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Agents Balk At Requirement That Short Sales Be Offered At Auction

Written by on Monday, 17 February 2014 5:03 pm
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At the January meetings of directors of the California Association of Realtors® (CAR) a substantial number of attendees expressed considerable frustration and dissatisfaction with a relatively new aggravation in the short sale world. Their sentiments are shared by many agents around the country. I refer to the introduction of bank-required auctions into the short sale process.

Some might think, "Well, so what? The short sale market is pretty well over by now anyway." Would that it were so. Last November, Reuters published an article with the title "A new wave of U.S. mortgage trouble threatens." The article dealt with the re-setting of Home Equity Line of Credit (HELOC) loans that were originated during the bubble years, primarily 2004 - 2007. The numbers are staggering. Said Reuters, "Between the end of 2003 and the end of 2007, outstanding debt on banks' home equity lines of credit jumped by 77 percent, to $611.4 billion from $346.1 billion..." A vast majority of those loans re-set at the ten-year mark. Re-setting these loans usually means that they convert from interest-only payments to loans that will fully amortize over the remaining twenty years. This results in a very large payment jump.

There's not a great deal of historical data for this, but early signs are not encouraging. The Reuters article points out that a "high percentage of home equity lines of credit went to people with bad credit to begin with…" Amy Crews Cutts, chief economist at Equifax, is quoted as saying that the increase in payments on HELOCs is a pending "wave of disaster." In short, it appears that short sales will continue to be with us - perhaps in increasing numbers - for at least a few more years.

So, what is the concern about auctions being inserted into the short sale process? (Note: We are not talking about foreclosure auctions.)

Here's what happens: Larry, the listing agent, takes a short sale listing, duly noting that selling price and terms will be subject to lender's approval. Barbara, the buyer's agent, brings an offer acceptable to the seller, so the deal is shipped off to the lender (or servicing agent) for approval. But, rather than give a 'yes' or 'no' or counter offer, the lender says this.

"We will approve the deal, but only if we first put the property up for auction and find that we cannot get a better price. If we can get a better price, then the auction buyer gets the property. The listing agent still gets his/her commission, but the original buyer's agent is left out - unless the original buyer joins the auction and winds up being the highest bidder."

Today, the major players in this scenario are Nationstar as the lender (having purchased significant loan portfolios from both Lehman Brothers and Bank of America) and Auction.com serving as the auctioneer.

The complaints are varied. Naturally, buyers' agents are the most upset, as they stand a chance of being completely cut out of the deal. Moreover, it is an enormous frustration to their clients who, depending on how much they want the property, may have to pay more for it (which, of course, could happen anyway) and will also have to pay a 5% surcharge to the auction company.

While, as noted, listing agents will still receive their brokerage fee, they have concerns about liability. In a typical transaction, a buyer's agent has considerable responsibility to look out for the buyer's interests. Buyers' agents do such things as arrange for inspections, examine title issues, look for all sorts of 'red flags', and disclose matters of concern to the buyer. An auction company isn't going to do that. (Indeed, its paperwork will give it plenty of coverage in that regard.) Listing agents - who well may not want to be dual agents - are concerned that they are going to be held liable for matters that normally would have been the concern of a buyer's agent.

At their January meeting, the CAR directors voted as follows: "That C.A.R. "SPONSOR" legislation to require an auction company to indemnify or "hold harmless" the listing broker in a transaction against liability that results from the auction company's actions in a short sale transaction."

Whether such legislation, or a version of it, can gain traction in the legislature is an open question. It will be an interesting process to watch.

Bob Hunt is a director of the California Association of Realtors®. He is the author of Real Estate the Ethical Way.

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7 comments

  • Comment Link Patricia Beattie Thursday, 20 February 2014 7:16 pm posted by Patricia Beattie

    Outrageous! Most short sales are handled by the institution and Seller has little or no say to begin with. This is really about the bank collecting as much as possible. That's it. The Seller isn't receiving anything and the Agents are rarely paid full commission and now in this case, only one side. Therefore, if you take a short-sale, you better be able to sell it too and do double the work. But moreover, why, why, why do banks insist on cutting professionals out? One guess.

