Negotiate that fee down to somewhere around $1,000 to $2,000. If the home is that close to the auction date, tell your real estate agent that you’re going to buy the home at the auction if the lender won’t approve the short sale and if the negotiators won’t go for a reduced fee. Most of the third party short sale negotiators out there are paid much less than $9,000.
Here’s some help with the math: I asked the consumer to ask the short sale negotiator how many hours he’s spending on this file v. how many hours he’s working on those biceps. Consumer says the SSN said he’s spent 10 hours so far on this transation! !! !!! Wow! Well! Okay then, let’s divide $9,000 by 10 hours. That’s a going rate of $900 per hour. That’s probably close to the hourly rate charged by the Johnnie Cochran law firm for litigation cases and I’m fairly certain that this licensed real estate agent negotiator doesn’t have as much experience or education as the JC legal team. Counter back with $100/hour and settle around $200/hour max.
I am betting they’ll take the $2k.
Ask for the negotiator’s $2K to be put on the HUD I Settlement Statement as a seller’s closing cost. There’s a chance the lender will pay it. If not, the buyer needs to as himself: Is this house worth $2k out of pocket at closing? It’s also important for the buyer’s new lender to know about this additional fee. Insist that it’s paid out through escrow and shows on the buyer’s side of the HUD I Settlement Statement if the lender refuses to pay it as a seller’s cost.
Buyers: do not agree to pay any money after closing, on the side, without disclosing this additional amount to all parties including the lender.
Predatory Short Sale Negotiators: The world is watching you. I wonder if your dreams are haunted the way I was haunted after watching The Hurt Locker. Soon your predatory fees are going to explode in your face. Oh, and loan mod salesmen thinking that being a short sale negotiator is the next big way to “make six figures with no experience,” please go back to the used car lots. I’m sure there are some openings at the Toyota dealerships.
Continuing education should not be boring. CE should not make you fall asleep, wish you were back at the office, or wish you had spent your time and money doing something else. Continuing ed should be fun, enjoyable, interactive, and relevant. CE Forward will push you to work hard in the classroom. You will experience more than just butt chair time in our CE classes. We are a forward-looking company and we watch for relevant trends, issues and new laws. We help you learn using methods beyond just a lecture. In our classes, workshops, and keynotes you get to do more than just sit there and listen.
Comment by Roger Ingalls on 4 February 2010:
I first came across this fee 2 years ago, when I was originating a loan for a client.
It showed up on the HUD-1 settlement as a cost to the seller (not buyer), in the amount of $2,000.
I guess the seller agreed to pay it.
Loved the article, and yeah, $9K is way too much for that service. It should cost something, but not that much.
Comment by jillayne on 4 February 2010:
Hi Roger,
I’ve seen short sale negotiator fees ranging from $1,000 on the low end to 1 percent of the purchase price which might end up being pretty high depending on the purchase price.
Either way, what’s being done in order to earn this fee? Yes, short sale negotiators work hard. They spend hours on the phone with the lender’s loss mitigator but how much money should a homebuyer expect to pay, reasonably, for this service?
If the home is being purchased way under value then maybe a buyer will believe the fee is reasonable yet most lenders want to see short sale offers that are somewhat near market value.
I’m not pleased with the affiliated arrangement between the two companies and see potential conflicts of interest.
Full disclosure is the prudent way to go, including exactly WHAT is being done for that $9,000.
Comment by kc on 5 February 2010:
If the seller has already accepted the offer, and there was no prior agreement between the buyer and the “short sale negotiator,” what leverage does the “short sale negotiator” have to make the buyer pay anything?
The buyer should just tell the “negotiator” to go jump in a lake.
Comment by kc on 5 February 2010:
a “Short Sale Negotiator” who is charging an additional additional $9,000 fee on top of the real estate commissions paid to both the agent for the seller and the agent for the buyer.
And the negotiating company is owned by the listing agent’s company owner? Wow. That’s chutzpah.
Comment by frederick m. oberlander on 5 February 2010:
in every state i know of, and that kind of includes some big ones, the word used to describe someone who is paid money to negotiate the terms and conditions for the sale of real estate is a BROKER.
in english, i dont care what you call it, doing this is operating as a real estate broker and the fee agreements are void and probably illegal if the broker isnt licensed. no quantum meruit either.
obviously it is within the scope of an attorney’s representation, but that’s not the point. there are unlicensed people doing things they shouldn’t and can’t charge money for.
period.
Comment by jillayne on 5 February 2010:
Hi frederick m. oberlander,
In WA state, short sale negotiators must hold a real estate license, a loan originator license or be otherwise exempt from licensing such as an attorney. In this particular case study, I did run the negotiator’s name and this person does have an active real estate license….and owns both companies: the real estate brokerage as well as the short sale negotiations company.
I wonder if that affiliated business arrangements disclosure was made…
Comment by jillayne on 5 February 2010:
Hi kc,
The seller had not yet accepted the offer. The offer was submitted with a reduced negotiator fee…and the seller…rejected the offer.
Over in the CR comments, one of the readers pondered whether or not part of that $9,000 was going to be paid to the seller under the table.
