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Court Case Could Effect Short Sale Specialists

Short Sale Law Recently a court case ruling about Administrative Fees (Busby v. JRHBW Realty, Inc, d/b/a RealtySouth) made me think, "Good for them!" I've never been a proponent of Admin Fees. They are junk fees after all. However, as a short sale specialist, I had to think about this a bit more.

In this case, the plaintiff won a class action law suit against RealtySouth for charging Admin Fees that were legally proven not to have done anything to help in the transaction. Short Sales can feel like the wild west and now some of the extra ways of collecting a full commission are in jeopardy.

Let's look at Section 8 of Respa (since it was used in this court case)

"No person shall give & no person shall accept any portion, split or percentage of any charge made or received fro the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed."

While RESPA allows for fees to be paid with cooperative brokers, the plaintiffs in the above case argued that the admin fee charged was not for services actually performed. This got me to thinking about Short Sales. I've got some key areas where there is potential grey area, especially if the seller of a short sale has to take a note back (liability!).

Negotiations - You might be doing this or outsourcing it, are you collecting the fee for it? Might be best to outsource or at least have it go to someone other than your Broker or personal business.
Extra Fees - Did you pad the HUD to allow for you to cover HOA, taxes, etc. Now that the deal is approved you want to pocket the extra money. After all you earned it, Short Sales are tough! Now with this case, any fee could be questioned at a later date. (Not suggesting that padding the HUD is right or wrong, just a practice that I have seen)

Ultimately, it's better to try to charge a higher (but not exhorbinant) commission % than it is to add fees onto the HUD needlessly.

Luckily, most sellers and buyers are extremely happy when the short sale process is complete, but it does bare paying attention to!

Article over your head? If so, feel free to contact me with referrals! (I LOVE SHORT SALE REFERRALS!) or questions!

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Joshua Jarvis
direct : 770-374-4667

Atlanta Short Sales

Posted by Joshua Jarvis on 07/07/2009 07:49 PM

Comments (39)

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39 Comments on Court Case Could Effect Short Sale Specialists

JUL

Very interesting. Thank you for sharing the information. Laws are different from state to state, but it is definitely important to be up on things!

JUL

I see no relevance to the respa rule nor the case law you mention in regards to short sales.

The short sales are so different than the traditional real estate practices that the mere mention that the negotiator and the real estate agent are one in the same is laughable. They perform 2 completely different duties and are 2 completely different roles.

I feel sorry for those agents that try / must do both the negotiation and manage their real estate career. They are 2 completely different jobs and if you fail to treat them as such, you will either be burried in stress, or stuck on the phone, while other agents are courting your client.

Brady - they are different in terms of the way they are done, just like REOs are different from traditional transactions. This court case however, exposes "FEES" that aren't related to selling the home that appear on the HUD. So for licensed people trying to collect fees on the HUD, it is relevant.

Sounds like you might be bitter about something. Please add something to the conversation next time, bring some value and everyone will be better for it.

I know that it is difficult to get what is fair in a short sale transaction sometimes. However, using the word padding is not so professional in my opinion. It evokes a negative image.

I think you should just charge the commission that you feel you have earned. If the fees come in lower than expected, then that is SELLER money. Or bank money in the short sale case (which is acutally seller money since it lowers their deficiency).

Using the word padding evokes images of why RESPA came into being: kickbacks. According to RESPA you cannot take a fee for collecting a fee.

I fully understand what you mean though. You pad your expenses to get a low approval, and then load up your commission after the real expenses are in so that you net the same to the bank. From an agent perspective, it makes perfect sense. But from an industry perspective...or from an outsiders look into our industry, it looks wrong.

Just my opinion!

Chris Butterfield

Great information, I've heard more recently regarding transaction fees and court cases. Definitely not a good idea to just tuck the fee into the HUD!

Chris - Thanks! Padding is used in the general sense to cover unexpected fees like HOA fines and Taxes that might have been left and unfound until the closing. Sometimes there's a shortage and other times there is an overage. I've seen agents try to move that overage back to the commission side.

It will be interesting to see if changes are coming. One thing to clarify is that I believe RESPA only applies to the buyer, not the seller. A broker can charge an admin. fee to a seller w/o violating RESPA.

We are experiencing some unusual problems with short sales lately. We have had a couple of buyers who were asked to come up with extra cash just prior to settlement. The amount of cash requested was $5,000 to $7,000 - not a small amount to any buyer, I'm guessing. We attempted to build the extra money into the loan amount on one of the deals and were told, "no, it needs to be cash." Also, there seemed to be difficulty expressing this money on the HUD-1.

