The owner provides the real estate investor with all the necessary paperwork to approach the lender with a short sale offer. The real estate investor submits his short sale offer. It is an amazingly detailed offer consisting of the owners hardship letter, financial information and tax returns, a preliminary HUD-1 Settlement Statement, a Second Opinion BPO, photographs, a CMA and anything else that may convince the lender to accept the offer.

After a dozen or so follow up phone calls to the lender, (few of which, if any are returned), the investor would either walk from the deal in utter frustration, or continue to attempt to contact the lender. There are few things in life more frustrating and aggravating than dealing with an over-worked/under-paid Loss Mitigations Specialist that has the organizational skills of a turnip! For those investors with the patience and perseverance to stay in the process, the lender would eventually call them back.

The lender would order a Broker’s Price Opinion (BPO) to determine the viability of the investor’s offer. The lender must submit the short sale offer to the financial investor who funded the mortgage, and that investor needs a realistic valuation of the property in order to accept or decline the short sale offer. Unfortunately, the lender doesn’t want to pay for such a realistic valuation because it would mean paying a certified appraisal that would cost upward of $350.00 and they, the lender has to foot the bill. Since they are processing an average of 400 new foreclosures each month, simple math will tell you the lender would go bankrupt just paying for appraisals! So, they contract for the BPO through a Property Recovery Company.

The Property Recovery Company hires a “commission-driven” real estate agent to develop the BPO. The going rate for a BPO is $65.00; a portion of which is split with the agent’s broker. Most real estate agents aren’t very busy these days so BPO’s have become a good source of income. I have met some agents that claim to be doing 15-20 BPO’s each week. More likely than not, the agent is promised the listing agreement in the event that the Short Sale offer is not accepted and the lender ends up taking back the property through the foreclosure.

Does anyone see a conflict of interest here?!?!?!?!?! What could possibly be the real estate agents motivation to realistically value the property to what the market is actually doing? If he or she does, the competent real estate investor’s short sale offer would be accepted and the agent would lose out on the listing and the potentiality of a commission.

Now couple this with the strict parameters set forth by the lender as to what types of properties can be utilized when developing the comparable sold and comparable listed portions of the BPO. When determining the value of the property, the agent must ignore other REO properties that are on the market or have sold; they must ignore For Sale By Owner properties that are on the market or have sold; and, they must ignore all other “non-conventional” transactions. This cuts out 65% of the real market. Additionally, the criteria for “radius to subject property” for BPO’s is expanded to 5 miles rather than the industry standard of 2 miles. The BPO can only include properties that have been listed and sold by real estate agents. Naturally, I also found the word ludicrous to be a synonym for the BPO!

So the lender gets back a BPO that is 25%-30% higher than what is happening in the real world. In essence, it is the second time that the lender hoodwinks the financial investor. The first time was at the time of the origination of the mortgage: when the lender directed the certified appraiser (whom the lender didn’t mind utilizing because the borrower was footing the bill) to make sure the appraisal came back a minimum of 10% higher than the loan amount being requested; so the loan could be funded at 90% LTV (regardless of whether the property was a mansion, or if it was falling down, built on a termite hill or on an Indian Burial Mound!) The financial investor funding the mortgage was none the wiser. Now the lender is “sticking it” to the financial investor a second time, by providing them with false and incomplete information.

Sorry ‘bout that! Back to the BPO. The lender shipped the BPO information off to the financial investor who funded the mortgage. The investor looked at it and naturally denied the offer…no way are they going to take such a loss to these damn real estate investors! They then directed the lender to take back the property and list it for what the real estate agent who developed the BPO said the property is worth.

The real estate investor thinking their offer was just too low; licks his wounds and goes on to another short sale project. Eventually, after going through the above narrated process again and again, the real estate investor say’s the hell with short sales…there’s just no money to be made in them.

