Short Sale Negotiator Fees and Mortgage Fraud

I just wrote about what to watch for with short sale negotiation fees, but there is one form of short sale scam that deserved its own special article.

Mortgage Fraud

Short sale negotiators are hired by listing agents and sellers to take care getting the sale approval through the bureaucratic short sale process with banks. They all charge a fee, and that fee can either be paid by the seller (who likely can’t afford it), the listing agent or the buyer. In many deals that our buyers are seeing these days, buyers are being asked to pay for the short sale negotiator fee.

Buyers out there will all react the same way to these fees. “The property is listed for $400k and they want me to pay 1% on top of that to the short sale negotiator? No way, that is the seller’s problem.” Of course crafty listing agents have concocted a scheme to get over this objection to the fees. Let’s take at look at the scam with a hypothetical example.

  1. Short sale home listed for sale at $400,000.
  2. Buyer makes an offer for $400,000.
  3. Seller accepts the price of $400,000, but insists that the buyer pay 1% to the short sale negotiator.
  4. Listing agent tells the buyer to rewrite their offer as $400,000 with a 1% seller credit towards their closing costs. (Net offer = $396,000)
  5. Short sale negotiator presents the offer to the bank with 1% seller credit and gets it approved.
  6. Buyer pays the 1% short sale negotiation fee directly at closing, which is offset by the 1% seller credit towards their closing costs, so the net result to the buyer is zero.

This certainly gets the seller, listing agent and the short sale negotiator what they are hoping for, plus it removes the buyer’s objections to paying the fee. What’s not to like, right?

Well, take a closer look at what the listing agent just did. They received an offer to buyer the home for $400,000. They then encouraged the buyer to submit a lower net offer than what they were originally willing to pay, and that gets presented to the short sale lender. Quite simply, the listing agent and seller received an offer for $400,000 and then modified it for presentation to the bank at $396,000. Where did the extra $4000 go? Into the pocket of the short sale negotiator.

I may not be a lawyer, but I don’t think I need to be to call this what it is, which is misrepresentation. Real estate agents are ethically and legally bound to present all offer terms and deal honestly with all parties to a transaction, including banks. This certainly feels like a form of mortgage fraud being perpetrated by the seller, listing agent and short sale negotiator.

What if you encounter this situation when buying a short sale? My advice would be to never participate in a scheme that intentionally misrepresents the terms of a deal to the bank. Like real estate commissions, short sale fees are negotiable. Also, it helps to look at the overall transaction. If you are getting a decent deal, even when paying the extra fee, it may be worth proceeding. If you run into roadblocks, a gentle reminder to the listing agent may be in order insisting that they present the actual terms of your offer to the lender. That is their job.