short sale & commisions

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short sale & commisions

Mary Ann Rocco
Huntington Beach, CA · Member since 2009 · 13 posts · 0 votes

I'm looking for better understanding about short sales and real estate commissions. I apologize for the length of this post.

The short sale has not been approved because of the 2nd with Chase, but I want to ignore the issue of the 2nd for now. I’m trying to understand certain numbers.

The property is in California and I’m the buyer. I signed a contract saying I would buy a house for 720,000 plus an additional out of pocket expense of 20,000 towards the second and 1% in commissions to the agents and another 1% to the negotiator which is an additional 14,400. I knew the agents were receiving a total of 5% commissions but as a first time home buyer I didn’t think to ask my agent where the other 4% was coming from.

The outstanding loan balance on the 1st (GMAC) is 656,000. The outstanding loan balance on the 2nd (Chase) is 175,000. The issue of the 2nd is a whole other post so I won’t go into detail on that. I have a copy of the GMAC short sale letter. It outlines the following numbers:

We agree to accept proceeds generated by 720,000. Seller to net zero. Net proceeds to GMAC will be no less than 653,000. Yes, that’s only $3,000 short.

It goes on to list all of the closing costs approved (not to exceed)
Taxes title, etc. = 8,515
6% agent commissions = 43,200
Payoff towards second = 15,000

I’m trying to understand the issue of the 6% agent commissions and that fact that I’m paying that on top of the amount owed to the bank. Something about this seems 'off' to me. I was told they moved the numbers around to make this short sale go through more easily. I realize that I signed a contract and the bottom line is what it is, regardless of how it’s ultimately divided, but is this normal practice in how the numbers work? I was under the impression that in a short sale, the banks would kick a certain percent back towards commissions. Since the total loan is only 656,000 GMAC is not really paying anything towards the commissions, I am. My agent thinks this is fine, and I trust my agent, but I can’t let go of this nagging feeling that something’s not right, but I know nothing about the the real estate industry. I feel deceived by how the contract was worded and how the numbers are playing out. Can anyone give me their opinion on this situation? Is this SOP in short sale world?

Mary

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Justin S.
Residential Real Estate Agent · Chandler, AZ · Member since 2009 · 1k+ posts · 928 votes
16y

I'm not sure why you are paying out of pocket expenses that are not going towards the property. I have not seen this, but that does not means its not right.

IMO, a typical deal would be you pay $720,000 for the house, and those funds would be distributed as follows:

720,000 - Purchase Price
-8515 - Taxes, title, ect
-43200 - Commisions
-15000 - towards second
653285 to the first.

I have no idea why you are paying additional 1% to the agents and another 1% to the negotiator. Typically the agents will each give 0.5% to the negotiator. In addition, the extra $20,000 to the second is unnecessary.

Basically you are paying the agents and the negotiators for not doing anything extra. The negotiator should be ensuring you do not have to come out of pocket to satisfy both liens. I know the negotiator did not do a thing to get the first satisfied. Losing $3K on the first is NOTHING compared to other houses. The bank is probably throwing a party that they only lost $3K. I've gotten approvals where the banks have lost over $150,000.

IMO, you are being taken advantage of by the agents. You should only be paying $720,000 for the house and nothing more.

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  • Justin S.
    Residential Real Estate Agent · Chandler, AZ · Member since 2009 · 1k+ posts · 928 votes
    16y

    I'm not sure why you are paying out of pocket expenses that are not going towards the property. I have not seen this, but that does not means its not right.

    IMO, a typical deal would be you pay $720,000 for the house, and those funds would be distributed as follows:

    720,000 - Purchase Price
    -8515 - Taxes, title, ect
    -43200 - Commisions
    -15000 - towards second
    653285 to the first.

    I have no idea why you are paying additional 1% to the agents and another 1% to the negotiator. Typically the agents will each give 0.5% to the negotiator. In addition, the extra $20,000 to the second is unnecessary.

    Basically you are paying the agents and the negotiators for not doing anything extra. The negotiator should be ensuring you do not have to come out of pocket to satisfy both liens. I know the negotiator did not do a thing to get the first satisfied. Losing $3K on the first is NOTHING compared to other houses. The bank is probably throwing a party that they only lost $3K. I've gotten approvals where the banks have lost over $150,000.

