“CASH FOR KEYS” – INFORMATION FOR CONSUMERS AND DRE LICENSEES
The challenge to successfully market REO properties has given rise to a growing practice known as “cash for keys”. The Department of Real Estate (“DRE”) has been receiving questions and complaints from consumers about “cash for keys” solicitations. This article is intended to provide some guidance for consumers and licensees when involved in a “Cash for Keys” program to minimize any misunderstandings or violations of the law.
“Cash for Keys” Programs
When a lender takes a home back as a result of a foreclosure action, it becomes responsible for that property. The longer the lender has to wait to sell the property, and the more money it has to spend to repair damage to and/or to maintain the property, the greater will be its ultimate loss. The consequences of foreclosure and the looming legal eviction action affects the prior resident owner of the foreclosed property and/or the tenant(s) living in the property the same way – they must, unless there is an existing landlord-tenant rental or lease agreement which survives the foreclosure by law, or a written agreement with the new owner/lender to maintain or modify the tenancy, vacate the property in a relatively short period of time.
If the lender can make a deal with a tenant to pay for the tenant’s security and utility deposits, moving expenses, and maybe even temporary living expenses, and perhaps a bonus for a quick moving date, it would be in the lender’s interest to do so to avoid the inevitable minimum 3 to 6 month delay associated with formal legal eviction proceedings. In the many circumstances, the lender would most certainly prefer that the tenant agree to vacate the property within a certain number of days, leave the property in “broom-swept condition”, remove all debris from the interior and the yard, leave all fixtures and landscaping intact, and turn over the keys and garage door openers.
Practical Application of “Cash for Keys”
Generally, the amount offered to tenants vary and is usually negotiable. Anecdotal reports from those who have had experience with “cash for keys” programs report that $500 is generally the minimum and $5,000 the maximum amount offered to tenants for their keys.
The amount an owner is willing to pay for a tenant’s keys depends on several factors, including the value and physical condition of the property, and the plan(s) the lender has for the property. Other factors include the amount of time the tenant needs to move out.
Laws Protecting Tenants’ Rights With Respect to Foreclosed Properties
As recently as early 2008, in the absence of a written lease agreement requiring greater notice, California law required that an owner provide only a 30-day notice to a tenant to vacate the property for any reason (other than the failure to pay rent, which required a 3-day notice).
However, recent legislation has changed the rules.
Signed as an urgency measure in 2008, Senate Bill 1137 gives tenants at least 60 days after a foreclosure before they can be asked to vacate the property. The provisions of SB 1137 are due to sunset (be repealed) on January 1, 2013. To review a copy of the bill and get more details, please visit www.leginfo.ca.gov.
Federal legislation was enacted effective May 20, 2009, requiring property owners who have taken a residential property by foreclosure, to give their tenants at least a 90 day notice to vacate the property before beginning the eviction process. That federal law is applicable nationwide, and it is known as “Protecting Tenants At Foreclosure Act”. The law is found at Title 7 US Code section 701 (“the Act”). See http://thomas.loc.gov.
The Act provides that if a tenant is renting under a lease entered into before the notice of foreclosure was communicated to the tenant, the tenant may remain in the property until the lease ends, unless the owner sells the property to a purchaser who will occupy the property as his primary residence. In that case, the owner may properly give the tenant a 90day notice to vacate.
While the Act provides greater protection to tenants than State law, local law may provide even more protection. If a particular property is subject to local “rent control” or “housing assistance” laws, or so-called “just cause for eviction” ordinances, those laws may provide even greater protection than the Act itself. As an example, even the Act itself provides that the owner of a residential property which is subject to a “housing assistance contract”, and who has a lease with a tenant in that property, is subject to any additional protections in the housing assistance contract (this typically applies to “Section 8” properties).
Finally, there is a bill pending in the California legislature that would require tenants be told of their rights when the property they occupy is foreclosed. Senate Bill 1149 requires that tenants who are living in foreclosed homes be given notice of their rights and responsibilities under these state and federal laws by requiring a cover sheet be attached to any eviction notice that is served within one year of a foreclosure sale. The cover sheet would delineate the laws and rights a tenant may have in cases where the property he or she occupies is foreclosed upon. The bill also seeks to help protect tenants who would otherwise have a negative mark on their rental history by prohibiting the release of court records in a foreclosure-related eviction unless the plaintiff landlord prevails. Whether the bill is signed into law will not be known until October 2010.
