Why Using a Short Sale Negotiator Service is Bad for the Buyer

Suburban StreetA trend that has been gaining popularity among real estate agents is the short sale negotiator service.  This is a third-party service that helps facilitate a short sale of a house.  It is sometimes called loss mitigation as well.  I am personally not a fan of this type of service, as it is a way to shift the agent’s duties onto a third party while extending the cost to the buyer.

A short sale is when the proceeds from the sale of a property will not cover the balance owed to the lienholder/bank, and the homeowner is unable to make up the balance to satisfy the lien in full.  The lienholder will agree to accept an amount less than is owed to them.  This is often done in attempts to avoid foreclosure of the property.

Short sales can be complicated transactions.  A buyer places an offer on a house, but unlike a regular sale, the seller must then get the lender'(s) approval before being able to sell the house.  Since they are selling the house for less than what is owed on it, the lender must be on board with the transaction and must give their approval to accept a final amount that is lower than what they are owed.  Getting lender approval is the tricky part.  It can be a time consuming process, and might take several months to get an answer back from the lender.

Real estate agents loathe this process because on one end they have a buyer who is excited about the house but will get increasingly impatient and might decide to walk away after months with no answer on their offer.  On the other end, the agent has to constantly try to follow up with the selling lender over the course of many months to make sure the paperwork is all in order and to keep on top of the transaction.  Many short sales are worked on for a long time only to be derailed at the very end due to the buyer moving on to another property, or due to the lender not accepting the short sale offer.

Short sales can happen one of two ways.  The first and best way is that the real estate agent and seller get the lender’s pre-approval for a short sale before listing the property for sale.  This allows for the transaction to flow much more smoothly, and it allows for the property to be listed at a price that is much closer to the actual accepted selling price.  The second way is for the seller/agent not to consult the lender ahead of time and not to inform them of their short sale intentions.  In this scenario, the seller often lists the house for sale at an attractively low price in order to reel in a lot of offers.  They then take the offers to the lender and ask the lender to accept a short sale.  The lender may or may not accept the short sale offer, and this is when the process can start to take a long time to go through and buyers begin to get frustrated with the lack of progress.  The lender might also come back and say they will accept a short sale, but will counter at a price higher than what the property was listed for sale at.  Buyers tend not to like this either.

Given the complexities of the short sale process, many agents have started turning to the short sale negotiator service to handle short sales for them.  The listing agent is still the primary agent in the transaction, and the negotiator service is a third-party to the transaction.  The negotiator service steps in once an offer has been placed, then will handle contacting the lender and trying to get the lender to accept the deal, or to at least negotiate a price with the buyer.  The short sale negotiator will also make sure all paperwork is in order, and will handle all lenders if there are more than one on the property.  Many agents like these negotiator services because they have people experienced with the short sale process handling all of the paperwork and staying on top of negotiations with the lenders.  It makes their job easy.

Now I’ll bet you are wondering what the problem is.  So far this short sale negotiator service sounds great.  And it can be great – for real estate agents.  My problem is how it affects the buyer.  Short sale negotiators do not work for free.  Someone has to pay them for all the hours they spend working on the deal.  But, is it the listing agent or seller who hired them to do the work the one that pays them?  Nope – this cost gets passed along to the buyer.

Negotiator fees are earned generally in one of two ways.  One is that the negotiator service fees are paid by the buyer, which can be quite expensive.  Typical fees start at $2000-3000 and go up from there.  Sometimes it is a flat fee charged, and sometimes it is a percentage of the house sale price.

Another way short sale negotiators make money on the deal is they actually act as the purchaser on the property, then quickly turn around and sell it to the buyer.  This way is more unethical in my opinion.  The negotiator agrees upon a purchase price with the lender, then turns around to the seller and tells them the price they will sell the home to them for, usually a few thousand dollars more than the approved price.  This is essentially flipping the house.  It is not illegal, but too often the negotiator does not clearly disclose to the buyer that they are in fact reselling the house to them and not just acting as an intermediate negotiator.  The buyer may be unaware of how much the negotiator is up-selling the property to them.  Flipping the property using this method also increases the chance of title mistakes or other paperwork confusion since there are multiple transactions happening quickly.

Why is this bad for the buyer?  In my opinion the buyer is getting charged more than necessary.  The negotiator service is doing all the work that the real estate agent should really be doing.  A negotiator service is not a necessity, and all the work they do can be handled by the listing agent.    But with the negotiator service, it is not the agent who pays for it but the buyer.  Great for agents as they do less work for the same money.  Bad for buyers as they pay for a service that should be handled by the real estate agent.

One of my biggest problems with the short sale negotiator services is that it is often not well disclosed to the buyer that they will be paying for a negotiator service.  This service, as well as their fees, should of course be fully and clearly disclosed to the buyer at the very start of the transaction.  If everyone is ok with the fees, then great, all is well.  However, many agents realize that some buyers might not love the idea of thousands of dollars of extra fees paid to a third party to a transaction, so they gloss over the negotiator part and do not clearly explain to the buyer what they are purchasing.  This is not to say agents are lying about using a negotiator, but I have seen many throw the negotiator wording and fees into the middle of a contract and hope the buyer signs off on it, knowing they probably do not fully understand what they are agreeing to.  They know a buyer will likely inquire about the fees at closing when they appear on the HUD statement, but at that time the buyer has waited months for the house, is excited about it, and is just ready to close so likely won’t lose the house over the negotiator fee.  This is unethical in my opinion.

If you are a buyer looking at a short sale property, be sure to ask your real estate agent if a short sale negotiator service is being used.  If they are, ask for a clear disclosure of all fees in writing ahead of time.  Ask for more concessions or reduce your offer if you do find there will be a negotiator fee.  You can also ask to not use a negotiator service, however luck with this working is not all that great.  Why should the buyer have to pay more money because the listing agent is either not experienced enough or is unwilling to do the work required to close a short sale deal?