Our suspicions were raised. We killed the deal and are back out looking again (after 4 months of waiting for bank approval on the short sale, of course). We don't understand why there seems to be no transperancy in these two transactions. I think we need a lot more discussion, invesitgation, and maybe regulation surrounding short sales.

Joshua, glad you clarified how the "padding" goes in the pocket of the agent in the comments. When I read that, it sent up a huge red flag. We are indeed in a wild west with short sales. The rules keep changing.

Sharon

I think this is good information to know, because there are a lot of questions on the best way to get fair compensation for you services in a short sale. Our Office have talked about having a fee for during a Short sale. Just talk at this point! But, anyone who have done a few short sales, know just charging a higher commission over 6% doesn't work. The banks (most) will only pay 5% in some situation (same agent both sides or both agents same office) and they always make the final decision on what they are going to paid, the sale contract don't matter. I have heard that some agents only received 4% to slit, a Short sale is too much work for that kind of money...

I am (so to speak) no short sale specialist, but I do see the problems with these transactions (if they reach that stage). I for one don't believe in "padding" either but understand the desire for this when dealing with short sales.

No matter what type of transaction you are involved in, you still have to jump some hurdles on your way. Working with buyers doesn't guarantee a commission either. How many of you have worked with buyers and invested time, effort, and money only to see the buyer change their mind or go with a "friend-broker" after using your expertise and service "for free".

Maybe we need to re-examine the current system and come up with a fee structure for buyers and sellers. I have heard of some creative negotiating methods where agents will offer a lower commission if they receive a small upfront fee for getting the actually listing on the MLS. It shows that the sellers are committed to their broker and buyers could get the upfront fee back as a rebate (or down payment if you will) during close of escrow.

This is a great blog with great information.

Here are my 2 cents worth:

First and foremost, my job when listing a short sale is to get the seller out of a bad situation. That is what they hire me for. I will fight as hard as I can for my commission and do not "pad the HUD". I make sure that we cover HOA fees, back taxes, liens, etc but do not "pad the HUD". Afterall, my job is the help the seller. Do banks cut commissions? Sometimes they do, sometimes they don't. I have never had one pay less than 5%, 90% of the time I get 6%. Either way, it is my job to help the seller out of a bad situation.

In the end, when you close a short sale and take that burden off of the seller, that seller will remember you and you WILL get referrals out of it. So if you take a commission hit, trust me, you will make it up in referrals.

Do what is right by the seller and don't focus your attention on padding HUDs or the commission. Do what is right and the money will always be there for you. Do the wrong thing and focus on money, your business will be a roller coaster

Just my opinion

Anja - Collecting any sort of fees is dangerous territory, but putting them on the HUD now is a danger zone of higher priority!

The "padding" reference was such a small part of the post, I'm surprised everyone keyed in on that.

A fairly high percentage of short sale listings end up as foreclosures. These families are losing their homes. Agents that hold themselves out as short sale experts may be expected to account for their failures when the legal actions are taken.

Roy, you are right about agents identifying themselves as "short sales experts". A couple of weeks ago, NAR mentioned this in an article that agents may want to change the term from "expert" to perhaps "certified" or another term in order to avoid liabilities. I completed the CDPE course received the certification. I contacted the institute about about the NAR article and perhaps changing the "expert" to another term. I have not heard back.

To the original thoughts on this blog, I agree with Jeff Payne that it is about the helping the seller. However, as individual agents, this is a business that we run with real expenses. Josh, I am with you on the "wild west" of short terms. I am watching to see if there are any entities (banks / mortgage lenders, NAR, etc) pushing more standards / guidelines, rules, etc on short sales, for both the buyer and the seller.

Courtney Peace Hagins ABR, CDPE RE/MAX Island Realty Hilton Head Island, SC

Although I am a CDPE (Certified Distressed Property Expert) there is a local title company here in my area that is processing short sales and is having a tremendous success rate.

They put a line on the HUD charing the seller (aka BANK) for a short sale coordination fee. They will waive it if the bank protests, but it's only $1200 and in most cases, the bank has just been paying it. The seller doesn't and the agents don't, and the bottom line is the deal gets done.

Padding the HUD is a bad thing but I personally approve of charging a FEE for service out front. Short sales are a pain from start to finish. Here in Ca. short sales are taking 6-8months if your lucky. The 2nd lien holders aren't accepting payoffs, One of mine fell through in last week before closing. The NOD wasn't filed for 6months. I worked on this deal for 8months (my son's friend). I didn'nt make a dime for all my time! I can't make a living with those kind of results. I also agree with Roy. Attorney's are out in full force here in Ca. suing Lenders left and right and the Brokers are right in the middle of a class action suit.