The lender takes back the property because no one bids at the auction. The lender turns the property over to the Property Recovery Company who secures the property, does the necessary repairs and cleaning, and then contacts the real estate agency who performed the BPO. The agency is directed to place the property on the market and get it sold as quickly as possible, normally asking for a 30-45 day sale.

The agent, fully knowing what the market is bearing, now completely ignores what he stated in his BPO and lists the property at a value normally 10%-15% higher than what the real estate investor was offering in his short sale. The property eventually sells, in about 4 to 6 months for an average of 6% less than the asking price.

When a final analysis is done, the lender must reconcile the cost of taking back the property and paying the financial investor. The cost of taking back the property (inclusive of the real estate commission) runs an average of 35% of the amount of the mortgage that was being foreclosed. Statistically, the lender is getting about 18% less than what the real estate investor was offering 4 to 6 months earlier. Amazingly, no one is holding the real estate agent’s feet to the fire. It’s just business as usual.

Slowly but surely this is all changing. When I give talks on the subject of short sales, I use the analogy of the lender having “Two Giant Heads”. The Two Giant Heads are not attached to a body and are incapable of communicating with each other; at least they were at one time. Through the marvels of financial ruination however, the Two Giant Heads are learning to communicate.

Giant Head Number One is the Loss Mitigation Department. This department is made up of the rudest, most incompetent people that the lender can amass. If they lack sufficient rudeness or incompetence, they receive Special High Intensity Training to buff up on those “skills”. Their primary role is to prevent the possibility of a short sale. They accomplish this by changing personnel and fax numbers on a weekly basis. You cannot speak to them directly, kind of like the Wizard of Oz; rather you must wait until they call you back.

You must go through their automated process where, only by the Grace of God or centrifugal force, can you actually speak with someone. Then there is no guarantee that the person you speak with speaks English (or at least a version of it that you can understand).

They pass your message on to the Loss Mitigation Specialist that has been assigned to the mortgage (this week). They rarely call you back and when they do, it’s to inform you that they have lost or misplaced your 70 page Short Sale Offer (or accuse you of having never sent it in) and ask if you can refax it to yet another fax number. Once they receive the refax, their procedure is to lose it a minimum of two more times, asking you to again fax it to their “direct fax number” which is again a different number than the last several fax numbers you were given.

They tell you that they are ordering the BPO. This is a bittersweet point in the process. On one hand you believe you are making progress, yet on the other you know you are going to meet a real estate agent at the property who is ultimately going to prostitute him or herself; and make all of your hard work to date completely futile. And then you wait….

You make a dozen calls to the loss mitigation specialist assigned to your short sale. You leave dozens of messages. Just when you are contemplating putting in an application at Wendy’s or Burger King because this real estate thing just isn’t panning out; you get a phone call from the lender.

The lender is informing you that your short sale offer is being denied. They explain that the BPO on the property that needs everything from new HVAC, new appliances to a new roof and a new septic field, inclusive of the removal of a wild dog and 2 abandoned cars has come back at a value that is so far in excess of what your carefully compiled statistics indicate is a fair and just offer that it makes you instantly see red and want to hurt someone! On the plus side, they usually will tell you what the financial investor will accept. You quickly do some mental calculations and realize that there is no way you can buy the property at that price. You feel a sense of outrage. You get a little belligerent with the Loss Mitigator and tell them they can stuff their counteroffer and take the property back.

As far as you are concerned, your efforts resulted in abject failure. As far as the Loss Mitigator is concerned, it’s “Mission Accomplished”. For some reason, both you and the Loss Mitigator go on to work on more short sales.

This brings us to Giant Head Number Two: The REO Department. These are the poor schmoes that end up with the property because the imbeciles in the Loss Mitigation Department did their jobs. Unaware that a competent short sale offer was submitted by a competent real estate investor that knows his or her local market better than 95% of the real estate agents in that market; and, dealing only with BPO that someone in that 95% developed, the REO Department goes about the process of getting the property off their books.

