As an Agent - Make Sure you ID a Short Sale Situation Up-front. Listing Agents Aren't Revealing it. Protect Buyer Clients Who Have a Timeline

Many homes that are for sale in various neighborhoods in the Chicago area, are not occupied anymore - and a number of them are pre-foreclosure or foreclosure properties. Others - will be short sale situations.

Homes that are currently occupied may be listed for a figure where the seller will come up short after paying off the principal balance of their loan(s).

If the seller can't cover the shortfall - it will be a short sale situation - meaning that the lender will have to pick up some of the shortfall.

It is important to note that many agents are not advertising that their listed property will be a short sale in the remarks section of the MLS sheet - because they don't want to dissuade a buyer from writing an offer on the property.

Short sale situations can drag on for quite some time - and many buyers have certain time-lines. Negotiations with the lender about how much of the deficiency the lender will pick up can take time.

If a buyer client wants to get into a home in the next 60 days - it might not happen if they are buying into a short sale situation.

So - it is important that the agent representing the buyer find out as soon as possible from the other side what the seller's equity is (which can sometimes be gleaned from the tax record) at the moment - and if there will be a short sale situation - and if so - how much -- so that the buyer isn't blindsided with delays.

As a rule of thumb - the larger the deficiency - the longer the negotiation can take with the lender.

With any short sale situation - we give the buyer "an out" in the contract - if the seller's short sale negotiations with the lender are not concluded within X days.

Our buyer client can then seek a deal elsewhere.

About Short Sales...

If you are in the market to buy a home, or if you are selling a home - you have no doubt heard the term "Short Sale".

If a seller owes more on the property than what it is worth - a short sale is one option. A seller in this situation needs the lender to accept a "short" loan payoff, or in other words accept less than the full amount due on the loan.

So how does that effect you - the buyer? A short sale require the lender to agree to the reduced pay off. Therefore, when you negotiate on a short sale, you are negotiating with two parties:

1. The seller who owns the property
2. The lender who holds the loan.

You need the approval of both parties to get your offer accepted - so the process can be long and tedious.

It is important to make sure the seller has received preliminary approval from the lender, because if the lender does not agree to the terms you will have no contract.

We question the seller and/or the seller's agent to make sure the process is in place, and that the bank will cooperate. This process requires the seller to submit documentation to the lender demonstrating hardship, along with evidence that the market value is less than the outstanding loan.

It can be a long, drawn out, and ultimately aggravating experience. Often, you are dealing with layers of bureaucracy, and this can slow the process down.

You want to make sure that you have interest rate protection during this process. In a normal transaction, buyers will typically lock in interest rates for 30 to 60 days. That may not be enough time for a short sale, and you want to avoid being 45 or 60 days into the sale only to find out that your rate lock expired, and your interest rate just went up 1/4%.

We usually include in the purchase agreement a time frame for lender approval, with a clause that gives the buyer the right to cancel the transaction if the lender does not approve the sale after a certain period of time. In this way - our buyer client is free to pursue other properties if the lender is dragging their feet.

There can sometimes be issues at closing - if the owner is still living in the home. Often times, sellers in this situation are angry and frustrated, and on occasion can damage the property, remove appliances, fail to maintain the landscaping, leave the property dirty and full of debris, or take other actions that will cost you money.

We protect you with a walk through prior to closing - and if the seller is still there - we would make certain demands (depending on the situation) at the closing table to compensate you.

Since the seller theoretically has no money, any issues at close typically have to be negotiated with the bank.

Lenders like to sell properties "as is" in these situations, as they do not want to get into negotiations over property repairs. This is okay, if you have a good inspection - and know what you are dealing with (or not.) We will cancel the contract for you - if the inspections uncovers issues with the property that you don't want to deal with.

We can certainly request that the bank resolve certain issues. They are under no obligation to do so, but if the request is reasonable and it makes business sense for the bank to agree, they usually will.

Short sales can be fairly straightforward, or very complicated. This depends on the stance of the lender. Some banks are much easier to deal with than others when it comes to short sales.