What Renters and Resident Owners Can Do to Protect Themselves
Tenants and resident owners of foreclosed properties must take a significant amount of personal responsibility in this matter. They should become acquainted with federal and State law concerning foreclosures and tenant evictions, and also with local laws which apply to their particular situation. For example, in the City of Los Angeles, beginning December 17, 2008, tenants who are current in their rent payments can not be evicted because of a foreclosure. Many cities in California, including Santa Monica, West Hollywood, Beverly Hills, Oakland, and Berkeley, are subject to local “rent control” and/or “just cause for eviction” ordinances, which may provide even greater protections. Without a working knowledge of applicable local law, a tenant is at a distinct disadvantage.
Tenants and resident owners should make sure that any “cash for keys” offer is coming from the new owner of the property, which is often a lender or a government sponsored mortgage investor, such as Fannie Mae or Freddie Mac. Tenants and resident owners should insist on verifying the identification and authority of the person making the “cash for keys” offer. They must insist on receiving a written “cash for keys” agreement, and carefully read and understand that agreement. They should have a trusted and competent attorney, real estate licensee, family member or friend review the agreement and provide counsel concerning its duties and obligations.
Before signing the agreement, a resident owner should call his or her lender directly to confirm the authority of the person making the “cash for keys” offer. A tenant must be especially careful. The tenant should call his or her landlord and ask about the foreclosure and the identity and contact information for the new owner. It would not be unusual for the landlord to tell the tenant to continue to make rent payments directly to the landlord. That should not be done if the landlord is no longer the owner of the property. And finally, a tenant or resident owner should never hand the keys over unless the money is delivered. Cash is best. If paid by check, the tenant or resident owner should make certain the check is good and/or clears. If the keys are handed over, and the owner fails to pay the money, or if the owner’s check bounces, the written agreement should be sufficient to allow the tenant to prevail in a small claims action against the owner. But obtaining a judgment is far easier than collecting it. Without a written agreement, the chances of obtaining a judgment are substantially reduced.
Is A Real Estate License Required to Solicit “Cash For Keys”?
There is no way to generalize and declare that a real estate license is, or is not, required to solicit “cash for keys”. The particular facts of each transaction will determine the answer to that question.
Responsibility of Real Estate Licensees Who Engage in “Cash For Keys” Transactions
A licensee who solicits a “cash for keys” deal should identify him or herself to the resident owner or tenant when requested to, and provide his or her DRE license number. A consumer may look on the DRE website (www.dre.ca.gov) and, on the “Home” tab, under the heading “Consumers”, click on “License Status Check” to verify that person’s license status. Under that same heading, there is also a link to “How to File a Complaint”. One who has been solicited by a DRE licensee is encouraged to file a complaint with DRE if the solicitor has not acted fairly and honestly in the “cash for keys” transaction, or if the solicitor has engaged in any other unlawful conduct.
It should go without saying that California real estate brokers or salespersons who engage in “cash for keys” negotiations with tenants must be aware of the federal, State and local laws relating to foreclosed properties, and the tenants’ rights with respect to their tenancies or leasehold interests. The old saying “ignorance of the law is no excuse” really does apply in this context.
It should also go without saying that DRE licensees who solicit a resident owner or tenant to accept a “cash for keys” proposal must act fairly and honestly with respect to the transaction. Dishonest behavior, misrepresentations, harassment, failures to disclose material information to a resident owner or tenant, including failing to advise the resident owner or tenant of his or her rights with respect to eviction (that the licensee has knowledge of) as a result of foreclosure, or negligence, could possibly lead to license disciplinary action. A licensee who hires unlicensed persons to solicit cash for keys deals can also be liable for the dishonesty, misrepresentations, harassment and/or negligence of his or her unlicensed agent.
Conclusion
A fair and equitable cash for keys agreement will mutually benefit both the new owner of the property and the resident former owner or tenant residing in the property.
For tenants, resident owners, and Department of Real Estate licensees, knowledge of the law concerning this subject is power – power to avoid problems that are just looking for place to happen.
For resident owners and tenants in foreclosed properties, your only real safety lies in your taking the responsibility to protect yourself. Get the agreement and all other communications in writing. Have someone you trust look the written documents over. Make sure the solicitor is authorized to act for the real owner of the property. And do not give up the keys before you get the cash.
Additional Resources: The office of the California Attorney General issued a News Release on June 28, 2010, entitled “Brown Investigates Whether Tenants’ Rights Are Violated in Foreclosures”. You may wish to consult that Release for more information.
If you are a tenant or resident owner and believe your rights have been violated, you can contact the California Attorney General at www.ag.ca.gov, and/or the California Department of Real Estate at www.dre.ca.gov.