I don't think Brady Pevehouse sounds "bitter" about anything. I think he's responding to your comment, "Extra Fees - Sure the HUD was padded to allow for you to cover HOA. Now that the deal is approved you want to pocket the extra money. After all you earned it, Short Sales are tough! Now with this case, any fee could be questioned at a later date."

If short sales are so "tough" and you feel you've "earned" a fee, why can't you be upfront about all fees to begin with? As my mother used to say, "If you do it, don't be ashamed of it. If you're ashamed of it, don't do it." She also said, "A clear conscience is the softest pillow."

So was the verdict that they are not allowed to chage admin fees for the processing an negotiation of Short Sales, over an above the real estate commission? I ask as I know a few people doing this regularly on a pretty hefty scale...

You call yourself a "Short Sale Specialist" and then you pad the HUD to cover expenses your title company is suppose to find out about and put on the HUH??? This is laughable.

I don't think it's considered padding the HUD if it's monies you legitimately carried for the HOA fees, maintenance or other services in furtherance of the sale. An alternative to all of these questions would be to document fully what services are covered and what are not and costs involved for what is not PRIOR to the signing of the listing agreement and then all parties are aware & made informed consent. Properly evaluate your business, fixed costs etc. prepare your systems and methods and then charge an appropriate commission this way "Junk Fees" wouldn't be as big of an issue.

Everyone is keying in on the padding of the HUD, I'm not suggesting that I do that but rather that it does happen.

... the HUD to cover expenses your title company is suppose to find out about and put on the HUD???

Sometimes HOAs will fine the homeowner and/or other things will happen throughout the short sale process, that can effect the bottomline. I'm not condoning padding anything, but it does happen and for good reason.

Question: Is it considered padding a HUD if you are planning for a closing 5 months out?

Joshua,

I think you raise good points, and I recommend the KISS principle. Stick to what you do as a Real Estate Professional. Let someone else make a little money if they can successfully negotiate with the seller's lender and buyer. If they can't, they don't get the fee (and you avoid the risk). The only problem I have with this scenario is if negotiators want to "cut" the Realtor commissions without cutting their own fees commensurately.

I've got an offer in on a Short Sale where my buyer agreed to a third-party "negotiator" service that the listing agent found (and that the buyer will pay for should the lender refuse). At first, I was a little skeptical, but it makes complete sense from a liability (and time-consumption) standpoint. Additionally, my buyer is clearly benefitting from "negotiator" services already rendered for a previous offerer because this particular property already has an "approved sales price"

There may come a time--where the negotiation of short sales is not something a Realtor may want to get involved with. First and foremost, it is too time consuming. I just cannot spend hours on the phone dealing with a mortgage company that may or may not approve the short. Then there is the liability. If things don't go well and the client's house goes into foreclosure--thinking the client will blame the bank and the Realtor. Six hours on the phone to not get an approval: six days in court fighting with your once happy client. Not sure if it is worth it.

I agree with Scott (#21). The bigger issue is full disclosure (and full documentation of services rendered). If the admin fee was discussed in advance it probably would not be as great an issue.

Joseph - in the court case, it was clearly discussed and even defined... it just did not stand up in court.

I think you always have to be careful charging fees for services. I am out sourcing some work for which there is a charge, that I do not see a penny of.

Joshua - Florida allows Realtors to faciliate short sales, but there are stricter regulations on outside companies, reference the Florida Foreclosure Rescue Fraud Prevention ACT. If preliminary HUDs are estimating anticipated costs at a later date, they need to be made "exact" at closing. If the funds went someplace other than where stated on the HUD, the Florida title agent and Realtor would be committing fraud.

I didn't know that real estate agents do a HUD...doesn't that come from a lender? And since when can an agent tack on a fee anyways? I know that sometimes things are slightly overestimated(not grossly from all that I've seen) but that way there'e enough money i escrow to cover anything unforseen rather than scramble towards the end of an escrow and have a buyer wire in or bring in additional funds. i've not known there to ever be an exhorbitant check given back for leftovers in escrow.

I have the CDPE designation, but this brings up some good point. How can anyone be an "expert" in anything these days? Everything changes so fast, it makes my head swim.

Amy - The bank requires a HUD so you either get a lender or attorney to create it or you do it yourself. It's a preliminary HUD so the bank can see their true "NET."

It seems to me there are additional services performed in a short sale than in a traditional sale, and it should be permissible for the agent to be compensated for the work. That said, it must be done legally and in line with the bank's approval.

