There have been numerous discussions on recent blogs focused on two specific topics of interest regarding if a short sale negotiation fee is allowed:
1. The ethics/legality of the agent getting compensated for the short sale negotiations
2. The use of and compensation for 3rd party short sale negotiators, particularly in requesting that the buyer pay the negotiating fee to the 3rd party.
Also of interest was a recent blog post where a seller supposedly sued the listing agent when his house foreclosed, claiming that the requirement of the buyer to pay a negotiation fee discouraged buyers from submitting a contract. In this case, the seller never saw an offer come to the table and the home went to foreclosure. Now the seller is blaming the listing agent saying that this fee kept buyers away from seeing his home and placing an offer.
Not being an attorney and therefor, not one to offer any legal advice, I would like to refer to a detailed article written by an attorney I retain. Suggested solutions from the article addressing the above topics are outlined below. However, the reader is advised to read the entire article that can be found at Short Sales Negotiations - A legal Perspective of Compensation
The following are excerpts from Ron Ballard's White Paper Entitled: Tuesday, October 5th, 2010 Short Sales Negotiations - A Navigable Quagmire of Agency, Duty and Compensation. While it has a CA slant as a response to recent DRE (Department of Real Estate) publications, the concepts are fairly universal.
Posted by Ron Ballard
A listing agent is paid compensation for a sale that closes, typically in the form of a "commission," which is a percentage of the purchase price. A commission is ordinarily a form of contingent compensation for procuring a buyer who is ready, willing and able to purchase the property.
The common 6% "full retail" commission historically does not include the hours and hours that is typically involved to ascertain the short payoff amount(s), if any. Moreover, the skills and knowledge needed to effectively process and "negotiate" short sale payoffs have not been part of traditional real estate training nor part of the licensing examination process. How then could they be considered as part of a listing agent's "duty" and be folded into a normal commission? The Update doesn't say.
The DRE (CA Department of Real Estate) position is that "negotiations" must be conducted by a licensee in order for "compensation" to be legally paid. But "compensation" is not synonymous with "commission." A short sale processing fee for the many extra hours involved in ascertaining acceptable discount(s) is a reasonable addition for someone to be paid for lots of extra work. Unfortunately, the input I receive from short sale processors is that the discounting lenders are less frequently approving a processing fee on the seller's side of the HUD. This leaves the buyer's side as an area to explore.
Regardless of improvements shortening the time for short sale processing at some banks, licensees and investors continue to report short sale processing times of four to six months as common, with an occasional 4 to 6 week surprise here and there (plus 9 to 12 month deals on the long side). Certainly the buyer is interested in the efficiency and effectiveness of the short sale processor. The DRE Update seems to erroneously assume that only the seller is interested and affected. Since both the seller and the buyer are interested parties, the designation of the short sale processor and the method of compensation properly falls into the realm of negotiation.
As one likely is sensing, the roles, duties and methods of compensation involved in settling short sale payoffs has virtually unlimited size, shapes, colors and flavors. The necessity is for appropriate definition, disclosure and consent - just the kind of complexity lawyers love because it can create a lot of work.
Problem: The MLS remarks or a pre-sale instruction sheet state that the buyer must agree in advance to pay the SSN's fee if they intend to present an offer. Offers will not be presented without this. DRE states this is a problem if "the requirement for the Buyer to pay the SSN is being driven by the Listing Agent and/or the SSN, and is really not a requirement of the Seller . . ." This could stifle and limit the presentation of legitimate offers.
Solution: I agree that this is a problem IF the seller does not know about the remarks or term sheet or have an understanding of what is going on.
Different approaches can be taken to solve this and they all begin with seller education by the listing agent. The listing agent should have a written discussion of the seller's options in this respect and a signed consent approving the approach that will be taken. If the seller chooses the approach discussed in the Update with the understanding that it might limit offers and might not be approved by the bank(s), then the seller is entitled to make that choice.
Proper documentation is key, including whether the SSN is connected with the listing agent (or is the listing agent) and how compensation will be handled. If I were advising the seller, I would want the listing agent to keep the "Buyer pays" approach as preferred but negotiable. The seller can always include these kinds of terms in a counter-offer and engage in active negotiations regarding them.
Problem: The buyer is told that he or she "must" request a credit for nonrecurring closing costs ("NRCC"), typically 3%, and apply that to pay the SSN fee, and possibly junior lien holders. The NRCC may be shown on the HUD1 but might be paid outside of escrow if not approved by the Lender.
Solution: A short sale package must include a projected HUD1. These likely change through the course of the process. The NRCC and it's application should simply be shown early enough in the process for proper disclosure to the lien holder which provides sufficient time to object or acquiesce. The payment must then be handled according to the approval or rejection.
Problem: Although the SSN Addendum is a contract document, it is alleged that some SSN's don't send it to the Seller's Lender in order to conceal this information. Intentional concealment of a material contract issue may constitute fraud.
Solution: First, the SSN Addendum is a separate addendum because the issues are not covered in standard forms; hence, an addendum is physically and practically necessary. There is nothing nefarious about this. However, the concealment is likely improper because the terms would likely be considered as "material" to the transaction. It simply needs to be sent in to the lender as part of the initial short sale package and "concealment" is avoided.Problem: Buyers may be asked to pay off the seller's credit cards debt, the seller's moving expenses, to buy the seller's furniture at an inflated price, and to otherwise provide funds for the direct benefit of the seller. These are problematic if not approved by the seller's lender.