Tuesday, October 19, 2010
San Diego Short Sales Do's and Dont's
Several months ago, the California Department of Real Estate ("DRE") issued a publication on residential Short Sales which provided an overview of the practice area, and a warning to the real estate industry about legal and ethical minefields and the growing fraud in this area. The publication also discussed and pointed out certain egregious and unlawful practices of short sale flippers, and it was followed by a DRE Consumer Alert on Short Sale transactions. Unfortunately, Short Sale fraud is growing, and it too often seems that licensees and those counseling licensees may wrongly conclude that unlawful or questionable practices "cannot be bad" because “everyone is doing it.” Licensees must understand that fraudulent and unlawful practices will invite disciplinary action by the DRE and possible civil and criminal liability. This DRE Short Sales update is written on the growing, questionable, and sometimes unlawful practice of short sale negotiators ("SSN") requiring/compelling Buyers to pay the SSN's fee. The DRE will publish and disseminate additional updates as necessary and appropriate to protect the public and to inform its licensees of practices that are problematic, questionable and/or unlawful. Discussion Many brokers have noticed and reported a sharp increase in the number of Listing Agents and SSNs who are requiring that Buyers pay the SSN’s fee. The Buyer’s agents are sometimes told (either in the Remarks Section of the MLS and/or in a pre-sale instruction sheet) that Buyers must sign a special Addendum created by the SSN in which the Buyers agree to pay the SSN’s fee if they intend to present an offer.
Buyer’s Agents may also be told that their clients’ offer will not be presented if the Buyer does not agree to sign that SSN Addendum and include it with the offer. If the requirement for the Buyer to pay the SSN fee is being driven by the Listing Agent and/or the SSN1 , and is really not a requirement of the Seller, there is potentially an ethics violation and a breach of the Listing Agent’s fiduciary duty to the Seller by stifling and limiting the presentation of legitimate offers.
1 The SSN is (or must be), unless exempt under very narrow statutory exemptions, a California licensed real estate broker. See sections 10130 et seq. of the California Business and Professions Code, for the licensing requirements and the exemptions. Also, see the discussion in paragraph (c) below.
One version of this scenario is where the Buyer is told that he or she “must” request a credit for non-recurring closing costs ("NRCC") (the NRCC is typically 3%) as part of the Buyer's offer with the understanding that the Buyer will use that money to pay the SSN’s fee as well as any other party who is not satisfied with the amount authorized by the Short Sale Lender (such as a second Lender). The NRCC will or may be shown on the HUD1 and if the fee is paid through escrow it would appear on a late-escrow HUD-1. However, these additional fees are often paid outside of escrow since the Lenders may not approve the same. Remember, in Short Sales, the Seller’s Lender may require, and in many cases makes it clear, that the Seller is not to receive money or any other benefit from the sale. The SSN Addenda that have been created to shift the payment responsibility for the SSN's fee to the Buyers may raise significant legal concerns for Brokers. In some instances the Listing Agent is trying to get paid extra money to serve as both the Listing Agent and the SSN. In other cases, the Listing Agent has hired an outside SSN because that agent is not able or willing to provide short sale negotiation services to their clients, but at the same time the Listing Agent does not want to share his or her commission earnings with the outside SSN that has been hired to do that work. To better understand the pitfalls and perils involved in these types of arrangements, we offer the following: (a) Although the SSN Addendum is a contract document, the primary reason that these terms and conditions are on a separate Addendum may be to better enable the Listing Agent and/or SSN to conceal this information from the Seller’s Lender and, in some instances, the Buyer’s Lender. Based upon anecdotal reports from lawyers and real estate practitioners, it appears that unscrupulous SSNs are purposely not sending these Addenda to the Lenders as part of the package of information requesting Short Sale approval from the Seller’s Lender. This practice of intentional concealment would support and/or may lead to a finding of Lender Fraud. If the SSN Addendum is not sent to the Seller’s Lender, the Lender may not be aware that the Buyer (whether or not they are approved to get the NRCC credit) is being required to direct funds to others in the transaction including, but not limited to, the SSN. It is noted that in addition to paying for the SSN, Buyers may be asked to pay off the Seller’s credit card debt, the Seller’s moving expenses, to buy the Seller’s furniture at an inflated price, and to otherwise provide funds for the direct benefit of the Seller. If those funds/payments are not expressly approved by the Seller’s Lender, those “additional” payments could be extremely problematic from a legal standpoint.