Thanks Joshua, nice article about short sales and what the sellers/listing agents should watch out for. When I get a short sale; the first thing I do is to ask the escrow officer to run a HUD1 for the property. They will also do a Prelim, which helps me understand the seller's / property's siutation better. I will then ask for an update HUD1 when we have an offer to be sent in.

I actully like short sales, believe or not!.

JUL

First off, CDPE has only a 47% success rate on a short sale so you shouldn't be calling yourself a specialist or an expert (in my opinion) because someone gave you a piece of paper.

Anyway, padding the HUD is perfectly fine. Moving the money elsewhere on items that the lender has limits on, such as commissions, is not. The latest strategic way to maximize your profits on a short sale is to set up an LLC and have the buyer to pay the LLC for the short sale processing fee. You could also have the majority of the commissions paid to the listing agent and have a separate buyer's broker agreement between the buyer and the buyer's broker to compensate the broker for the loss of the commission.

I do agree, a short sale agent should realize that you should be paid for the time you spent on the phone with the banks. It is a different animal and you should compensate yourself for it.

Joshua,

Maybe my response was made in a rush, as I was on my way out the door when I typed it up. Therefore I have edited it slightly, in hopes you can understand it better.
As for the mention of being bitter, not at all. Just like 2 attorneys can interpret one laws 3 different ways agents can as well. I find it unflattering that you attacked me the way you did, based upon my opinion, but that is your right, and I will give you that. I will make it a point not to respond your postings in the future so as to not waste your time, as you pointed out, I have done thus far.

In my opinion, the court ruling you referenced was in regards to brokers / agents charging additional admin fees that were added onto the HUD;
         1. without proper notification and documentation to the client
         2. without actually performing a service justifying an additional charge
         3. without performing a service above nor beyond the standard real estate duties

Now I admit, yes, that is my interpretation of the law, and if all 3 items are met, and justified then the fees can be charged and would be legal. The role of a negotiator goes above and beyond the role of a real estate agent (and is what I called laughable, and maybe what you took offense to?) which is why I explain to my clients, as a real estate agent, my job is to market a property, procure a viable offer to the clients best interest and satisfaction as well as perform as a facilitator between the buyer & seller or their agent to ensure the transaction closes all the while protecting the client through inspections and contract negotiations with the buyer or seller. None of those duties involve negotiation with the lender for 30-60 or sometimes 90 days, handling the paperwork as a lender would to get the seller approved for a distressed sale / short sale, risk the transaction not closing because the lender works on a different time line and under different interest all together.

In short, just as a lender / mortgage broker would expect to be compensated, a negotiator should do the same. Negotiators do compile near the same paperwork on behalf of the seller this time instead of the buyer, so again someone "asking" for a fee to be paid for this additional service is not out of the question. It is up to the lender to approve this fee. And naturally, it would be required that this fee be disclosed on the preliminary HUD to protect all parties including oneself as the negotiator.

I still stand by the last statement in my prior post, which may have been the part you took offense to, you did not state what you believe to be irrelevant, but agents who feel in their best interest to handle the negotiation as well as the duties of a full time agent, in my honest opinion may potentially do a disservice to their client and their business. Being stuck on the phones and not procuring new leads, new listings, new buyers, performing walk-thru's etc. may not appear as much of a loss of time in a single transaction, but as it can add up, and if so, the agents' business will suffer. This is why it is often better to consider a professional negotiator with experience to do what it is they do best while the real estate agent does what they presumably were hired to do which is market properties, procure new clients and manage their real estate career.

Needless to say, I have a feeling you will not see eye to eye with me on this, but it is just my opinion.
And no, I don't think your article was over my head. The fact remains that not everyone will agree and if that is the case, then as stated before I will not trouble you with an opposing opinion again.
I am sorry that you felt, "my opinion" lacked value because I did not agree with you.
I do hope others see value in my previous post as well as this one..... & thanks to the anonymous Consumer ~ who ever you are for reading & realizing I was not bitter. (someone buy that guy or gal a drink).. rushed maybe but definitely not bitter.....

Sorry for the long post, but as you may guess, just as I have not attacked your character, I do not take kindly to someone attacking mine.

Yep, I think that if you are going to charge anything it should be upfront to the parties. If you honestly feel that you've earned the fee, then get it and defend it. Being able to charge it just because you can, or no one will find it, is just not right. I love it when you find out that the listing agent charged 8% and you received 2.5% on the selling end.

JUL

Interesting Blog Joshua. I think that too many agents think about "right now money" as opposed to being fair in our pricing and thinking about possible referrals down the line.

JUL

Laws are changing daily state by state, many with unintended consequences.

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