Buyer Paid 3rd third Party Short Sale Negotiation fees. FRAUD? I think NOT!
People throw the “F” word around like it’s the newest Hollywood trend. Unfortunately, what it primarily does is further misinformation along the internet like a contagious disease. Let me say up front, our firm is a 3rd party short sale negotiation firm for others and we do charge our fees to the buyers. My partner Nick, owns a licensed brokerage in New Hampshire and Massachusetts and homeowners hire us to negotiate their short sales. I have heard ALL the “haters” arguments. I normally let things roll right off me, but sometimes stupidity merits a response.
I happened to be researching something on the internet today when I came across a blog written by a “hater” – You can tell a hater because the LOVE to throw out the term FRAUD or SCAMMER. Short sale fraud, mortgage fraud, FBI investigates fraud, flip scammer, 3rd party negotiation scam, and they love to tout how much fraud there is in this country, but have very little in the way of substance and facts in their blogs. They regurgitate other blogs, or bias studies, and never actually RESEARCH the subject they write about. They will tell you not do deal with “that type of person” or don’t work with “that type of group”, when in reality THAT group may do an excellent job. They canvas the internet with the words fraud and scam and scare the crap out of homeowners, and readers alike. They make generalizations, have a clear prejudice against certain groups, and yet can’t seem to EVER cite the law in which the fraud has been committed. They sleep with the word SCAMMER under their pillow and foster the hate towards others.
So this blog in a nutshell claimed it was FRAUD for a 3rd party negotiator to charge the short sale negotiation fee to the buyer. They CLAIMED that because the mortgage lien holder was netting less because of the negotiation fee, fraud was being committed. They professed the best way to address the fee is to add it as a seller concession. Now, I know why we don’t do that, but let’s examine this a bit.
Most third party negotiators charge in several manners. Some, charge the fee directly to the list agent, stripping the list agent of their hard earned commission. Some, charge the lender the fee in the form of seller concessions, and some charge the buyer directly, such as us. In each case there are areas that could raise an eyebrow if the fee was not properly disclosed up front. Now, in our case charging a buyer a short sale negotiation fee is disclosed by the listing agent in the description of the property on MLS. This puts the burden on the buyers. The buyers now have a decision to make. Do they want to buy a house that has extra fees included? It is not UP to an agent to make that decision for a buyer. I have read countless threads where agents say, “I just won’t show that property to my buyer,” to which I respond, “It’s not your decision to make!” If a buyer is ok with the fee and wants to see the house, it’s NOT UP TO THE AGENT to NOT SHOW IT.
Now, let’s get onto the lender netting less because of the fee and the CRAZY claim that it’s fraud. So, let’s look at this fee paid by the buyer paid at closing vs. seller concession. YES, when a buyer offers $400,000 on property, like other 3rd party negotiators, we allow the buyer to reduce the offer into the lender the amount of the negotiation fee. So for example if the $5000 negotiation fee is subtracted from the offer price, the lender in essence gets $395,000. Now, a purchase contract is generated, the offer to the lender is $395,000 and the $5000 negotiation fee is written right into the contract as an agreement between the buyer and seller for the buyer to pay the fee at closing. This fee is EXACTLY the same as when a short sale is listed and the buyer is responsible for smoke certificates, title V inspections, certificates of occupancy, etc., which are all usually the responsibility of the seller, but in a distressed situation, they historically become the responsibility of the buyer, as either the seller is under financial duress and cannot afford those fees OR the selling lender in an REO situation discloses those items need to be paid by the buyer. In each situation, the listing agent CLEARLY identifies those are the responsibilities of the buyer if they want the property. In the case of seller concessions, the buyer’s offer is the same. They are still paying $400,000 for the house, and the fee is deducted from the proceeds as a concession for the seller to pay. THE BANK NETS THE SAME AMOUNT $395,000 as in actuality the SELLER (Mr. or Mrs. Smith) is not really coming to the table with the money. So, the argument that it’s FRAUDULENT to charge a buyer a negotiation fee because the bank NETS LESS, holds no water. The BANK NETS THE SAME amount of money. Now of course, there are dozens of other fees that are deducted from proceeds of the sale, however I’m trying to make this simple so ANYONE can understand this.
It is NOT NETTING the lender less money to have a buyer paid negotiation fee. It is also not fraudulent for a 3rd party negotiator to charge a short sale negotiation fee to a buyer so long as everything was disclosed up front, put on the HUD and in the contract. Disclosure is key. FRAUD is INTENTIONAL MISREPRESENTATION. Be smart enough to know who you are dealing with and if you have questions, ASK THEM! Don’t just write up irresponsible blogs and articles as there are plenty of those already on the internet scaring people.
Now less discuss one other outrageous comment I read which pertains to overpayment. This blog spoke about buyers overpaying for property if they pay a negotiation fee. Let me make one thing perfectly clear. SHORT SALES are considered DISTRESSED PROPERTY. A distressed property sells CHEAPER than their non-distressed counterpart because a distressed property is considered by the appraisal community as LIQUIDATED VALUE. (Please read my post on what liquidated value is) – MOST lenders will also take a percentage % of the BPO price. So for instance, the bank values the property at $300,000 and most lenders will allow an offer that NETS them in the range of $240,000 – $276,000 which is about 80-92% of the BPO value. The type of loan the seller has will give an indication what the lender will want to NET so for instance I’ve seen discounts up to 80% of the BPO value on conventional and about 90-92% on the BPO if the loan was VA/FHA. There is NO overpaying for a distressed property unless a buyer WANTS to overpay. I’ve only seen ONE buyer overpay for a property, meaning pay more than the BPO value and it was an investor who wanted the property to develop on the land. Also, no lender for the buyer will pay more than what the property APPRAISES for and appraisals are market value.
Third party short sales negotiators charging buyers fee CAN be and IS done correctly by many firms. Know who you’re dealing with, check their track record, ask for their approvals and make sure the fee is disclosed before you execute the contract. So long as the above have been put out on the table, you will likely have a smooth transaction.