    To Brian Sharp ~ Not every State uses SS forms, but if so, great tip!
    To Tom McCannus ~ Yes. Agreed. Excellent writing.

    Note: The 5% is only paid if the Buyer decides to go to auction to make the best offer and get the house. Separately from the offer submitted?

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  • Comment Link Nancy Larkin Tuesday, 18 February 2014 12:40 pm posted by Nancy Larkin

    This short sale mess just gets worse at every bend.

    I really appreciate Bob Hunt's article, and Tim Mc... you make some very valid points and I can see why you were/are so upset. I think it's utterly disgraceful that we allow this sort of abuse happen to homeowners/buyers/agents.

    I truly don't know what the answer is. I would love to see us agents/brokers refuse to deal with short sales, but then I would imagine, that these "crooks" would find another way to harm the sellers even more.

    Very sad that we've come to such a state of greed and disregard for someone in trouble to easily take away his home. It's a far cry from the American Dream

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  • Comment Link Tony Morales Tuesday, 18 February 2014 12:25 pm posted by Tony Morales

    Ok there is misinformation in this article., I too had originally contested the auction process, however I have gone a different course. I had contacted CAR legal twice and they responded that there is nothing illegal what Nationstar is doing. The Short Sale Addendum states that a seller can obtain additional and backup offers. Also, and I have verified this, that if the original buyer's offer is accepted, or if the original buyer outbids another buyer than they do not pay they 5% premium. Also, it makes no sense for a buyer to make a low ball offer and then wait for auction process, as Nationstar will always have a reserve price

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  • Comment Link Tim McCannus Tuesday, 18 February 2014 11:05 am posted by Tim McCannus

    Sorry about the typos below... I was pretty angry as I typed!

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  • Comment Link Tim McCannus Tuesday, 18 February 2014 10:58 am posted by Tim McCannus

    Having been through this process on three occasions, I can tell you this is outrageous.

    Who is going to counsel the homeowner on which offer and which buyer is best for the homeowner? Auction.com? No, they just DICTATE which offer will be selected. So much for the homeowner's rights to select a buyer and to make certain their liability is limited.

    Last time I checked, the homeowner is the only person who has the right to accept an offer for the purchase their home. The Short Sale Lender only has the right to approve or reject the amount the will receive for the release of their lien. They DON'T have the right to pick the buyer. This is a wild overreach of power and control. If they would get their act together on valuation, this would be an issue. Nationstar is so lost on value that they have resorted to taking over the transaction through Auction.com and ADDING a 5% fee (which drives price DOWN by 5%) in an effort to maximize their return. That's insane.

    To be clear: The homeowner is the only person taking contractual risk by entering into a formal purchase and sale agreement which can expose the homeowner to legal liability in the form of breach of contract claims and specific performance actions. Is Auction.com suggesting that they will look out for the best interest of the homeowner while Auction.com SELECTS THE BUYER FOR THEM? Not a chance! They are looking out for their 5% fee only.

    If Nationstar doesn't ultimately approve the short sale with the buyer Auction.com selected, can my client sue Nationstar for intentional interference if they end up foreclosing on the home? Isn't that foreclosure THEIR fault seeing that THEIR service provider picked the wrong buyer?!?

    Auction.com intends to advertise and market the home – are they licensed to do so? Are they going to force my client to enter into an agency relationship with them in order to conclude a short sale? Where is the legal right to collect a 5% fee (read: COMMISSION) for showing the property on their website? That sounds like licensed activity, yet they don't represent either party to the transaction!

    Auction.com states that they will be drafting the documents for the purchase and sale. Are they acting as a licensed attorney? Will they be drafting protective language for the homeowner in the event the buyer THEY PICK wishes to sue the homeowner? Will they indemnify the homeowner against the buyer THEY select in the Auction.com process? Will they indemnify the homeowner in the event the short sale fails and the homeowner faces deficiency liability because THEIR buyer failed to get short sale approval? In fact, is Auction.com going to negotiate the terms of the Short Sale with Nationstar? If so, in whose best interest? Are they going to GUARANTEE approval of THEIR buyer in the short sale at the price THEY secured?