I’ve already explained the outcome so I will not subject you to it again. Why then, you might ask, am I such a fan of short sales? The answer is simple: When they work, the paydays are substantial and they make all this frustration worth while.

And, the process is changing for the better. The Two Giant Heads are now beginning to communicate. I guess it is a normal consequence of taking back so many properties through foreclosure and taking such huge losses on the re-sales. I just can’t figure out why the Loss Mitigation Specialists responsible for all this are not tarred and feathered and run out of town on a rail!

We at QuadReal have used this period of time when the Two Giant Heads were “incommunicato” to develop a thorough and successful Short Sale Procedure. Our submittals are so well crafted that we are actually getting calls back from the lender in record number. We only have to make 6 calls now to get a return, as opposed to the “old days” where we would have to make a dozen or better. Our offers are being accepted without a tremendous amount of counter-offering and negotiations.

Perseverance is the key as it always is in real estate investing. And just when you think it’s safe to go back in the water… in swims the real estate agents in circling schools with ravenous hunger. As an investor, if we find that the subject property is tied up with a real estate agent, we used to flee!

I would rather work with a dozen Loss Mitigators than a single real estate agent that doesn’t know a short sale from a short rib! I am working with two of them now and their arrogance and incompetence is alarming. They may very well work to prevent the short sale from happening and cause the owners to lose their homes. If you e-mail me through our Contact Us portion of our website, I will happy to divulge their names and their agencies and give you advice to steer clear of them.)

Real estate agents are all tied up with their commission. It’s all about the money, which I guess is understandable…but not under these circumstances. These agents who take on distressed property think it is business as usual. Know this: if the investor makes an offer on a property that is currently listed with a real estate agent, if the agent is not willing to lower their commission rate, they will try to convince you that someone is going to have to pay it if the short sale offer is accepted.

The lender will only pay 2.5% which means someone has to make up the difference. WE REFUSE! We do not require nor desire to have the agents as part of the short sale negotiation, primarily because they know not what they are doing. Therefore, if they are doing nothing but standing at the end of the line at the closing table with their hand out, they should not be overly compensated for doing nothing.

I was reading a post on a real estate social network and the writer was stating something I hear quite often. He was obviously an agent talking to other agents. He was stating that agents need to be very aggressive in making sure the bank does not reduce their commission. In fact the writer said:

“Who do they think they are to cut commissions? Negotiate for this! You work ten times harder on a short sale, so why should we be paid less. Fight for this commission. If you have to, take all listings at 8% and start there. Don’t let them push you around on this issue. They will break when you push!”

Great advice. Too bad it could put the agents on the other end of a massive lawsuit.

Short sales are not new. We have been doing short sales since before they became fashionable. We were doing foreclosures back when Sellers actually had equity. It’s not the short sale that is new; it’s the opportunistic real estate agent that are new to the game. Newly dubbed “short sale experts” are out there trying to do short sales and obviously the reason why is because of the lure of a big payday. Most have found out that short sales are, from their jaded perspective, a lot of work, and have elected to forego them. We say “Bless their little hearts!”

Some however, who have decided to make it a “go” are learning from “instructors” that they need to watch out for the lender who will try to reduce their commission. There are a couple of reasons for that:

The first is obvious, they want to net more. Real Estate agents are commission driven. These are the same folks that told all these people who are now in foreclosure that mid-2006 was a “perfect time to be buying”. The bubble had already burst and any real estate professional with an IQ over 35 knew it!

The other is that they agents are required to do so. The banks will only pay a certain commission rate and that’s a fact.

I have taken the time to speak with a number of prominent real estate attorneys in our area. I have also spoken to a number of real estate boards in regards to this. Here’s what it boils down to and you agents may not like it:

If an agent is taking on a Seller in foreclosure they do so knowing full well they are in financial distress. The agents know their clients are about to lose their home if a short sale is not completed. Some agents have even told the Sellers that they are “short sale experts”. Once an agent has taken that listing, their fiduciary responsibility is considerably magnified. Not only are they charged with protecting the best interests of their clients, they must place their client’s interests ahead of their own.