As always, you should seek out an experienced, professional Exclusive Buyer Agent to help you navigate these waters.

Link to Kiplinger's Personal Finance Article - In a Market Where Negotiation Counts.... Find an Exclusive Buyer Agent

Kiplinger's Personal Finance Article - In a Market Where Negotiation Counts.... Find an Exclusive Buyer Agent

The article states, "In a market in which negotiation counts, you'll do well to hire a buyer's agent to help you identify good prospects and to frame and negotiate your offer (to find an exclusive buyer's agent, go to www.naeba.org). Look for one who is knowledgeable about your area's new-home market -- its dynamics, values, builders and subdivisions."

The only problem with the paragraph is that they should have put the word "exclusive" in front of - buyers agent -- when stating -- "you'll do well to hire a buyer's agent."
As a buyers agent works for a company that lists property for sale and may represent the seller 99% of the time... whereas an exclusive buyer agent and their company never represent the seller.

The article mentions how builders can try to make the buyer use the financing partner of the builder..... Which again - relates to some of my posts below...about lender steering..

A good agent will help you compare the lender's offerings with those of another lender, analyzing the good-faith estimate. Instead of getting extra material things thrown in - see if you can have them NOT give you the material things - and get yourself an added price reduction instead...

The article also give you tips on how to select a good home builder.... All in all - it is one of the better written Real Estate articles I've seen in a long time - meaning - accurate facts.

Joint Venture Agreements Between Brokerages and Wells Fargo

Recently - the founder of Long & Foster, the Washington DC area's largest residential real estate brokerage, urged his thousands of agents to recommend the company's in-house mortgage lender more often - and stop working with outside lenders such as Bank of America.

In an e-mail to all Long & Foster agents and managers, Wesley Foster Jr. chastised his workers for funding mortgages through other lenders - instead of using Long & Foster's affiliate, "Prosperity Mortgage."


The e-mail sparked criticism, with some Long & Foster agents, consumer activists and others raising concerns about whether Long & Foster is trying to profit at the expense of their clients' interests.

Foster said he wrote the memo to make agents understand that each time they use Prosperity, they're helping Long & Foster.

HUD/RESPA rules state it is illegal "if the agents or office managers receive kickbacks or fees for doing nothing more than referring services."

However - this is not the first such joint venture revenue or profit sharing agreement that I have heard of between Wells Fargo and a brokerage - so apparently - such corporate agreements give a loophole - so that such revenue or profit sharing is legal.

RESPA may want to tighten up on their rules a bit...

This is another piece of evidence that many Real Estate companies pressure their home-buying customers to use an in-house lender or lender that is co-located at the company's office.

Stephen Brobeck, executive director of the Consumer Federation of Americas stated: "It will not serve the interests of their customer and may even erode the credibility of their agents."

One Long & Foster agent said that they found the e-mail "troubling" because it implies that agents should strive to make the company more prosperous, even if it means undermining a client's interests.

I noted previously in a blog post - that a large local Real Estate brokerage here in Chicago has penned the same type of joint venture agreement with the same company - Wells Fargo. So - Wells Fargo appears to be penning such agreements with major Real Estate companies across the USA - to help pad the brokerage's bottom line - in exchange for their agents pushing business to Wells Fargo.

Is sending your clients to a specific lender such as Wells Fargo - looking out for their best interests in a fidicuary manner?

A fidicuary means that you are looking out for someone's best interests. If you are looking out for their financial best interests - wouldn't you help them shop for the best loan rates and fees - and not steer them towards a lender because it will make your broker's company more profitable?

The brokerage company's financial interests are being placed ahead of the client's interests. That is not being a true fiduciary. The Wells Fargo loan may or may not be the best for the client. How would you know unless you compared? You wouldn't!

Real estate firms promote these arrangements as one-stop shopping - telling their buyer client "it is convenient" "just use Joe here in our office" (who either pays the office rent or their company has one of these joint venture agreements with the brokerage - which exploits a loophole in existing RESPA rules - to put money in the brokerage's pocket.

