Acknowledging that they can no longer hold their breath until the housing market recovers, many real estate agents have also had to learn that they can’t afford to be choosy about listing short sale properties. Many (dare I say most?) of these agents don’t have the knowledge and experience to navigate the short sale process successfully, so that leaves them with two options: (1) Refer the short sale to another real estate agent, but then they are only making 25% of the potential commission, and statistically only about 30% of short sales result in a successful closing. So many agents resort to option (2): Partnering with a third-party negotiator.
Third-party short sale negotiators used to come in many forms: real estate agents, loan originators, lawyers, title and escrow companies, espresso baristas – you get my point. Then legislation came along that limited who could negotiate on a short sale legally, redefining the options for short sale negotiators to real estate brokers, licensed loan originators and law firms.
There was a time when we used a third-party negotiator – but then we learned two important things. And if you’re contemplating short selling your home, you need to think about them too.
(1) The market is tough enough – why make it harder to sell your home? Simply said – third-party negotiators need to get paid. Before the release of the FTC’s ruling on Mortgage Assistance Relief Services (MARS), most third-party negotiators charged an up-front fee in additional to 1-2% of the sales price, usually with a minimum fee of $3,000, payable on closing. With the exception of law firms, most third-party negotiators can no longer charge up-front fees, but most are still collecting $3,000 or more for their services.
Knowing that third-party negotiators need to make an income, how do they get paid? In the majority of cases, sellers don’t have the money laying around – otherwise they’d be paying their mortgage. With the expense of marketing a home, and the significant time, energy and investment in education required to successfully negotiate a short sale to closing, I don’t expect listing agents to sacrifice their commission to cover it. Which leaves three alternative sources: the buyers agent, the buyer(s), or the bank.
Banks are wise to the “game”. They are taking a significant loss on the property and are left paying for most of the closing costs as it is – why should they be expected to pay for the expense of a third-party negotiator? Law firms can (and sometimes do) get around this by charging more expensive escrow or legal fees on the settlement statement. But a bank can turn these down as well, and if they do – the fee to the third-party can be the only thing between a successful short sale and foreclosure. If the bank doesn’t pay the fee – then that leaves the buyer and the buyer’s agent to pay the fee.
Let’s get rid of the buyer’s agent – do you think that they are going to choose to show a listing that entitles them to sacrifice part of their commission to pay a third-party negotiator that benefits the seller? (Yet some listing agents and sellers still expect this). If the bank won’t pay the fees, and the seller doesn’t have the funds to cover the fee, then by-and-large the real estate brokers using third-party negotiators expect the buyers to pay 50-100% of the third-party negotiator’s fee.
(2) A knowledgable agent = better representation. Being an active participant in the short sale process absolutely makes an agent better qualified to list short sale properties. Your listing agent should have knowledge of you and your situation, and they should be empathetic to your cause – the third party negotiator probably doesn’t even know what you look like. Who do you think is going to be more convincing when discussing your situation with the bank?
We are not attorneys, and I still encourage all of my short sellers to talk to one. But I don’t have to be an attorney to list properties and facilitate the discussion of closing terms successfully without the additional expense of a third-party negotiator. There are plenty of good third-party short sale negotiators, but I think that they only exist because an overwhelming amount of real estate brokers don’t know enough to facilitate the short sale process and they’re too broke to turn a listing down.
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My concern isn’t with third-party negotiators – my problem is with the dependence many brokers have on their services. Expecting buyers and buyers agents to pay for the short sale negotiation is a bit like asking the buyer to pay the seller’s excise tax (1.78% of the sales price). In a market environment where short sales make up only 10% of all closed transactions we don’t really need to make it HARDER for our sellers to avoid foreclosure.
For these reasons we no longer use third-party negotiators. We list short sale homes without any fee to the buyer or buyer’s agent, and no fee greater than our usual listing commission to the seller (which the bank pays a majority of the time).
What do you think will sell first? A listing with a disclaimer like this one, pulled from an active short sale near my house: “Short sale, subject to lien holder approval. 1 lien holder. Buyer to pay [attorney firm] professional negotiation service fee of $1,495.00. See attached form.” Or will a listing with the statement we make on our short sales sell faster: “One lien holder, experienced short sale agent with no fee to you or your buyer.”