If an agent ends up “negotiating” with a lender and the lender says they need to reduce the commission in order to make the deal work, the agent has no other alternative but to abide by this requirement. Historically, the agent is going to do everything necessary to defend their commission. However, by doing so they have just breached their fiduciary responsibility to their client.

In speaking with the attorneys for the State Board of Florida, FREC, we were informed that if an agent has to reduce the commission to ZERO to make the deal work, then they must. THEY MUST TAKE NO COMMISSION IF IT MEANS GETTING THE HOMEOWNER OUT OF FORECLOSURE.

Now I am not saying an agent that knows what they are doing should not be compensated. For that matter even the incompetent agent may need to be compensated based upon their listing agreement. In a short sale transaction however, they may have to forego getting paid if the bank wants to reduce the commission to make the deal. We know of several agents that have come back to us as the Buyer and told us the bank rejected the offer and wants more money, when in fact that was not the case.

The agents have told us that we needed to increase the offer in order to meet the banks requirements. When we refused the agents then told the Seller that the bank and the Buyer are being unreasonable and there is nothing they can do can do. This is an unparalleled breach of ethics.

I know there are many real estate agents that read our newsletter and I am sure I offend most more often than not. I am also sure that many do not believe me with this point. I recommend they call their local board...not their broker, not their friend, not another agent…but the State Board and ask this question exactly.

“I am working on a short sale. I have an offer and it’s below what the bank will accept. The deal will close however and the homeowner will be saved from a foreclosure if I agree to reduce my commission or eliminate my commission. I have been told that I have an extraordinary fiduciary obligation to a homeowner in distress and that I need to forego my commission if it is in the best interest of the Seller and it will keep him from losing his home. Is this true?”

If you are an agent, make sure you are sitting when you get the answer.

But many agents don’t worry. They believe no one’s ever going to know about their killing a deal because the bank wanted them to take less commission. They believe that no one is going to know that the deal may have been closed but the bank wanted $5,000 or $10,000 more. In the end it just did not close and they can tell the homeowner that the Buyer would not go up in price and the bank wanted more than the Buyer was willing to pay.

Well…that’s not exactly true. We have spoken to different attorneys in different counties and the next wave of real estate agent lawsuits are on their way. You see, each and every time an agent calls the bank to “negotiate”, those calls and everything you say on them are recorded. In fact, they AGREE to those calls being recorded as a condition to even being allowed to speak to a lender.

Lender reps are trained as to what they can and can’t say in regards to a client. More than likely in the real estate agents newly read “short sale expert” manual, the “experts” failed to mention that little bit of information.

Attorney’s that will be suing real estate agents can subpoena those phone records and in doing so can make a very compelling case for negligence. They can subpoena all of the agent’s notes and their short sale package.

If that’s not bad enough, so many agents and brokers nowadays are “chummy” with their own title company or title agent and try to get “creative” with the paperwork. The mistake they are making is utilizing a title agent instead of a real estate attorney. If they used a real estate attorney, it’s possible another layer of protection would have been put in place as a result of attorney/client confidentiality.

The two hour “short sale expert class” that these agents take, being given by agents who took the course the week before, left out that tidbit of information as well. Well, who knows, maybe the homeowner will just accept that they lost their home to foreclosure and believe that their agent did the very best that they could.

I however, see a proliferation of lawsuits stemming from misrepresentation and culpable negligence. Even the breach of trust is actionable. They may have caused the seller damages from which they will never recover.

QuadReal will be in the short sale business for some time. We have learned to deal with the turnips in the Loss Mitigation Departments of the lenders. Now, each and every time we find real estate agents involved in a property that we want to buy, rather than abandoning the seller, we will choose to hold the agent’s feet to the fire and apprise our client’s of what the agent must do to make the deal happen if it is destined to do so.

May your investments be profitable! God Bless!