I wonder how many brokerages have retaliated against agents who didn't make referrals to the in-house or joint venture lender?

Do agents get an extra year end spiff - which isn't formally tied to the in-house referrals - but still based on the number of in-house referrals? I don't know.... I'm just asking the question...

Loan Shopping Pays Off

One thing we ALWAYS do for our home buyer clients is help them shop for the best lender - by analyzing good faith estimates from different lenders - and helping the buyer pick the lender with the best rates & fees. Lenders hate it - but our buyer clients love it! On average - we save our buyer clients $20,000-$30,000 or more over the life of the loan - just by "shopping the loan." Time consuming? Yes. But it is worth it - for our client's sake.... And in appreciation - they give us a lot of referrals from doing things like this - that traditional agents typically don't do.

Sadly - most Real Estate agents don't even know how to analyze a good faith estimate - to ferret out junk fees.... Some agents may not even know what a "yield spread premium" (YSP) is...

(You may want to ask them when you interview them)

Many agents refer their client to an in-house lender (stating that "it will be convenient for you" - they are right here..) - where perhaps their brokerage gets some benefit from that (rent from the lender or an LLC profit sharing agreement etc.) That isn't being a true fidicuary for the buyer.

Real Estate Brokerages and Their Agents "Steer" People to Their Affliated Entities - and They Are Now Getting Sued For it...

Was the Realtor you used to purchase you home truly acting as a true fiduciary in protecting your home buying and financial interests?

Click on this link to read about one lawsuit about this.

A lender cannot give a kickback to real estate licensees for referring customer and clients - just as licensee's cannot pay an unlicensed person for a referral.

But apparently - there is a loophole in the (lender (in my personal observation noted below) or title company "affiliates" (in the case of the article)) and Real Estate company relationship - whereby - corporate structures or LLC joint ventures can get around that - by funneling money through the corporate ownership structure.

The article goes on to say... "When real-estate brokers or sales associates knowingly steer clients to higher-cost services that benefit the broker financially, they might violate the fiduciary responsibilities owed to those consumers."

The article states: "Real-estate brokerages increasingly rely on income from their affiliates and often seek to maximize their "capture rates" — the percentage of all home-sale transactions that use the affiliates’ services. They also argue that even if the affiliates’ fees or mortgage rates are not the lowest available, the quality and dependability of the affiliates’ services more than compensate for any price differences."

I've usually heard agents tell their buyers - "Hey - use Joe in our office - it will be more convenient for you." Well - that convenience could cost you thousands! Rather than help you "shop" for the best loan when you buy - most agents steer you to a "preferred lender" - perhaps one in their office.

Relocation Advisors Group helps you "shop" lenders. We analyze their Good Faith Estimates for you - so that you can have a lender that has low rates and fees. We have no hidden ties to any of them.

I was at a traditional Realtor meeting a few months ago - and ran into a "Large Lender" person at lunch who stated that Company X (I won't name them for their sake - but they are large) locally – had done a joint venture with them – creating an LLC – where there will be revenue sharing between Company X and "Large Lender" through the LLC -- with the revenue to Company X going up - if their agents pushed their clients to "Large Lender."

I was shocked. Apparently – that must be legal --- as Company X and "Large Lender" wouldn’t do something that is illegal - would they?

Such an arrangement though - to me - does not seem to be in the consumer's best interest. It puts the Company X's financial interests above that of their client 's financial interests. (Perhaps "Large Lender" would be the best loan in some cases - and in others - perhaps not.)

The article that is linked to above - goes on to say... "In the case of a broker-client relationship, fiduciary duty means that a real estate broker is bound to put a client’s best interests ahead of the broker’s and must not profit from the fiduciary relationship unless the client consents."

The relationship I learned about between mega-broker Company X and "Large Lender" does not appear to do that. I would assume that they have some form of disclosure to each client about the Company X and lender LLC profit sharing relationship - but I wonder about the font size..


Rick Hauser, ABR, GRI, Broker-Owner, Relocation Advisors Group Inc.