    IMO, you are being taken advantage of by the agents. You should only be paying $720,000 for the house and nothing more.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    16y

    I strongly suspect a better question is what commissions are the sellers/lenders paying? I suspect it is 5%. The agents and negotiator are trying to tack on another 2% so the agents each get their full 3% commission and the negotiator gets paid.

    In reality, it sure looks like GMAC is paying the full 6% and allowing a token payment to the second. $15K on a $175K second is actually more than a "token" payment. So, I don't know where this extra $20K is going.

    If you're paying any of these amounts out outside the closing and they don't appear on the HUD as POC (paid outside of closing), something improper is happening. I'd insist on the price being $740K or at least every penny of the $740K being accounted for on the HUD.

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    16y
    Originally posted by Mary Ann Rocco:
    ... My agent thinks this is fine, and I trust my agent, ...

    Mary


    As explained by other posts on this thread, trusting others with your money might just cost you some more of your money. Insist that all payments be part of the HUD settlement sheet, so that they are accounted for - that way you will see who is getting what amounts and from whom.
    Anything that is POC (Paid Outside Closing) should still be included on that settlement sheet.
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  • Scott Hubbard
    Rehabber · Tucson, AZ · Member since 2008 · 1k+ posts · 802 votes
    16y
    Originally posted by Steve Babiak:

    As explained by other posts on this thread, trusting others with your money might just cost you some more of your money. Insist that all payments be part of the HUD settlement sheet, so that they are accounted for - that way you will see who is getting what amounts and from whom.
    Anything that is POC (Paid Outside Closing) should still be included on that settlement sheet.



    Mary-

    If your NET purchase price is less than Fair Market Value, then I am going to disagree with my colleagues.

    Although it is against NAR protocol to receive a fee through a real estate transaction outside of closing and not disclosing all material costs on the HUD1, since Chase is nearly made whole, I am going to say this is not an issue for you. However, if your borrowing your money from a lender, you are required to account for all the true costs of the purchase price and this arrangement may not be valid. Lastly, some closing costs are tax deductible including commissions and not having them on the HUD can hurt you.

    Again, if your getting a good deal, then I think you will have no problem with this scenario. I have done such arrangements and this, as described, is perfectly legal even if your borrowing money. Again, this is prefaced that the 1st lender is made whole, or nearly made whole. In this case, Chase has more to lose as a foreclosure, so they will likely not care if your paying off HUD.

    On the other hand, I do foresee a possible issue with the second mortgage. Although the transaction is classifed as a short sale, since Chase has a small loss, GMAC will not approve the numbers as they stand now.

    This is because GMAC knows that Chase will stand too lose $40 to $50K of principal in a foreclosure scenario. So, GMAC will want a higher NET to agree to a short payoff. They will likely counter Chase because they can and since the current arrangement has already received approval, I predict the agents will come back to you for more money.

    The negotiator is terrible IMHO, because they should have leveraged a larger payoff for GMAC and a better NET purchase price for you. Since your paying top dollar for representation, your overpaying for a very amateurish mistake!

    My recommendations are:

    1. Make sure you are getting a good deal with at least a 5 to 7% value to fair market. Do not rely on your agent assessment of the market. Put a contingency in the agreement that the appraisal come in at least 5% of market value. After all, your paying premium dollar for a house that is distressed and you should be rewarded.

    2. Be clear that you will not re-offer or make up for an increase in the pay-off amount to GMAC. This fee, should be paid by the agents since you are relying on the expertise or by the seller since he is also benefiting from a short sale.

    3. Check with your lender, if any, to make sure they will not have a problem with this arrangement. Lenders are skittish about off HUD fees and payoffs.

    4. Check back here to let us know how things are going.

    Good Luck!


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  • Mary Ann Rocco
    OP
    Huntington Beach, CA · Member since 2009 · 13 posts · 0 votes
    16y
    Originally posted by Jon Holdman:
    I strongly suspect a better question is what commissions are the sellers/lenders paying? I suspect it is 5%.