    Auction.com is vastly over stepping its bounds. In a recent transaction they asked for a copy of the CAR form RPA. Then, after the auction process closed, we got a copy of the RPA back from Auction.com filled out with our brokerage information at the bottom. We NEVER agreed to that - it's a violation of CAR's copyright. They are improperly using CAR forms AND dictating contractual terms in those RPAs without negotiation AND WITHOUT REPRESENTING EITHER PARTY!

    Their 5% fee is atrocious and completely unsupported by the service they provide. The agents do all the work and Auction.com puts another 5% extortion fee into the transaction. How does this maximize the return to the bank?

    Just for the record: NONE of the three attempts at working Auction.com ended with them finding a buyer. We were forced to go through the 'auction' process three times on one home over the course of many months and they could never find a buyer willing to put up with Auction.com's nonsense. This lead to upset buyers threatening to sue Auction.com AND THE SELLER. It was 10 times as much work. Auction.com forces a separate escrow so that their fee can be put into an account they control. That killed one deal. Auction.com doesn't have any experience with drafting contracts, so they shove a 10+ page "addendum" onto the buyer that makes absolutely no sense and exposes both the buyer and seller to additional liability (and far less control than either agent will allow). That process killed another deal. We ended up selling to the original buyer we secured through the original MLS listing process (and through years of experience in closing deals!). The seller was absolutely worn out by the 6 open houses we were forced to hold even though we already had a buyer AND A SIGNED CONTRACT. The buyers were worn out and angry. The process was a nightmare and didn't produce anything of value at all.

    Having Auction.com thrust upon a transaction after a buyer has already been found by the real estate agent exposes the agent and the homeowner to a claim of intentional interference with the outstanding buyer/contract and exposes the homeowner to a breach of contract claim by the current buyer.

    Buyers in the market are already talking about how bad NationStar/Auction.com properties are to deal with. That it clearly a negative affecting on the market. Buyers know that if they make an offer and NationStar forces the auction of the property online, that they will probably be forced out of the transaction and into the Auction.com NIGHTMARE. There is also speculation of false bidding on the part of Auction.com or through external interference in an attempt to get the original buyer to increase their offer -- this doesn't work... trust me. They tried with our buyer and it failed miserably.

    The conflicts of interest raised by the "Auction.com process" are simply unbelievable and outrageous. They are basically stepping in a listing agent, buyer’s agent, real estate attorney, lender advocate (getting them the best price), auctioneer (charging bidding fees, cancellation fees, buyer premium fees, etc) and short sale negotiator… That's simply not acceptable and CAR should take a stand. The Bureau of Real Estate should investigate this entire process (in actual practice, not in theory from what Nationstar/Auction.com tells them they are doing).

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  • Comment Link Ann Wilkins Tuesday, 18 February 2014 10:24 am posted by Ann Wilkins

    In our area we often have buyers put earnest money in escrow once their short sale offer is accepted by seller. We might also have buyers do inspections up front to determine if they want to wait for the house and to see if there is anything significant that we need to negotiate. If a house goes to auction then no one would be willing to tie up the earnest money or do the inspections. Plus, the 5% surcharge is a huge amount - I'm not sure if it can be financed. I suppose Nationstar is majority share holder in the auction company?

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  • Comment Link Brian Sharp Tuesday, 18 February 2014 9:46 am posted by Brian Sharp

    Buyer's agents need to strike 4.ii and 4.iii from the SSA form and then add a clause, "All other offers to be back-up to this offer" when they present offers on short sale listings. That way, if lender tries to require the auction route, listing agent says, "Sorry, we are forbidden by contract to accept other offers except as back-up to offer #1."

    Have a solid deal with buyer #1 IS good for the lender, because otherwise, if buyers know the home will just go to auction after they write an offer, they either won't write an offer in the first place, or they'll come in low then take their chances at the auction later. Both of these reduce sales price, which harms the lender.

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