(b) Including the payment of the SSN’s fee on a HUD-1 is arguably not sufficient to qualify as a realistic, timely disclosure to the Seller’s Lender that such a payment will be made. The Seller’s Lender’s Term Sheet usually specifies the total amount of commission compensation that is to be paid to the Listing and Selling Brokers in the transaction. That Term Sheet may constitute escrow instructions from the Lender, and the Lender might not approve a payment to an SSN that is to be added to the amount One version of this scenario is where the Buyer is told that he or she “must” request a credit for non-recurring closing costs ("NRCC") (the NRCC is typically 3%) as part of the Buyer's offer with the understanding that the Buyer will use that money to pay the SSN’s fee as well as any other party who is not satisfied with the amount authorized by the Short Sale Lender (such as a second Lender). The NRCC will or may be shown on the HUD1 and if the fee is paid through escrow it would appear on a late-escrow HUD-1. However, these additional fees are often paid outside of escrow since the Lenders may not approve the same. Remember, in Short Sales, the Seller’s Lender may require, and in many cases makes it clear, that the Seller is not to receive money or any other benefit from the sale. The SSN Addenda that have been created to shift the payment responsibility for the SSN's fee to the Buyers may raise significant legal concerns for Brokers. In some instances the Listing Agent is trying to get paid extra money to serve as both the Listing Agent and the SSN. In other cases, the Listing Agent has hired an outside SSN because that agent is not able or willing to provide short sale negotiation services to their clients, but at the same time the Listing Agent does not want to share his or her commission earnings with the outside SSN that has been hired to do that work. To better understand the pitfalls and perils involved in these types of arrangements, we offer the following: (a) Although the SSN Addendum is a contract document, the primary reason that these terms and conditions are on a separate Addendum may be to better enable the Listing Agent and/or SSN to conceal this information from the Seller’s Lender and, in some instances, the Buyer’s Lender. Based upon anecdotal reports from lawyers and real estate practitioners, it appears that unscrupulous SSNs are purposely not sending these Addenda to the Lenders as part of the package of information requesting Short Sale approval from the Seller’s Lender. This practice of intentional concealment would support and/or may lead to a finding of Lender Fraud. If the SSN Addendum is not sent to the Seller’s Lender, the Lender may not be aware that the Buyer (whether or not they are approved to get the NRCC credit) is being required to direct funds to others in the transaction including, but not limited to, the SSN. It is noted that in addition to paying for the SSN, Buyers may be asked to pay off the Seller’s credit card debt, the Seller’s moving expenses, to buy the Seller’s furniture at an inflated price, and to otherwise provide funds for the direct benefit of the Seller. If those funds/payments are not expressly approved by the Seller’s Lender, those “additional” payments could be extremely problematic from a legal standpoint.
(b) Including the payment of the SSN’s fee on a HUD-1 is arguably not sufficient to qualify as a realistic, timely disclosure to the Seller’s Lender that such a payment will be made. The Seller’s Lender’s Term Sheet usually specifies the total amount of commission compensation that is to be paid to the Listing and Selling Brokers in the transaction. That Term Sheet may constitute escrow instructions from the Lender, and the Lender might not approve a payment to an SSN that is to be added to the amount
authorized as payment for the Listing and Selling Brokers. Lenders may consider any fee charged by a SSN to be a commission payment because the SSN is performing California real estate licensee activity. When the Buyer’s separate payment of the SSN’s fee appears on the final HUD-1 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), Lenders may take the position that this constitutes a violation of the Lender’s Escrow Instructions, and that may constitute Lender Fraud. Recently, a Northern California Title Company (that had also served as the escrow holder) settled a case by paying the Lender the entire amount of the forgiven loan (plus attorneys’ fees and costs) simply because the escrow holder authorized a minor payment that was not approved by the Lender. (c) The SSN Addenda may contain provisions which purport to establish that the SSN (who is negotiating with the Seller’s Lender on behalf of the Seller) is also representing the interests of the Buyer in order to support the rationale given as to why the Buyer is to pay the SSN fee. The muddled and unsettled issue of who the SSN is actually representing can be used, depending on the facts and circumstances, as the basis to allege undisclosed dual agency which could lead to a rescission of the transaction, disgorgement of all commissions earned by all Brokers and sales associates involved in the transaction, and ultimately to the revocation or other discipline of some of the real estate licenses. It is possible that an SSN might fall entirely outside the scope of the statutory agency disclosure law which generally pertains to Listing Agents (defined under California Civil Code section 2079.13(f) as “a person who has obtained a listing of real property to act as an agent for compensation”) and Selling Agents (defined under California Civil Code section 2079.13(n) to generally be an agent “who sells or finds and obtains a buyer for the real property”). For example, California lawyers performing legal work and rendering services in the course of their legal practice are not included in the above-identified disclosure law. An ill-conceived creation of a dual agency relationship might not be properly confirmed in the Purchase Contract or the Addenda (as required by California Civil Code sections 2079.13et seq.) and the SSNs might not provide the Seller with the Agency Disclosure form in a timely fashion (if they provide it at all). Nor does the SSN generally bother to give the Buyer an Agency Disclosure form, although the same would be required in the event there is an agency (“Selling Agent”) relationship between the SSN and the Buyer. Failure to provide a timely Agency Disclosure can invalidate the obligation to pay commission under the terms of a Listing Agreement (please see Huijers v. DeMarrais, 11 Cal.App.4th 676 (1992)). That same reasoning and analysis may form a legitimate basis to negate the SSN fee.