Comment by frederick m. oberlander on 5 February 2010:
without advising you on washington law, which i cannot do, it is likely that the negotiator would then be liable to conform to the requirements of any other broker, and that may include disclosures in writing as to whom he/she represents, and so on, the list is complex.
i am not saying whether anyone got their moneys worth as i cannot know. i am simply saying that no one has a right to engage in this activity without proper qualification.
i am saying nothing you havent already said, but i am saying it generically as laws differ from state to state. i have a grave problem with the whole concept of “after agreeing on a deal (ill assume it was not yet in writing for statute of frauds purposes and not yet partially performed yadda yadda yadda) i then got informed i have to pay another $9,000″
if im reading this right, a deal was made even if not enforceable by specific performance and THEN this new closing cost or charge or fee or whatever it is pops up?
how is that legal in washington if its operating as a broker and brokers commissions (well in most states they do, not all) have to be spelled out in writing in advance to be enforceable, because this sure as hell looks like a commission to me if its success-based.
Comment by Wendy Hughes-Jelen on 5 February 2010:
This scenario reads almost like a deal that I just had flip out recently because my client, the buyer, did not like the idea of being forced to use a particular 3rd party negotiator for $9k – the lead listing agent was also the 3rd party negotiator under an LLC. We didn’t find this out until near the end of the inspection period and had to ask several times to find out who it was that the Seller was requiring us to use (according to the co-listing agent). There was no contract or agreement for the fee (like I have seen with another contract), and no disclosures or explanation of what was going to be done in exchange for that fee.
The buyer had a ton of questions so when he talked to the 3rd party negotiator he was being forced to “hire”, the man (listing agent/negotiator) yelled at the buyer, said he had a ton of other buyers, and hoped this buyer would get out of the way. Based on our experience with the property (the buyer and I both live in the neigbhorhood of the property) we doubt this to be the case but after being yelled at and essentially called an idiot the buyer just refused to pay an extra dime to that agent, and then later decided even if I could smooth things out he refused to deal with the listing company. Unfortunately we used the inspection to get out of the deal so the seller, who also is an agent with another firm, has no idea they just lost a gold-plated buyer who was guaranteed to close because of a jerk of a listing agent/3rd party negotiator.
I hope the house goes REO so the buyer gets another crack at it. And I will be filing a complaint with the Department of Real Estate.
Comment by biliruben on 5 February 2010:
Hey Jillayne -
Nice work.
Any sense for whether short-sales offer the better bargain vs. foreclosures are REOs?
Thanks.
Comment by short sales on 5 February 2010:
This is an interesting read. Thank you for sharing this article.
Comment by Short Sale Software on 5 February 2010:
Great article. I’ve worked with various loss mit companies, but the fees are normally $2 – $3k, $9k seems like a helluva lot. I get it varies state by state, but some do really provide value. In particular, I know of some that have connections within banks that can speed up the short sales process to 2-4 months, instead of the typical 5-9, assuming of course the offer is fair, the documentation is clear, and the case to the bank is ironclad.
I also work with a lot of investors who don’t mind paying negotiation fees as it takes that set of work out of their daily efforts, even though it impacts their margins on their short sale flips. Gonna be interesting to see how the next few months plays out! Great post and comments!
Comment by Jillayne on 5 February 2010:
Hi Wendy,
Here’s the link to the DOL for you or anyone else reading that wants clarification on this type of activity:
http://www.dol.wa.gov/business/realestate/contact.html
Scroll down to the bottom of that page for the PDF form.
Regulators tell us they need to hear about these types of issues sooner rather than later.
Comment by Jillayne on 5 February 2010:
Hi Billiruben,
It varies.
Sometimes a buyer can get a short sale approved at slightly below current market value and is thrilled with their price. However, if they’re extorted into the kind of payola arrangement on the side, that might not be so good of a deal.
Buying homes at the auction? Well the investor gurus locally tell me that yes, some of the lender/servicers are drastically cutting opening bids on some of the homes up for auction. For more info, see them interviewed here:
http://www.youtube.com/jschlicke
Start with “auction part 1.” They are all under 5 min each.
REOs may be a better choice for some first time homebuyers as bidding at an auction is not for everyone and you often cannot see the inside before the auction.
REOs are not cream puff homes though. No pretty staging and sometimes they are a disaster inside and out. Priced well, sometime those POS can bring faster equity if the new owner wants to put some of their own time and elbow grease into it.
Comment by Jillayne on 5 February 2010:
Hi Short Sale Software,
Thanks for stopping by. I agree; the typical “negotiator” fee I’m seeing out there ranges from $1,000 to $3,000 max or 1 percent of the sales price with a cap at some point.
One of the commenters from the article on calculatedriskblog.com (CR linked to this article last night) said in parts of California, almost 70 to 80 percent of the inventory is short sales and all have some sort of side-payola arrangement where the buyer must agree to pay the seller, off the HUD I several thousand dollars.
Yikes!
Pingback by Predatory Short Sale Negotiators | Rain City Guide on 6 February 2010:
[...] received a call the other day from a consumer who was in the process of purchasing a short sale home. The homeowner has [...]
