Short Sale Snoop—Negotiator Fees…Are They Legal?

It’s common to see a statement like this (or something similar) in the listing agent remarks in the MLS:

Buyer to pay a 1% short sale negotiator fee to facilitate this transaction.

Question:  Is this legal?

Answer:  It depends.  The California Department of Real Estate and State Attorney General Brown have issued short sale fraud alerts regarding this and other types of short sale activity taking place REGULARLY.  In some cases, the Seller AND Buyer may wittingly or unwittingly be a party to lender fraud.

Why fraud?  Well, imagine you are the lender agreeing to take a large loss on the short sale.  You would likely want to know about any and all monies changing hands in the transaction.  Since you regularly negotiate commissions, escrow fees, termite payments, and 2^nd and 3^rd lienholder payouts, you would likely also want the right to approve any negotiator fee paid by the Buyer or Seller.  At a minimum you would want to know it exists.

In many cases these fees are either paid outside of escrow or are not stated clearly in the contract, escrow instructions, and/or HUD1 statement.  They are therefore hidden from the lender.  Whether intentional or not, all parties to the agreement sign a term letter generated from the bank requiring that the transaction be transparent and giving the lender (the bank) the right to approve all terms and conditions.  This puts said parties at risk for lender fraud.

So how do we proceed legally?

1. Write any fees to be paid by Buyer or Seller into the CAR Residential Purchase Agreement clearly.  Do not write it in a separate addendum that an unscrupulous listing agent or Seller could keep separate from the lender.
2. Demand that negotiator fees be written into the escrow instructions and be explicit.
3. Double check that the HUD1 has a separate line item for the negotiator fee that is not a part of any other payment.

If done legally, is it a good idea for a Buyer or Seller pay a negotiator fee?

Yes and no.  If one can avoid it and still secure the deal, then that is the best solution.  In all circumstances, the fee should be reasonable, and a buyer should feel he/she is getting a fair market value for the home.  In cases where a negotiator has already been engaged, see if you can get a credit toward closing costs and state clearly that the negotiator fee is to be paid through that credit in escrow.  NEVER pay any upfront fees.  At all times fees and commissions should be paid upon close of escrow and through a properly licensed escrow company.  As a Seller, ask your listing agent why he/she feels the need to employ a negotiator.  Chances are they are too busy, too inexperienced, or just lazy.  If I were listing my home, I’d have the listing agent pay it out of his/her normal commission and not burden the buyer any more than they already are.  Getting a loan is tough enough in this new lending environment.