(d) While much of the written documentation with reference to the Short Sale transaction will refer to a sale for fair market value (“FMV”), the SSN and Listing Agents may orally emphasize the payment of less than the FMV as part of a scheme to induce the Buyer to want to pay the SSN fee. Unfortunately, if the Buyer acknowledges that he or she is paying less than the actual FMV of the property, then he or she is acting in direct contravention of what Buyers and Sellers may be required to certify to secure the authorized as payment for the Listing and Selling Brokers. Lenders may consider any fee charged by a SSN to be a commission payment because the SSN is performing California real estate licensee activity. When the Buyer’s separate payment of the SSN’s fee appears on the final HUD-1 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), Lenders may take the position that this constitutes a violation of the Lender’s Escrow Instructions, and that may constitute Lender Fraud. Recently, a Northern California Title Company (that had also served as the escrow holder) settled a case by paying the Lender the entire amount of the forgiven loan (plus attorneys’ fees and costs) simply because the escrow holder authorized a minor payment that was not approved by the Lender.
(c) The SSN Addenda may contain provisions which purport to establish that the SSN (who is negotiating with the Seller’s Lender on behalf of the Seller) is also representing the interests of the Buyer in order to support the rationale given as to why the Buyer is to pay the SSN fee. The muddled and unsettled issue of who the SSN is actually representing can be used, depending on the facts and circumstances, as the basis to allege undisclosed dual agency which could lead to a rescission of the transaction, disgorgement of all commissions earned by all Brokers and sales associates involved in the transaction, and ultimately to the revocation or other discipline of some of the real estate licenses. It is possible that an SSN might fall entirely outside the scope of the statutory agency disclosure law which generally pertains to Listing Agents (defined under California Civil Code section 2079.13(f) as “a person who has obtained a listing of real property to act as an agent for compensation”) and Selling Agents (defined under California Civil Code section 2079.13(n) to generally be an agent “who sells or finds and obtains a buyer for the real property”).
For example, California lawyers performing legal work and rendering services in the course of their legal practice are not included in the above-identified disclosure law. An ill-conceived creation of a dual agency relationship might not be properly confirmed in the Purchase Contract or the Addenda (as required by California Civil Code sections 2079.13et seq.) and the SSNs might not provide the Seller with the Agency Disclosure form in a timely fashion (if they provide it at all). Nor does the SSN generally bother to give the Buyer an Agency Disclosure form, although the same would be required in the event there is an agency (“Selling Agent”) relationship between the SSN and the Buyer. Failure to provide a timely Agency Disclosure can invalidate the obligation to pay commission under the terms of a Listing Agreement (please see Huijers v. DeMarrais, 11 Cal.App.4th 676 (1992)). That same reasoning and analysis may form a legitimate basis to negate the SSN fee.
(d) While much of the written documentation with reference to the Short Sale transaction will refer to a sale for fair market value (“FMV”), the SSN and Listing Agents may orally emphasize the payment of less than the FMV as part of a scheme to induce the Buyer to want to pay the SSN fee. Unfortunately, if the Buyer acknowledges that he or she is paying less than the actual FMV of the property, then he or she is acting in direct contravention of what Buyers and Sellers may be required to certify to secure theSeller’s Lender’s approval of the Short Sale. In the past, Sellers have been required to certify under penalty of perjury that the property is being sold for FMV. More and more Lenders are now requiring that the Buyers also execute comparable certification documents. Misrepresentations, perjury, and/or the subornation or perjury, have serious legal, criminal and/or disciplinary consequences. Also, any “artificially lowered” purchase price would not prevent the taxing authorities from assessing the taxable value of the property at FMV. If that occurs, additional liability exposure may be created for the Brokers, depending on their involvement in a fraudulent scheme.
