Sunday, October 10, 2010

Department of Real Estate Takes Aim at Short Sale Negotiator Fees

On September 20, 2010 the California Department of Real Estate (DRE) posted on its website an update to its previously issued "Consumer and Industry Alert(s) Regarding Short Sales Fraud, and Related Issues." The latest discussion concerns "the growing, questionable, and sometimes unlawful practice of short sale negotiators ('SSN') requiring/compelling Buyers to pay the SSN's fee."

The article locates four areas of potential legal liability when this practice is implemented. They are: (1) Breach of Fiduciary Duty, (2) Lender Fraud, (3) Violation of Agency Law, and (4) Violation of RESPA. (Note: The article itself does not present its concerns in such a systematic format; but space limitations impose organizational requirements on my summary.) Problems present themselves in the following circumstances.

(1) Breach of Fiduciary Duty: (a) It is reported that some listing agents indicate in the MLS agent-to-agent remarks section that offers will not be presented unless the Buyer includes with the offer an Addendum specifying that he will pay a specified amount to an SSN. If this is not a requirement of the seller, the failure to present an offer would be a breach. (b) In some situations the listing agent will specify that the Buyer "must" request a specified credit for non-recurring closing costs as part of the offer, with the understanding that the SNN fee will be paid from that credit. The DRE paper states that, if this happens, "then the SSNs may be involved in a 'shell' game. If that occurs, the Buyers' interests might not be properly protected…" and the SSN and/or the agents may have breached their fiduciary duties.

(2) Lender Fraud: This may occur in a variety of ways. (a) It could happen if the Buyer's obligation to pay the SSN is not made known to the seller's lender (e.g. the Addendum referred to above might not be included in the paperwork submitted). (b) It could also occur if the payment is hidden by not showing up on the HUD-1. (c) If the seller's mortgage holder does not know that an SSN payment is being made to the listing office, that might violate the lender's term sheet with regard to allowable commissions. (d) The buyer's willingness to pay an SSN fee may be the result of a collusion for the sale price to be less than Fair Market Value, in violation of the lender's requirements.

(3) Violation of Agency Law: This can happen when the SSN's agency relationship is not clearly disclosed. Moreover, to the degree that the SSN may be portrayed as representing both parties, the dual agency may not be properly explained and confirmed by the principals.

(4) The DRE also suggests that payment to an SSN by the buyer could be a RESPA violation in the form of a "junk fee" paid to a settlement service provider in a situation where "no real or added services are actually performed for the Buyer…"

The DRE paper is carefully hedged and full of qualifiers. It seldom says that a particular act really is a violation of something -- only that it "might be" "could be" "raises questions" "appears problematic" etc. Well, ok, that's what lawyers do; but, because of that, the paper provides little in the way of clear guidance to practitioners. But the intent is clear -- Stay away from charging buyers to pay short sale negotiators!

Even though the DRE article will not come right out and say that the practice of having buyers pay for short sale negotiators is illegal, it regrettably demeans those who engage in this practice.

"In some instances the Listing Agent is trying to get paid extra money to serve as both the Listing Agent and the SSN. In other cases, the Listing Agent has hired an outside SSN because that agent is not able or willing to provide short sale negotiation services to their clients, but at the same time this Listing Agent does not want to share his or her commission earnings with the outside SSN that has been hired to do that work."

How outrageous! Are we to suppose that if the house needs painting, the listing agent should either do it himself or else pay the painter…?

Negotiating a short sale with the Seller's lender(s) is generally a difficult and time-consuming task. It is an important and non-duplicative service. Moreover, to be done well, it typically requires knowledge and skills that have been acquired through experience and/or formal training. Negotiating a short sale is not within the scope of traditional brokerage services. It should not be assumed that even the most competent and experienced listing agent will also be in a position to conduct effective short sale negotiations.

It is fortunate for consumers that an unrelated cadre of qualified and competent short sale negotiators has emerged around the country. Far too many potential short sales have wound up to be foreclosures because of inept agents trying to do the negotiations. But no one should expect that qualified short sale negotiators will offer their services for free. It certainly isn't a listing agent's obligation to pay them. The seller, who has no money, can't pay them. And now the Department of Real Estate tells us that the buyer shouldn't be the one to pay them.

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