    Before I go on with more details on my situation I need to first understand this part of the equation. If a seller is broke and a bank is taking a hit on a loan, how is either of them paying a commission? Say I make an offer of 100,000 on a short sale where loan is $200,000. Wouldn't the commisions for the agents come out of the 100,000 that I'm putting into the pot? Or does the bank increase their 100K loss even further by throwing in towards agent commisions? I need to get this part down before I go to the mattresses!

    PS- I appreciate all of your responses so far!

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  • Scott Hubbard
    Rehabber · Tucson, AZ · Member since 2008 · 1k+ posts · 802 votes
    16y
    Originally posted by Mary Ann Rocco:
    If a seller is broke and a bank is taking a hit on a loan, how is either of them paying a commission? Say I make an offer of 100,000 on a short sale where loan is $200,000. Wouldn't the commisions for the agents come out of the 100,000 that I'm putting into the pot?

    Mary-

    In a short sale transaction, the lender must agree to the sale. As part of that agreement, lenders will try to close that gap between break even and loss by cutting costs. One of those cuts could be commissions. In the approval letter, there will be a itemized cost allowance which you should review. Typically, agents will get 6% commissions, but lenders will sometimes hit them with a 5% cap.

    In your example, your offer is $100K and the lender will then net $100K less commissions and closing costs. So, yes they will essentially be "throwing in towards agent commissions".

    Again, you should review the approval letter to make sure this is indeed happening. Sometimes the lender, if they wanted to net $100K, might counter-offer the buyer to cover their closing costs so they end up with $100K.

    I personally believe the agents are making you pay more than you should. Agents should not be paid more than 6% and this is backed by Fannie Mae and Freddie Mac guidelines. However, if you are getting a very good deal and since this is a short sale transaction, then I would tell you the end justifies the means. But, if this is not a very good deal, then why would you reward them?

    My advice to you is to investigate the matter more thoroughly to make sure your getting a good deal. If not, then dispute the merits of this transaction and walk away. There is no reason to pay a premium for a short sale where you do not leverage a GREAT buy!

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  • Mary Ann Rocco
    OP
    Huntington Beach, CA · Member since 2009 · 13 posts · 0 votes
    16y

    Thanks - that clarifies the situation for me. The bottom line is that what I'm paying for this house is unchanged. I expected to pay 754,000 which is appraised value. The breakdown of who is getting what in my contract with the seller was deceptive. Instead of the agent/neg commission of 2%, the 754,000 goes towards 6% in commissions. But the bottom line remains the same.

    Now the question is do I walk away from my dream house after 4 months of being in escrow because of semantics?

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  • Scott Hubbard
    Rehabber · Tucson, AZ · Member since 2008 · 1k+ posts · 802 votes
    16y
    Originally posted by Mary Ann Rocco:
    Thanks - that clarifies the situation for me. The bottom line is that what I'm paying for this house is unchanged. I expected to pay 754,000 which is appraised value. The breakdown of who is getting what in my contract with the seller was deceptive. Instead of the agent/neg commission of 2%, the 754,000 goes towards 6% in commissions. But the bottom line remains the same.

    Now the question is do I walk away from my dream house after 4 months of being in escrow because of semantics?



    Only you can answer that question. If you intend to stay in the house for many years, then the price is not that relevant. Personally, I believe the agents are being overly compensated and are taking advantage of your emotional attachment. I find it curious that your paying exactly the appraisal value. Hmmm! How ironic....

    For the most part, your purchasing a house on an AS-IS basis. It is possible that the current owner could not afford upkeep or maintenance. When you consider this plus the time and stress involved in a short sale, you should be receiving a discount to fair market value.

    I doubt GMAC will accept just $20K anyway, so I believe they may go back to the well.

    Good Luck!

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  • Mary Ann Rocco
    OP
    Huntington Beach, CA · Member since 2009 · 13 posts · 0 votes
    16y

    This is a great forum. I'm very grateful for the advice.

    I have some thinking to do. I'll post an update when I know the end of the story...

    Mary

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  • Nick Reuter
    Real Estate Investor · Bradenton, FL · Member since 2009 · 99 posts · 42 votes
    16y

    Good luck Mary!

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