Last week we discussed in some detail a California Department of Real Estate (DRE) "alert" concerning "the growing, questionable, and sometimes unlawful practice of short sale negotiators ('SSN') requiring/compelling Buyers to pay the SSN's fee." In many cases it noted clear violations of law that could occur when an SSN is used. For example, the SSN might not be licensed (a requirement in California except for certain attorney exceptions). Or, the payment to the SSN might be hidden or not appear on the HUD-1 (possible lender fraud). Or, the agency relation between the SSN and the Buyer and/or Seller might not be properly disclosed and confirmed. ETC.

Of course, none of these violations, and others, necessarily occurs when an SSN is paid by the buyer. They just might occur. Other aspects of the DRE paper were even less definitive. "Lenders may consider any fee charged by an SSN to be a commission payment … and that payment had not been authorized in the Lender's Term Sheet (i.e., when added to commission that the Listing and Selling Brokers are receiving it may exceed the limit authorized by the Lender) … and that may constitute Lender Fraud."

In any event, the tenor of the document was clear: "… real estate licensees must understand how truly unsafe and problematic this practice is in terms of potential license discipline and civil and criminal liability." What could an agent take away from such a warning except, "Don't have Buyers pay Short Sale Negotiators!"?

Subsequent to the appearance of the DRE advisory, the Legal Department of the California Association of Realtors® (CAR) published on its web site two documents dealing with this and closely-related issues. (It is tempting to say the CAR publications were in response to the DRE memo, but they are not described as such. The timing might be purely coincidental.) One, dated September 30, 2010 is a question-and-answer discussion titled Short Sale Fraud. A six-question section deals with "Short Sale Negotiator Scams". The second document, slightly more than 3 pages in length, is titled Short Sale Negotiators, and is dated Oct. 5, 2010.

Both documents acknowledge the potential value of using a short sale negotiator who "can facilitate and expedite the short sale process," but both emphasize that a good deal of care must be exercised. The Short Sale Negotiators article addresses the question of payment of SSN in some detail.

Sellers, of course, might pay the SSN fee; but this is extremely unlikely. The seller probably does not have the money to do so. Who else then? The CAR memo offers this opinion: "Probably the least problematic method of payment, both legally and practically, is for the listing agent to simply pay the SSN out of the listing agent's side of the commission." An example is then given in which the transaction commission is 6%. The listing agent offers out 2.5% to the selling agent, and then from his/her 3.5% pays 1% to the SSN.

Well, that all works pretty well in a world where commissions are 6%. (And is it really true that the organization that has so long admonished us regarding our talk about commissions is now using 6% in an example?) Unfortunately, and despite all the programs we read about, 6% commissions are pretty uncommon in the short sale arena where we live. 4%, maybe 5%, would be more realistic. And then, with a fairly typical 1% SSN fee, the listing agent is liable to wind up as the one who is really short in this deal.

"Listing agents and sellers, however, may prefer to have the buyer to pay for the SSN fee," the CAR paper acknowledges. "This is not illegal if done properly; however it must be done very carefully." For the most part, though, the subsequent discussion deals with issues relating to the presentation of offers. To be sure, the memo also emphasizes that a buyer's payment of an SSN fee must be fully and clearly disclosed, in a timely manner, to both the buyer's and seller's lender(s). And, of course, it must appear on the HUD-1.

Regrettably, though, the CAR memorandum does not address and analyze many of the Real Estate Department's this-could-be-a-problem scenarios. Nor does it offer any kind of how-to-do-this-right analysis. For example, it doesn't suggest how agency and agency disclosure should be handled.

This is not meant as a criticism of what CAR has done so far. If anything, it is more of a plea that more will be done, that perhaps some new forms will be created to help agents through these situations.

Having a buyer – the only one who has any money – pay for an SSN presents the listing agent with a minefield to cross. The DRE says in effect, "It is way too dangerous; don't try it." CAR is more positive. "It's possible to make it across, but you need to be very careful. For example, don't step on those little springy things sticking out of the ground."

We've heard the warnings. Please, can anyone give us a map?