Recently, I’ve noticed a new phenomenon of seeing third-party negotiators or self-styled “investors” involved on certain short-sale transactions.  I’m not sure where all of them are coming from, but their presence has me concerned and a bit alarmed. 

As real estate brokers, we usually approach short sales in the following generic manner.  A distressed homeowner who is unwilling or unable to continue supporting his mortgage payment and owes more than the current market value of the property would apply for a short sale approval with the mortgage servicer or lender.  This would allow the homeowner to sell the property for less than what is owed and allow the mortgage-holder to accept the loss.

Since the mortgage-holder or bank is taking a loss on principal, the goal is to sell the property for as much as possible to minimize the realized loss.  To this end, banks want the participating real estate brokers to affirm in writing that the transaction is arms-length, or between two unrelated parties with no undue benefits to each, and that the property has been properly marketed.

Even when everything is done properly, the bank usually does not agree with the offered market price and has its own internal negotiator work

out a price that the bank can accept as being close to the market price.  While this process can go on for months, the large number of recent completed short-sale transactions have helped to standardize the process.

However, sometimes a listing agent would require the involvement of a third-party negotiator who assists the buyer in working out a deal with the bank.  Ostensibly, this negotiator is experienced in the process, and he comes at a price to the buyer, anywhere between $750-1500.  I find this practice to be quite objectionable.  If the bank is already paying for the commissions of both the seller and buyer agents, then the extra fee charged by the negotiator to the buyer is effectively an extra loss to the bank.  I’m all for savvy buyers getting a good deal, but that’s the whole point of hiring good real estate brokers to represent them.  Paying somebody else to do the listing agent’s job isn’t economically or ethically acceptable.

Another even more questionnable practice involves “investors” who try to flip a property.  These guys seem to have received their investment scheme training from something called the Real Estate Strategies Institute.  They do something quite different from traditional real estate flips in which an investor buys, repairs, and sells a property for profit.  Rather than put in an effort to add economic value to a property, they try to short circuit the short sale transaction by getting a complicit listing agent to submit their low-ball offers to out of state servicers and hold back higher offers.  So, while the listing is being marketed on the MLS, the market-based offers are not reaching the bank.

This is different from the more obvious fraud of having accomplices submit false BPOs or appraisals to banks, but it achieves the same goal.  Apparently, they come armed with special legal documents that they want any potential buyers to sign as addenda to the offer.  Effectively, they want the buyer to accept the fact that the interloping investor has already received a lower approved price from the bank and will resell the property immediately to the buyer at a profit.  In addition, they also want the buyer and his agent to not attempt to submit the higher offer to the bank.  I’m not a lawyer, but that just sounds more than fishy to me.

Aside from the legal grey area, a more pressing problem is the inability of the buyer to refinance the purchase since the interloping investor just added a transaction to the process, violating many lenders’ rules requiring seasoning to prove a transaction was arms-length.  The lenders I work with aren’t comfortable with these suspicious transactions either.  So, if you come across such a situation, I’d advise caution for any buyers or buyer agents.