Solution: Generally, I agree. The short payoff letters always state that the seller cannot receive additional compensation or any of the sales proceeds. I agree that the buyer must not pay "an inflated price" for seller's furniture. However, there should be nothing wrong with actually buying personal property at true "moving sale" prices. This is not disguised sale proceeds when it is comparable to what the sellers are otherwise receiving from an actual moving sale.
Problem: Including the SSN fee on a HUD1 is "arguably not sufficient to qualify as a realistic, timely disclosure" to seller's lender that such a payment will be made and may violate the amount of commission approved by the lender.
Solution: First, I disagree with DRE's characterization of any kind of short sale processing or negotiation fee as a "commission." As stated above, "commission" is for procuring the sale and should be properly identified as commission on the appropriate lines of the HUD1. The short sale processing fee is for additional services and should be properly identified as such.
This is particularly true when short sale processing or negotiations is provided by a third brokerage, an attorney, or a limited scope of duty (clerical/administrative) third party processor. There is no basis for considering these services as "commission." They were not part of procuring the buyer. Secondly, the feedback I receive is that banks closely review HUD1 forms. They often identify negotiation fees and reject them. The "final" HUD must be approved by the bank prior to closing and must agree with the negotiating HUDs. Hence, it's unlikely that anyone is "slipping a fast one" by the bank. If there is an impropriety as cited in the Update, then the resulting consequences are appropriate.
This all goes back to the principles I, and other attorneys I collaborate with such as Jeff Watson, have been advocating since 2008 (probably earlier for Jeff): properly and timely disclose the relevant facts of the transaction to the appropriate participants. Education, disclosure and consent typically overcome the issues raised in the various releases we see from numerous entities in this niche.
Problem: "The SSN Addenda may contain provisions which purport to establish that the SSN (who is negotiating with the Seller's Lender on behalf of the Seller) is also representing the interests of the Buyer in order to support the rationale given as to why the Buyer is to pay the SSN fee." This may create issues of unclear agency duties or of insufficiently disclosed dual agency.
Solution: Once again: the standard agency documentation is inadequate for any kind of short sale in my opinion. It was not designed for short sales. I have master forms for my clients which can state that the short sale negotiator or processor is working on behalf of the buyer and not the seller. The seller is advised to seek independent counsel to analyze the resulting outcome. Sometimes the buyer insists upon being the negotiator and is highly experienced in doing so. I cannot emphasize enough the inapplicability (and the lack of existence) of a cookie-cutter approach to handling the roles and compensation for loan payoff discounts. All of the roles need to be properly defined and acknowledged in customized documents. Since both the seller and buyer are interested in the outcome of the short sale processing, the SSN should have a communication system that can keep both of them up to date. Many online processing services provide this feature.
Problem: The lender's documents might require a seller and/or buyer to certify that the transaction is made at fair market value (FMV) but the listing agents may orally emphasize the payment of "less than FMV as part of a scheme to induce the Buyer to want to pay the SSN fee."
Solution: The FMV certification will be the topic of an entire article. For now, suffice it to say that, by definition, it is impossible for a short sale to take place at fair market value. The definition of fair market value requires that neither buyer nor seller be under any duress to sell and that unlimited marketing time be available. To the contrary, short sales are distress sales with the seller under pressure to sell. Any lender asking for a FMV certification is asking the impossible and they should know that (as should DRE).
Problems: The Update goes on to discuss further scenarios that involve lack of disclosure, or of consent, or of negotiation between seller or buyer, or settlement payments outside of escrow, or of redirection of funds differently than approved on the HUD-1.
Solutions: The DRE Update generally seems to assume that the respective roles have not been defined, the terms have not been disclosed, and the seller and buyer don't know what's going on so they can't give consent. If any one of these participants were my clients, I wouldn't want them involved in transactions like that. The solution, though, is simple. Although the verbiage might be extensive, pretty much all of the issues can be resolved by relevant disclosures up front, with consent from buyer and seller, and relevant information provided to the lender(s).
The [DRE] Update often treats a negotiation or processing fee as a "junk fee" that doesn't provide real value to a buyer. To the contrary, I have clients who are buyers who negotiate strongly with a seller to assure that the short sale processor or negotiator will be one they (the buyer) select and they offer to pay. This is because the role is critical for the buyer to have a successful deal. I welcome anyone who has "negotiated" a short sale to comment on this article that the process was so simple and quick that they would do it without compensation. No one "in the trenches" would even conceive of that. Compensation for short sale processing or negotiation is not a "junk fee."
I have yet to see DRE warn consumers about the widespread fraud consistently perpetrated by the banks.
Real estate licensees, title companies, escrow companies, buyers and sellers are well-served by being made aware of the risks of fraud. However, the world of negative equity has created a new paradigm for which outdated and unprepared analysis do not work. There is a legal quagmire in short sale negotiations and processing that can be confusing. But regulators should not freeze markets or hinder transactions because of the mere risk of confusion. The confusion can be overcome by proper navigation through this quagmire with effectively negotiated and documented transactions. DRE would serve the public well by advising how transactions can be properly structured, not just vaguely pointing out risks without offering solutions other than inaction.
Related Posts:
1. Click title for: Short Sales Negotiations - A legal Perspective of Compensation
2. Click title for: Part I: An Attorney's Perspective of Short Sale Flip, Flop or Hold - A Tale of Three Myths
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