Before you list your short sale, ask your prospective agent if they are using a third-party negotiator and why. If they give you a reason that makes sense, please leave it in the comments below – I’m open to correction and commentary. 
Hi Jesse,
Over and over again I continue to hear stories from Realtors about third party short sale negotiators asking the Realtors to pay them off the HUD 1, huge HUGE fees that aren’t necessarily justifiable compared with the experience the 3rd party SSN’s bring to the table.
Why should a buyer pay more money for a home on a short sale when a buyer could buy a different house without the extra expense of a third party middle-man fee being padded onto the sales price? Just doesn’t make sense.
Realtors should be required to co-list with an experienced short sale agent (I’m assuming there is at least one in every office) or refer the entire deal to an experienced agent. Once the agent is experienced (not sure how we’d define that…..X successfully closed short sales?) the agent would be allowed to list short sales on his/her own.
Thanks for this read…Now if you could only find me a Pro Bono legal advisor who could screen my sellers for short sale qualifications….Short Sales would make awesome Short Stories.
Good luck to everyone. The market is getting better.
Jeannie,
IMO screening would be the job of the listing broker. An attorney would answer LEGAL questions for his/her fee.
The WA State Bar Association offers free legal aid to people in financial distress facing foreclosure. The home seller will have to fill out paperwork to make sure they qualify but this is a bona fide option for some. wsba.org
Dear Jesse,
I am in the process of submitting an offer for a short sale purchase. The house is listed for $74,900 and I am shooting my offer at $75,000. My agent says there is a third party negotiator fee, probaly around $3,500. She says this is because they have done all of the hard work getting the bank to lower the listing sale price from $150,000 to $75,000. The current owners are getting a divorce and cannot afford payments anymore. I don’t know much about short sales. Does this sound right to you?
That explanation doesn’t really jive – the bank doesn’t set the price on a short sale unless it’s HAFA approved, and even then I don’t see them approving a property for $150,000 AND $75,000 in the 120 days that the sellers would have to market the property with HAFA. The reality is that the $3,500 is simply a third-party negotiator fee, and you already know how I feel about that based on the article above. You don’t have much of a choice (sadly) if you want the house. The only way third-party negotiators go away is if listing agents quit relying on them and educate themselves on the short sale process, and listing agents probably won’t do that until buyers say that they won’t offer on homes with a third-party fee.
If this is the home you want, either agree to pay the fee or write it into your initial offer that you won’t pay the fee (or that you’ll only pay a portion of the fee). This will go over like a lead balloon, but crazier things have happened.
Hi Jesse, I appreciate your article. I like how you tried to look at it from all angles. I have been a buyer’s agent for two buyers on properties with a negotiation fee charged to them. Neither buyer had any issue with this because they knew going into the sale they would have to pay the fee. In our area, listing agents put the fee right in the description of the listing. Realistically, my buyers saw the properties online and called me to see the houses.
Once I spoke to the listing agent and she explained the process and I in turn explained it to my buyers, they both went forward. I actually LIKED the firm that negotiated for the sellers so much that I called them after the second closing and asked to work with them. They told me they wouldn’t work with me. Their contract is with the seller, but that I could refer business to them and so far I have and they in turn have referred listings to me.
Here are my thoughts: 1) buyers have to pay fees anyways that are usually seller responsibility such as taxes, septic inspections, fire inspections etc. so why if the seller stipulated something like “if you want to buy my house, you must pay off X” is there a problem? 2) REO lenders selling property do it all the time. You want to buy this house, you must send in a pre approval with X lender. Sellers can make stipulations for the sale and if one stipulation is the buyer must pay a particular fee to buy the property, so long as this was all disclosed, UP FRONT, I don’t see any issues. Agents are so up in arms about things that they really don’t look closely at. If everyone involved is happy, then I have no problem with it. Realistically it’s up to the buyer if they want to put an offer on a property that has a negotiation fee. Not us.