Home : Blogs : Amy Gooden : Amy's innermost Real Estate thoughts

Whats with "4th party" involvement in short sales?

I came across this scenario for the second time today. I am wondering if anyone else has come across this and what your thoughts are.

I was looking at a short sale listing for one of my buyers. There was an addendum attached to the MLS sheet that was prepared by the listing agent. The addendum explained that upon bank approval, a "4th party" (party 1-seller, party 2-buyer, party 3-seller's mortgage company) would purchase the home from the seller and then on the same day sell it to the buyer. Oh and did I mentioned the "4th party" is the listing agent's ex-husband?

So is it just me or does this sound...I don't know...shady?

I heard of this one other time about a week ago. The buyer's agent on one of our short sale listings told me at closing that her buyer bid on one of these "4th party" short sales before bidding on ours. She said that there was the same kind of ex-marital relationship between the parties in their case. The listing agent on that short sale even revealed to this buyer's agent that the 4th party was looking to make a $10,000 profit.

What on earth? First of all, it doesn't sound like the listing agent is acting in the best interest of her seller. Second, doesn't profit that the 4th party hopes to make hurt the chances of bank approval of the short sale?

The whole thing just doesn't sound right. Anyone have any insight on this situation?

Posted by Amy Gooden on 01/19/2009 08:43 PM

Comments (11)

Short Sales in the ActiveRain Channel

short sale

Post is included in group: Short Sales Specialists
Post is included in group: Short Sale REALTORS®
Post is included in group: Foreclosures & Short Sales

11 Comments on Whats with "4th party" involvement in short sales?

JAN

Amy~ I have never heard of such a thing, but it does sound out of line and wrong.....FISHY for sure!

Never heard of this, and it sounds very unusual! (yes shady)

It's actually more common than you may realize. Unfortunately, not everyone believes in 'full disclosure' during the transaction, so there are probably many of these that are going unnoticed by the homeowners and the end buyers. I think it's wrong and refuse to be party to these when I'm working a short sale.

Michelle Schoen
The Permanent Record, LLC
Short Sale Negotiator

JAN

The only "4th party" I have heard of is when the the bank has someone else doing the negotiating. However, it has not been my experiance that the 4th party buys it and then sell it to the actual purchaser. The 4th party in my scenario only negotiates.

Amy-

This is a very common practice in land deals, as the purchase contract is actually an "option". Essentially your "4th party" has a contract for 10,000 less than your purchase price, has locked up the property and is reselling it to your client. I assume that they 4th party has negotiated the short sale with the lender and your client ISNT actually buying a short sale property since they will actually be buying from the "4th party". Making 10k and selling to your client under market value seems to be a win-win for everybody and since everything has been disclosed this transaction appears to be on the up and up to me.

Come check out our free Short Sale Webinar to learn more!

http://www.livefreeinvestmentgroup.com/Education/Events/WebinarRegistration.aspx?eventId=113&referralid=agriffin&pCode=AG8701

I agree that full disclosure is great but I think I will probably steer my buyers away from this type of sale. If a 4th party is trying to make a profit that is less negotiating room for my buyer.

As a sidenote: I called the listing office for the home involved in this situation. The answering maching that picked up said, "Press 1 for Real Estate and Press 2 for Travel arrangements." Doesn't sound much like a company I want to do business with...

JAN

AMY,

This "program" works like this. An investor (the 4th party) offers to purchase the property from the distressed homeowner with an "option" contract. They submit the low offer to the lender and at the same time the property is being marketed as a short sale. A buyer comes along and makes another offer on the property, hopefully for market value. The idea being that the lender agrees to the original low offer or something close to it and approves the short sale. At that time the investor is going to sell the home to the 2nd set of buyers for more than he paid and thereby making a profit. That program has many, many issues none bigger than the disclosure of the entire process to the lender. It's probably something you might want to be very careful in getting involved with.

Become a CDPE Today

JAN

Amy-- I have just been involved with this very situation. Some folks came into town and starting writing contracts like crazy, working with 15-20 agents at a time. They got many properties under contract (thanks to the REALTORS work) then never seemed to close themselves on them. I am sure they are looking for their own buyers to close a t a profit with a simultaneous closing. One other note: I showed these folks several properties that were "great deals"..they made an extrememly low offer on a contract that I sumbitted--then when it did not get accepted, I never heard from them again...only to find out that they then had submitted their OWN offers directly to the owners/listing agents on 2 of the properties I had showed them......These folks are REALTORS....bottom line, BE CAREFUL !

FEB

As many people stated, it is common. Whether it be an option contract or a double escrow, it does happen. If the listing agent is advertising the listing in hopes to find retail buyers while negotiating a lower purchase offer with the bank, then that agent is violating the fudciary responsibility that they have with their client. However, if the listing agent is listing the property for the person who has an option on the property, then the listing agent is ok.

By the way, most lenders are stating on their demand letters that the buyers are to be the person on the purchase contract and that assignment of the buyer cannot be made.

Agents should just have their commissions on a listing agreement and have the buyer pay the difference of what got approved by the bank either by having the buyer's agent amend the commission agreement and have a buyer's broker agreement between the buyer and the buyer's agent or by having the buyer sign a disclosure to have the buyer pay for reduced commissions and other expenses that the lender did not pay for in a short sale. This way, neither seller or buyer can come after the listing or buyer's broker.

Why would a buyer ever agree to pay part of the listing commission?

If you have a 10% listing agreement and If you negotiated a 200k purchase price on a short sale with the lender only agreeing to pay 5% while they buyer was expecting/willing to pay 250k, the buyer will be willing to pay at least the other 5% (10k) in commissions. Two ways this can be done (in this example):

1. Escrow instructions (or settlement instructions for you guys who do not use escrow) be amended to state that the buyer's broker forfiets their commissions to the listing broker. Then the buyer's broker has a buyer's broker agreement with the buyer which states that the buyer will pay 5% to their brokerage.

2. You have the buyer sign a disclosure stating that this is a short sale and there are some costs and expenses associated with the short sale that normally the seller pays for (such as HOA deliquency fees, commissions, repairs found on the home inspection, termite, etc.) but will not because the seller is in no position to do so and the lender has not agreed to these fees so the buyer is left to pay for these fees that total up to $10,000.

The second example gives you more flexibility to make 7.5% commission if you wanted too. You have a 10% commission agreement in which, let's say, you offer 3% on the MLS to the buyer's broker with MLS stating that commissions will be split 50/50 of what the LENDER agrees to pay. So now you give 2.5% to the buyer's agent from the 5% the commission that the lender agreed to and you keep the 5% from the buyer.

Leave a response…

Name:

Email:
(optional)

Comment:

What does the graphic say?