Comment by Elizabeth Weintraub on 6 February 2010:
I like the way you think, Jillayne, and am in complete agreement. Everybody and their uncles seem to have jumped aboard the short sale wagon looking for fast cash. Some of the third-party short sale negotiators are the worst.
I had National Quick Sale pop into one of my short sale transactions and demand a 1% technology fee, on top of what they called a $250 administration fee. I could not locate a real estate license for this company. I told them to pound sand, and the lender paid their fees.
In Sacramento, where I work, real estate agents earn a commission to negotiate short sales. Why should a buyer or a seller pay the same fee twice? If I hire an outside negotiator, and sometimes I do, I pay that negotiator out of my pocket.
Comment by Jillayne on 6 February 2010:
Hi Elizabeth,
Thanks for stopping by. What do you think it’s going to take to stop this?
Comment by Dan on 20 February 2010:
!00% transparency is the secret. Not all “3rd party negotiators” are bad guys, (or gal’s) I am one and I’m a pretty nice guy! I also do not charge one cent for a “mitigation fee”. I get paid from the spread that I negotiated with the bank and have a buyer ready to go when the SS is approved. You see I can start the SS process right away because I come in as the “B” buyer. So many times I’ve seen these commission hungry realtors (not all) camp on a listing waiting for a buyer so they can start the short sale process (you need one.) only to drag things out long enough to see the family thrown out on the street. If there was more training offered to realtors on this process besides the ½ day now you know everything class and here’s your certification, things could be much better .
Comment by Jillayne on 21 February 2010:
Hi Dan,
I offer a 16 hour series of 4 courses that agents must take in order to earn my trademarked certification.
I definitely agree with you that the one day or half day sessions out there proclaiming an agent to be “an expert” after only one day’s worth of training is dangerous. There is SO much more to learn about short sales because the rules of the game and the laws are constantly changing.
In terms of finding a buyer and then taking the difference between what the bank will settle for and what the new buyer will pay, I’m not so sure I’m sold on that business model either.
Why not just charge a flat fee based on the work performed?
If the home seller will owe the bank money after the short fall, and the middle man (you?) has made a profit by doing a quick flip, shouldn’t that extra money go to the seller so he/she can pay back the short fall owed to the bank?
In some states (such as WA state) there are some pretty specific laws and rules you’d have to comply with, when the homeowner is in financial distress.
Pingback by To the Students from the Advanced Short Sale Class at Prudential W Seattle on March 26, 2010 : ceforward.com on 26 March 2010:
[...] Predatory Third Party Short Sale Negotiators [...]
Comment by Christian Adam on 31 March 2010:
Truly, a real eye-opener. This will be tweeted for sure! And thank you for the length you went to explain something I needed to know.
Pingback by Salvaging Your Credit: Short Sale as an Alternative? || Marc Chase on 31 March 2010:
[...] else to be aware of, apparently, is what Jillayne Schlicke refers to as Predatory Short Sale Negotiators. Schlicke, CEO of CE Forward, Inc., Executive Director of the National Association of Mortgage [...]
Comment by Jillayne on 1 April 2010:
Hi Christian,
Thanks for stopping by CE4….and thanks for the twitter love!
Pingback by To the Students from the April 1, 2010 Short Sale Class at JLScott Puyallup : ceforward.com on 6 April 2010:
[...] Predatory Third Party Short Sale Negotiators [...]
Pingback by To the Students from the April 14, 2010 Short Sale Class at PNW Realty Kent : ceforward.com on 22 April 2010:
[...] Predatory Third Party Short Sale Negotiators [...]
Pingback by To the Students from the April 29, 2010 Foreclosure class at John L Scott Puyallup : ceforward.com on 29 April 2010:
[...] Dan-O, here are two articles I wrote: Predatory Third Party Short Sale Negotiators and 21 Questions to ask Short Sale [...]
Comment by Richard martin on 28 May 2010:
$9000 seems like a lot to pay for a negotiator the concept seems to make sense if there is a third person making a difficult short sale happen.
What about conflict of interest a real estate agent who happens to be a negotiator and is acting like he is brookering where does his loyalty/ representation lie it gets confusing should there not be some clear disclosures at this point.
Given the complexities of short sales a negotiator who can make it happen woud be earning well deserved payment but would $1000-$3000 not seem to be an appropriate flat fee, or maybe 0.5% of price.
Comment by amanda kirilenko on 31 May 2010:
Yet another example of scammers trying to make a buck. I plan to foward this to my agent so she can be on the lookout. Isnt two agents bad enough?
Comment by Larry Ives on 2 June 2010:
I have heard of these high SSN fees but in the few that I’ve done the fee has been 1.5K and 4K. One idea I’ve used was to have the buyer ask for X amount towards closing costs and then used a part of that money to pay negotiator. In both cases the lender allowed the closing cost allowance and the buyers actually received some closing cost help.
Pingback by To the Students from the June 2, 2010 Advanced Short Sale Class at SKCAR Bellevue : ceforward.com on 2 June 2010:
[...] are two articles I wrote about third party short sale negotiators: Predatory Third Party Short Sale Negotiators and 21 Questions to Ask Third Party Short [...]