Short Sale Negotiators

March 3, 2011 by  
Filed under Short Sale Negotiators

Short Sale Negotiators

Short Sale Negotiators

REALTORS® who conduct short sales are aware that the process can be time-consuming, frustrating and difficult.  As short sales continue to be a large part of the real estate market, many listing agents use short sale negotiators (SSNs) to assist with these transactions.  Some REALTORS® prefer to use SSNs so that they can concentrate on the more traditional role of an agent which is marketing and selling properties.  They elect to leave the difficult and time-consuming business of putting short sale packages together and dealing with the short sale lenders to a SSN.  These SSNs can be effective at getting lenders to approve short sales and help the transactions move faster.

REALTORS®, however, who are considering on being SSNs or using SSNs need to be very careful.  Certain SSNs may not be properly licensed and some may make requests of buyers, sellers, and agents that are simply unlawful.  Due to the problematic conduct of certain SSNs, the Department of Real Estate (DRE) has issued various warnings alerting consumers and the real estate industry of the issues with SSNs.  This article will review some of the things a REALTOR® who is thinking of being a SSN or using a SSN should consider to ensure that the SSN conduct is lawful and proper.

Discussion about the SSN with your client

As the listing agent, you should discuss with your client the merits of retaining a SSN to help with a short sale transaction and to represent the seller in the short sale negotiations with the seller’s lender. A seller should be fully informed as to what a SSN is, the pros and cons of using a SSN, the costs if any to the seller, and the seller’s right to select a SSN of his or her own choice.  It is advisable that a SSN has a SSN agreement in writing for the seller to sign.  As the listing agent or SSN, you cannot provide your client with legal advice, so if the seller has specific legal questions regarding any SSN agreement, you should suggest in writing that the seller review the agreement with an attorney.

Licensing

Make sure a SSN is properly licensed.   A SSN must be a licensed real estate broker or a licensed salesperson who is working under a broker.  An attorney is exempt from the real estate license requirement if certain conditions are met, such as the attorney is not using or attempting to use the exemption for the purpose of evading the licensing laws (Cal. Bus. & Prof. Code § 10133(a)(3)), and the attorney is not actively and principally engaged in the business of negotiating mortgage loans (Cal. Bus. & Prof. Code § 10133.1(a)(5)).

An indication that a SSN is not properly licensed is when the short sale negotiation entity is an LLC.  In California, an LLC cannot get a real estate broker’s license and therefore, should not be doing short sale negotiation. It is illegal to pay an unlicensed individual or entity for doing licensed work.  Even if it is technically your client who pays the SSN, as the person who effectively arranged the transaction, you may expose yourself to both criminal and civil liability, and you could have your license revoked or suspended by the DRE.

Payment of the SSN fees

Most SSNs do not require payment from the seller.  However, if a SSN does want payment from a seller, keep in mind that the DRE has rules regarding advance fees.  The law generally prohibits anyone who negotiates, attempts to negotiate, arranges, attempts to arrange, or offers to perform a loan modification or other form of mortgage loan forbearance, from claiming or demanding any upfront compensation (Cal. Civil Code § 2944.7(a)).  Furthermore, a SSN cannot collect an advance fee from a seller unless the advance fee agreement and materials have been submitted to the DRE for review (Cal. Bus. & Prof. Code § 10085), and any fees collected are handled in compliance with DRE advance fee and trust fund handling requirements (Cal. Bus. & Prof. Code § 10146).

Because sellers facing a short sale may not wish to pay anything out-of-pocket for a SSN, there are other options for paying a SSN.  Probably the least problematic method of payment, both legally and practically, is for the listing agent to simply pay the SSN out of the listing agent’s side of the commission. For example, if the commission for a transaction is 6% and the SSN fee 1%, the listing broker could offer 2.5% to the cooperating broker on the MLS, and then out of the 3.5% listing side of the commission he or she would earn, pay 1% to the SSN and keep 2.5%.  The listing agent may wish to mention in the MLS, among other things, that he or she is offering 2.5% to the cooperating agent because he or she is paying a SSN fee out of his or her share of the commission and how a reduction of the compensation by the short sale lender will be handled under Rule 7.15.2 of the California Model Multiple Listing Service rules.

Listing agents and sellers, however, may prefer to have the buyer to pay for the SSN fee.  This is not illegal if done properly; however, it must be done very carefully.  Typically a listing agent places a remark in the MLS that all offers must include as part of the contract language that the buyer will pay a certain fee for the SSN.  Some also state that offers will not be presented or considered by the seller unless the required language is in the offer.  Yet, a REALTOR® has a fiduciary obligation to act in the seller’s best interest, and a more specific ethical obligation to present all offers to the seller unless the seller waives this obligation in writing.  If it is in writing that the seller wants the SSN to be paid by the buyer and does not want to entertain an offer unless that language is in the offer, it would be permissible not to present to the seller an offer that does not include such language.  However, discuss with the seller that requiring a SSN fee to be paid by the buyer may reduce the number of offers received and reduce the offer price.  A buyer may have limited cash available, may not be able to afford a SSN fee in addition to their other costs, may not be able to get his or her lender to approve the buyer’s payment of the SSN fee, and therefore, may not make an offer which he or she otherwise would have made due to payment of the SSN fee.