(e) As discussed above, the SSN’s fee that is charged to the Buyer might not be part of the “negotiations” between the principals. Rather, it may be a requirement of the sale according to the Listing Agents’ comments in the MLS and/or on any pre-sale “terms of the sale” sheet distributed by the Listing Agent or SSN to prospective Buyers’ Agents. The latter may be effectively told that their clients’ offers will not even be considered (i.e., at times not even presented) unless the offer contains the required terms, including the credit and/or the requirement that the Buyers and their Agents must sign the SSN Addendum. Since the SSN is a service provider that should be paid through escrow, if no real or added services are actually performed for the Buyer, requiring the Buyer to pay that “extra” fee(s) also appears to constitute an unlawful "junk" fee under the federal law known as RESPA. (f) If the SSN’s fee is paid outside of escrow, so that the fee is not disclosed on the HUD-1, the concealment may be in violation of federal law. In addition, depending on their involvement, all of the parties to that transaction (Sellers, Agents, Buyers and Escrow holders) could be alleged and be found to have participated in a conspiracy to violate federal law by agreeing to structure the deal to include "hidden" payments outside of escrow. (g) The SSNs may claim that the Buyers are not really paying them a fee because the SSN’s fee is coming out of the 3% credit from the Seller to the Buyer for NRCC. Negotiators are often able to have the Lender approve such a credit on their “Term Sheet”. As discussed above, there may be Lender fraud issues involved in the redirection/misdirection of the credit, and this could also be the basis for a deceptive and unfair business practice lawsuit. If the Buyer is authorized by the Seller’s Lender to receive the credit as specified in the Purchase Contract with the Seller, but the Buyer is compelled to and must give up some or all of the credit to pay the SSN (or others), then the SSNs may be involved in a “shell” game. If that occurs, the Buyers’ interests might not be properly protected by either the SSN who may owe them fiduciary duties (as discussed above) or their own Agent who has those same fiduciary obligations. Breaches of fiduciary duties have consequences in terms of civil liability and license discipline.
(h) Finally, it must be noted that many of the Addenda or other documents used to require payments to SSNs may contain hold harmless language that may give real estate licensees a false sense of security as to the propriety of such transactions. . It should be noted that because there is usually no separate consideration paid for the hold harmless language, the enforceability of the obligation to hold the signers harmless is problematic. Conclusion There are many complexities in the area of Short Sales transactions. As noted above, fraud in this area is growing. The varieties of fraud continue to evolve. While examples of fraud and questionable and unlawful practices are discussed above, the discussion is not exhaustive, as fraud purveyors continue to modify their schemes and methods of operation. When dealing with the myriad issues arising with respect to Buyers being compelled to pay a “junk” fee(s) to an SSN, real estate licensees must understand how truly unsafe and problematic this practice is in terms of potential license discipline and civil and criminal liability.
Buyer’s Agents may also be told that their clients’ offer will not be presented if the Buyer does not agree to sign that SSN Addendum and include it with the offer. If the requirement for the Buyer to pay the SSN fee is being driven by the Listing Agent and/or the SSN1 , and is really not a requirement of the Seller, there is potentially an ethics violation and a breach of the Listing Agent’s fiduciary duty to the Seller by stifling and limiting the presentation of legitimate offers.
1 The SSN is (or must be), unless exempt under very narrow statutory exemptions, a California licensed real estate broker. See sections 10130 et seq. of the California Business and Professions Code, for the licensing requirements and the exemptions. Also, see the discussion in paragraph (c) below.
One version of this scenario is where the Buyer is told that he or she “must” request a credit for non-recurring closing costs ("NRCC") (the NRCC is typically 3%) as part of the Buyer's offer with the understanding that the Buyer will use that money to pay the SSN’s fee as well as any other party who is not satisfied with the amount authorized by the Short Sale Lender (such as a second Lender). The NRCC will or may be shown on the HUD1 and if the fee is paid through escrow it would appear on a late-escrow HUD-1. However, these additional fees are often paid outside of escrow since the Lenders may not approve the same. Remember, in Short Sales, the Seller’s Lender may require, and in many cases makes it clear, that the Seller is not to receive money or any other benefit from the sale. The SSN Addenda that have been created to shift the payment responsibility for the SSN's fee to the Buyers may raise significant legal concerns for Brokers. In some instances the Listing Agent is trying to get paid extra money to serve as both the Listing Agent and the SSN. In other cases, the Listing Agent has hired an outside SSN because that agent is not able or willing to provide short sale negotiation services to their clients, but at the same time the Listing Agent does not want to share his or her commission earnings with the outside SSN that has been hired to do that work. To better understand the pitfalls and perils involved in these types of arrangements, we offer the following: (a) Although the SSN Addendum is a contract document, the primary reason that these terms and conditions are on a separate Addendum may be to better enable the Listing Agent and/or SSN to conceal this information from the Seller’s Lender and, in some instances, the Buyer’s Lender. Based upon anecdotal reports from lawyers and real estate practitioners, it appears that unscrupulous SSNs are purposely not sending these Addenda to the Lenders as part of the package of information requesting Short Sale approval from the Seller’s Lender. This practice of intentional concealment would support and/or may lead to a finding of Lender Fraud. If the SSN Addendum is not sent to the Seller’s Lender, the Lender may not be aware that the Buyer (whether or not they are approved to get the NRCC credit) is being required to direct funds to others in the transaction including, but not limited to, the SSN. It is noted that in addition to paying for the SSN, Buyers may be asked to pay off the Seller’s credit card debt, the Seller’s moving expenses, to buy the Seller’s furniture at an inflated price, and to otherwise provide funds for the direct benefit of the Seller. If those funds/payments are not expressly approved by the Seller’s Lender, those “additional” payments could be extremely problematic from a legal standpoint.
