The fleecing of short sale buyers

It is no secret that there are a lot of home sellers who owe more than their home is worth. Because they are underwater on their mortgage, many are forced to ask the bank to take a payoff of less than they are owed, otherwise known as a short sale. As of today, ~14% of the active listings in the city of Seattle are being sold as a short sale, and that number goes up as you get away from the city, with ~17% of active King County listings as short sales.

Getting a home sold through a short sale can be a pain in the rump, and real estate agents selling these listings are trying to mop up on the opportunity. As a buyer, you need to be aware that these properties may represent a good value, but they may be loaded with extra costs to line the pockets of real estate agents and other short sale facilitators.Short Sale

Every week, my inbox is littered with offers from real estate agents who want to “take my short sales and pay me a referral fee.” Many real estate agents have neither the time, experience, nor the inclination to take their seller through a short sale process, so it is a logical decision to refer the business to another agent. Referral fees are common and expected in such situations, but let’s take a look at how all of this stacks up for some short sale buyers in a simple example from a solicitation I just received.

Sale Price: $400,000
Total commission approved by bank (6%): $24,000
Commission paid to buyer’s agent (3%): $12,000
Referral fee paid to original agent (30% of 3%): $3,600
Commission paid to seller’s agent (70% of 3%): $8,400
Short sale negotiation fee paid by buyer to short sale negotiator (1.5%): $6,000
TOTAL COMMISSION PAID: $30,000

 

The total commission paid out in this scenario is a whopping 7.5% of the sale price, or $30,000 on a $400,000 home. 6% of that is “built-in” to the sale price, and is typically what is approved by the short sale bank as part of their payoff. The additional 1.5% is being charged to the buyer directly for the services of the short sale negotiator. The seller is likely not financially able to pay the negotiator, and the seller’s agent doesn’t want to give up any of their commission, so they pass the additional cost directly to the buyer, yet the negotiator is providing a service on behalf of the seller. With four fingers in the real estate commission pie, the agents are forced to beef up the fees to make it all go around, and the buyer gets to pay the extra.

Buyers need to be fully aware of the fees that they are being asked to cover on the purchase of a short sale and need to make their determination of whether the home still represents a value with those fees tacked on. You can try to negotiate the add-on fees, of course, but short sale sellers and their agents can be stubborn, as they have signed contracts that obligate them to certain commissions and short sale negotiation fees.

My own opinion is that some real estate agents are gaming the situation to try and offload their work to short sale facilitators, while not giving up any of their fees in the process. If you are going to employ a short sale negotiator to do all of the legwork, then those fees should be paid by either the seller or deducted from the seller agent’s commission. There are short sale agents out there using this approach, but it is definitely a case of “buyer beware,” when looking at short sales. Be sure to have your own agent investigate each individual property and fully understand any contract terms that you are being asked to sign that will incur additional fees.