Fees on a shortsale, clarified

A shortsale negotiator who is a person other than the seller’s or buyer’s agents, may lawfully be paid a fee by any party to a shortsale, be it the seller, the buyer, the lender or one of the transaction brokers or agents, if:

• the shortsale negotiator holds a Department of Real Estate (DRE) broker license or is employed as a licensed sales agent under a broker;

• the fee is disclosed in writing to the buyer, the seller, the lender and all brokers involved, ideally through purchase agreements, escrow instructions or separate fee disclosure forms [first tuesday Form 119]; and

• the fee is stated in the HUD-1 closing statement prepared by escrow.

The shortsale negotiator may only collect a fee in advance of closing by first entering into a DRE-approved advance fee agreement. [For more information on advance fees, see the April 2011 first tuesday Letter to the Editor, Can an agent accept an advance fee for negotiating a shortsale?]

The federal Real Estate Settlement Procedures Act (RESPA) mandates that any fees paid to individuals other than those rendering services are prohibited. These include kickbacks to the seller, the buyer or third parties who perform no service at all to earn a fee. Finders render a service, but are not negotiators by definition, as they are not licensed. While finders can be employed by a broker or principal, they cannot negotiate any part of a real estate related transaction.

Brokers and agents receiving a fee for transaction services may not charge an extra fee for any service that is by necessity part of the negotiations agreed to be performed in listing agreements to sell or buy and close a transaction, traditionally called garbage fees. Additional fees are also prohibited for the referral of a buyer or seller to others who provide services to close the transactions (title, escrow, home warranty, inspections), no matter who agrees to pay the fee.

If negotiations with the lender in a shortsale are excluded from the services the listing broker is to perform on a shortsale listing, and thus become a proper additional fee paid to a third-party negotiator, that service had best be mentioned as excluded in the listing agreement and noted as additional fees the seller is to pay third parties beyond the broker’s contingency fee, whether it is fixed or a percentage of the sales price. [For more information about unlawful REPSA kickbacks, see the August 2011 first tuesday article, Kickbacks: the end of an opulent era and the October 2010 first tuesday article, How to make money as an endorsed, registered, law-abiding RESPA mortgage loan broker.]

first tuesday take: Seller’s agents are hiring third-party licensees to negotiate shortsales with lenders as the transactions prove increasingly time consuming. These shortsale negotiators correspond with the lender and work on getting shortsale approval while seller’s agents are free to focus on finding the right buyer. The fee earned by the negotiator is typically then paid by the seller’s agent, but may be negotiated to be paid by the buyer, the buyer’s agent or a combination of parties. Depending on the agreement between the parties, the third-party shortsale negotiator can be paid in addition to or from the fees paid by the seller under the listing agreement, so long as the service was not contemplated to be rendered as part of the broker services under listing agreements.

The most common arrangements involve the seller’s agent paying the negotiator out of his own pocket, and then taking a 3.5% share of an industry standard 6% fee to offset the cost, with the remaining 2.5% going to the buyer’s agent. Since no one broker is involved in the lender negotiations, it would be most fair to simply deduct the negotiator’s (broker) fee from the total fee paid by the seller on the transaction, then split the remaining fee 50/50 between the two brokers.

After all, that singularly focused help for arranging the shortpay with the lender once the purchase agreement has been negotiated takes a period of three to six months to complete before the agents can get back to closing the transaction, a service likely welcome by all, even the lender. [For more information about shortsales, see the September 2011 first tuesday article, You’re sure you’re a shortsale specialist? and How to facilitate a shortsale transaction.]

Re: “Short Sale Transactions: The “Lawfulness” of Fees Charged to Buyers” from the DRE Winter 2011 Real Estate Bulletin