(b) Including the payment of the SSN’s fee on a HUD-1 is arguably not sufficient to qualify as a realistic, timely disclosure to the Seller’s Lender that such a payment will be made. The Seller’s Lender’s Term Sheet usually specifies the total amount of commission compensation that is to be paid to the Listing and Selling Brokers in the transaction. That Term Sheet may constitute escrow instructions from the Lender, and the Lender might not approve a payment to an SSN that is to be added to the amount One version of this scenario is where the Buyer is told that he or she “must” request a credit for non-recurring closing costs ("NRCC") (the NRCC is typically 3%) as part of the Buyer's offer with the understanding that the Buyer will use that money to pay the SSN’s fee as well as any other party who is not satisfied with the amount authorized by the Short Sale Lender (such as a second Lender). The NRCC will or may be shown on the HUD1 and if the fee is paid through escrow it would appear on a late-escrow HUD-1. However, these additional fees are often paid outside of escrow since the Lenders may not approve the same. Remember, in Short Sales, the Seller’s Lender may require, and in many cases makes it clear, that the Seller is not to receive money or any other benefit from the sale. The SSN Addenda that have been created to shift the payment responsibility for the SSN's fee to the Buyers may raise significant legal concerns for Brokers. In some instances the Listing Agent is trying to get paid extra money to serve as both the Listing Agent and the SSN. In other cases, the Listing Agent has hired an outside SSN because that agent is not able or willing to provide short sale negotiation services to their clients, but at the same time the Listing Agent does not want to share his or her commission earnings with the outside SSN that has been hired to do that work. To better understand the pitfalls and perils involved in these types of arrangements, we offer the following: (a) Although the SSN Addendum is a contract document, the primary reason that these terms and conditions are on a separate Addendum may be to better enable the Listing Agent and/or SSN to conceal this information from the Seller’s Lender and, in some instances, the Buyer’s Lender. Based upon anecdotal reports from lawyers and real estate practitioners, it appears that unscrupulous SSNs are purposely not sending these Addenda to the Lenders as part of the package of information requesting Short Sale approval from the Seller’s Lender. This practice of intentional concealment would support and/or may lead to a finding of Lender Fraud. If the SSN Addendum is not sent to the Seller’s Lender, the Lender may not be aware that the Buyer (whether or not they are approved to get the NRCC credit) is being required to direct funds to others in the transaction including, but not limited to, the SSN. It is noted that in addition to paying for the SSN, Buyers may be asked to pay off the Seller’s credit card debt, the Seller’s moving expenses, to buy the Seller’s furniture at an inflated price, and to otherwise provide funds for the direct benefit of the Seller. If those funds/payments are not expressly approved by the Seller’s Lender, those “additional” payments could be extremely problematic from a legal standpoint.
