Many sellers in today’s real estate market owe more on their mortgage than their home is worth. A lost job, reduced income, change in family status, or a need to relocate put these sellers in an awkward situation of not being able to afford to sell the home that they can no longer afford. Banks allow sellers in these situations to pursue a short sale, where the bank agrees to release the mortgage on the home for less than they are owed. Sellers have to demonstrate financial distress in order for this to be successful, and the added review process by the bank is notoriously lengthy, uncertain and bureaucratic. Short sales are a compelling alternative to foreclosure for many sellers and can represent a good value for buyers, but there is a new category of agents out there trying to take advantage of the situation and price gouge these vulnerable parties.
The Short Sale Negotiator
Negotiating a successful short sale with a bank is painful and aggravating. Documentation requirements from the seller are steep, review timelines are long and there is no clear way to speed up your file at the large banks. Bank negotiators are overwhelmed with thousands of files, and they seem to to get to yours when they you reach the top of the file. Adding in a second mortgage, a mortgage insurance company or outside loan investor approvals bog down the process even further. It is not uncommon for short sale approvals to take 3-6 months, sometimes longer.
There is no surefire method to speed the processing of a short sale. The best advice is to have someone make a weekly phone call to the bank to find out the status of the file, any missing documentation and current timeline estimates. Getting the right person on the phone at a bank is also a challenge. Sometimes you wait endlessly on hold, but other times it is simply impossible to get them to return phone calls. Many real estate agents want to pursue more short sales, but don’t have the time or desire to chase the bank on these tedious details every week, so many are hiring 3rd party short sale negotiators to facilitate the process on their behalf.
Paying a Short Sale Negotiator
Short sale negotiators provide a valuable service, and we’ve used them on occasion to offload the tedious part of getting banks to respond. Short sale negotiators also need to be paid. This is a bit of a new industry that appeared over the last couple of years, so pricing and service levels seem to be all over the board. I have seen fees as low as $1200/transaction all the way up to 3% of the transaction, but the going rate seems to be 0.5%-1.0% of the transaction amount. Distressed sellers often don’t have the funds available to pay for a short sale negotiator, so that leaves three parties who can pay the fee. The listing agent who represents the seller can deduct it from their commission, the buyers agent can also deduct it from their commission, and the buyer can bring additional funds to the table to pay for the negotiator. I have seen all three examples, sometimes a mix of all three.
Agent Greed is Currently Targeting Short Sales
When the real estate industry sees a growing trend, in this case short sales, it tends to bring out a set of greedy vultures looking to take monetary advantage of the situation. I’ve seen agents cling to their 3% commission, while trying to extract 3% for the buyers agent and ANOTHER 3% for the short sale negotiator, for a total agent compensation of 9%! Most banks have guidelines that restrict commission payments on short sales to 6% for both agents, so any amount over and above that amount is likely going to be sought directly from the buyer. Look carefully at these fees and make sure you are getting a very good value on the home before agreeing to pay any such fees on behalf of the seller.
What to Watch for on Short Sale Fees
Here are the key items to watch for when short sale agents are trying to game the system for extra money.
- Short sale negotiation is a service being rendered on behalf of the seller. If the seller is financially capable, they should be required to pay any negotiation fees.
- If a listing agent is hiring a short sale negotiator to offload their work, they should be willing to deduct that fee from their commission. This doesn’t impact the buyer and doesn’t reduce the compensation to your buyer’s agent.
- According to our local MLS rules, reduction of a buyer’s agent compensation to pay for a short sale negotiator must be disclosed up front. A seller or listing agent cannot later coerce your buyer’s agent to concede their compensation, though some may be willing to do so.
- If the seller is still requiring the buyer to pay a short sale negotiation fee, do not agree to it or sign any contracts until you understand what you are getting in return for that fee. You should be told the identity of the negotiation company, the fee for their service, and there should be a contract that you sign with them outlining their fees and service.
- A real estate purchase is a negotiation between a buyer and seller, not their agents. If you don’t want to pay the negotiation fee, put that in your offer. The listing agent is required to present it to the seller, and ultimately it is the seller’s decision on whether or not to accept your offer without the fee included. Don’t be pressured by any agent telling you that it has to be that way.
Short sales can represent a good opportunity to buy a house at an attractive price. Sometimes that comes with some unwelcome or even unfair fees. Make sure you understand what those fees involve and make sure that the bottom line still makes sense before you commit to paying them. While we don’t welcome the greedy approach being pushed by some short sale agents, it is a reality in the current market. Working with a buyer’s agent who has successfully gone through short sale transactions can be a valuable resource when wading through issues like this.