To protect against a future legal or ethical claim the agent should confirm in writing both the discussion and the seller’s instruction that he or she wants the buyer to pay the SSN fee and that he or she will only review offers containing the language regarding the buyer’s payment of the SSN.  A better practice, however, may be to present all offers to the seller even if the required language regarding the buyer paying the SSN fee is left out and simply counter the offer which leaves the required language out, if it is an otherwise acceptable offer.  Presenting all offers may significantly reduce the risk of someone accusing you of not performing your fiduciary and ethical duties and you then having to prove that you did.

Some SSNs will suggest that the buyer’s agent pay the fee.  While this is not illegal per se, it cannot be done with properties that are placed on the MLS due to the MLS prohibition on conditional offers of compensation.  Under Model MLS rule 7.12, an MLS offer of compensation, “may not contain any provision that varies the amount of compensation offered based on conditions precedent or subsequent or on any performance, activity or event.”  Therefore any attempt to condition payment of the commission being offered in the MLS on the buyer’s agent paying a fee of any kind would appear to violate this provision.

Disclosure of SSN fee

A payment of a SSN fee by the buyer, seller, listing agent or buyer’s agent should be disclosed, both to the buyer’s lender as well as to the seller’s short sale lender.  Any attempts to hide this fee could constitute loan fraud (18 U.S.C. § 1014).  Depending on the specifics of the act, loan fraud is a crime that can lead to significant jail time, fines, and the loss of one’s DRE license.

Disclosure of the SSN fee should be clear and unambiguous.  It should not be hidden in any way.  If the SSN is paid by the buyer or seller at settlement, it should appear on the HUD-1 settlement statement (Appendix A to 24 C.F.R. Part 3500).  As a precautionary measure, the SSN fee should also be labeled in such a way that there is no question as to what it is.  Agents should coordinate with the escrow or title to confirm the SSN fee is clearly labeled and also obtain some evidence that the short sale lender has received the HUD-1 statement that contains the payment to the SSN prior to the close of escrow, to prevent any accusations that there is any type of lender fraud being committed.

Assessing the SSN

In addition to making sure an SSN is properly licensed, you should question the SSN upfront to make sure that he or she is worthy of hiring.  Many SSNs are good at getting short sales approved because they know how the lender’s short sale process works.  In some cases, the SSNs may have established contacts at the banks, and they know how to prepare and present the short sale packages and negotiate to get the deal done.  You should ask a SSN as to what exactly he or she will do for your client and the track record of the SSN in order to confirm that the SSN is actually performing a valid and legitimate service for the fee the SSN is being paid.  Examples of the types of questions you may want to ask a SSN include:  What specific services will you provide?  Generally what percent of short sales that you present to the lenders get approved?   What is your success rate with my seller’s lender and are you familiar with and have you worked with this lender before? Are you able to give us an estimated turnaround time for this lender, if not, why not?  Do you see any particular issues in my client’s situation that might cause problems or delay?  What is your success rate in getting lenders to insert language that would waive the lender’s right to pursue a deficiency (the difference between the amount owed and the amount the lender is receiving in the short sale)?   Do you make sure you clearly disclose your fee in a meaningful manner to the short sale lender prior to close of escrow?

The above questions are just a sample of the types of questions you might wish to ask, but the main thrust of your inquiry to the SSN is to make sure that he or she is providing a legitimate and useful service for your client and that the fee charged is, therefore, also legitimate.  It is a potential violation of the federal RESPA law to charge a fee for which no real service is rendered for transactions involving one-to-four residential units with a federally-insured loan (RESPA prohibits “unearned fees”).  Finally, it is a good idea when evaluating a SSN to review the C.A.R. legal article on Short Sale Fraud, available at http://www.car.org/legal/legal-questions-answers/2010-qa/short-sale-fraud-and-scams/.  Also review the recent DRE bulletins on SSNs, including the article called “Update to DRE Issued Consumer and Industry Alert(s) Regarding Short Sale Fraud, and Related Issues,” available at http://www.dre.ca.gov/pdf_docs/ca/ConsumerAlert_ShortSalesUpdate.pdf.  You may use these publications to ask the SSN about some of the items that are mentioned and see whether the SSN clearly states that those acts are illegal or improper and that those acts are not part of what the SSN does.

Conclusion

A SSN should help your transaction move more smoothly, not complicate your life with concerns about lender fraud and DRE discipline.  Many REALTORS® have had good experiences with SSNs which operate properly within the law.  Reviewing the information above should help you to be a SSN or choose a SSN who operates within the law to help your client get the deal done.

*** This information has been provided by the California Association of Realtors legal department. Housing Assist of America does not offer tax or legal advice and recommends homeowners to consult with their tax preparers and attorneys before making any decision regarding their properties.

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