(b) Including the payment of the SSN’s fee on a HUD-1 is arguably not sufficient to qualify as a realistic, timely disclosure to the Seller’s Lender that such a payment will be made. The Seller’s Lender’s Term Sheet usually specifies the total amount of commission compensation that is to be paid to the Listing and Selling Brokers in the transaction. That Term Sheet may constitute escrow instructions from the Lender, and the Lender might not approve a payment to an SSN that is to be added to the amount
authorized as payment for the Listing and Selling Brokers. Lenders may consider any fee charged by a SSN to be a commission payment because the SSN is performing California real estate licensee activity. When the Buyer’s separate payment of the SSN’s fee appears on the final HUD-1 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), Lenders may take the position that this constitutes a violation of the Lender’s Escrow Instructions, and that may constitute Lender Fraud. Recently, a Northern California Title Company (that had also served as the escrow holder) settled a case by paying the Lender the entire amount of the forgiven loan (plus attorneys’ fees and costs) simply because the escrow holder authorized a minor payment that was not approved by the Lender. (c) The SSN Addenda may contain provisions which purport to establish that the SSN (who is negotiating with the Seller’s Lender on behalf of the Seller) is also representing the interests of the Buyer in order to support the rationale given as to why the Buyer is to pay the SSN fee. The muddled and unsettled issue of who the SSN is actually representing can be used, depending on the facts and circumstances, as the basis to allege undisclosed dual agency which could lead to a rescission of the transaction, disgorgement of all commissions earned by all Brokers and sales associates involved in the transaction, and ultimately to the revocation or other discipline of some of the real estate licenses. It is possible that an SSN might fall entirely outside the scope of the statutory agency disclosure law which generally pertains to Listing Agents (defined under California Civil Code section 2079.13(f) as “a person who has obtained a listing of real property to act as an agent for compensation”) and Selling Agents (defined under California Civil Code section 2079.13(n) to generally be an agent “who sells or finds and obtains a buyer for the real property”). For example, California lawyers performing legal work and rendering services in the course of their legal practice are not included in the above-identified disclosure law. An ill-conceived creation of a dual agency relationship might not be properly confirmed in the Purchase Contract or the Addenda (as required by California Civil Code sections 2079.13et seq.) and the SSNs might not provide the Seller with the Agency Disclosure form in a timely fashion (if they provide it at all). Nor does the SSN generally bother to give the Buyer an Agency Disclosure form, although the same would be required in the event there is an agency (“Selling Agent”) relationship between the SSN and the Buyer. Failure to provide a timely Agency Disclosure can invalidate the obligation to pay commission under the terms of a Listing Agreement (please see Huijers v. DeMarrais, 11 Cal.App.4th 676 (1992)). That same reasoning and analysis may form a legitimate basis to negate the SSN fee.
(d) While much of the written documentation with reference to the Short Sale transaction will refer to a sale for fair market value (“FMV”), the SSN and Listing Agents may orally emphasize the payment of less than the FMV as part of a scheme to induce the Buyer to want to pay the SSN fee. Unfortunately, if the Buyer acknowledges that he or she is paying less than the actual FMV of the property, then he or she is acting in direct contravention of what Buyers and Sellers may be required to certify to secure the authorized as payment for the Listing and Selling Brokers. Lenders may consider any fee charged by a SSN to be a commission payment because the SSN is performing California real estate licensee activity. When the Buyer’s separate payment of the SSN’s fee appears on the final HUD-1 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), Lenders may take the position that this constitutes a violation of the Lender’s Escrow Instructions, and that may constitute Lender Fraud. Recently, a Northern California Title Company (that had also served as the escrow holder) settled a case by paying the Lender the entire amount of the forgiven loan (plus attorneys’ fees and costs) simply because the escrow holder authorized a minor payment that was not approved by the Lender.
(c) The SSN Addenda may contain provisions which purport to establish that the SSN (who is negotiating with the Seller’s Lender on behalf of the Seller) is also representing the interests of the Buyer in order to support the rationale given as to why the Buyer is to pay the SSN fee. The muddled and unsettled issue of who the SSN is actually representing can be used, depending on the facts and circumstances, as the basis to allege undisclosed dual agency which could lead to a rescission of the transaction, disgorgement of all commissions earned by all Brokers and sales associates involved in the transaction, and ultimately to the revocation or other discipline of some of the real estate licenses. It is possible that an SSN might fall entirely outside the scope of the statutory agency disclosure law which generally pertains to Listing Agents (defined under California Civil Code section 2079.13(f) as “a person who has obtained a listing of real property to act as an agent for compensation”) and Selling Agents (defined under California Civil Code section 2079.13(n) to generally be an agent “who sells or finds and obtains a buyer for the real property”).
For example, California lawyers performing legal work and rendering services in the course of their legal practice are not included in the above-identified disclosure law. An ill-conceived creation of a dual agency relationship might not be properly confirmed in the Purchase Contract or the Addenda (as required by California Civil Code sections 2079.13et seq.) and the SSNs might not provide the Seller with the Agency Disclosure form in a timely fashion (if they provide it at all). Nor does the SSN generally bother to give the Buyer an Agency Disclosure form, although the same would be required in the event there is an agency (“Selling Agent”) relationship between the SSN and the Buyer. Failure to provide a timely Agency Disclosure can invalidate the obligation to pay commission under the terms of a Listing Agreement (please see Huijers v. DeMarrais, 11 Cal.App.4th 676 (1992)). That same reasoning and analysis may form a legitimate basis to negate the SSN fee.
(d) While much of the written documentation with reference to the Short Sale transaction will refer to a sale for fair market value (“FMV”), the SSN and Listing Agents may orally emphasize the payment of less than the FMV as part of a scheme to induce the Buyer to want to pay the SSN fee. Unfortunately, if the Buyer acknowledges that he or she is paying less than the actual FMV of the property, then he or she is acting in direct contravention of what Buyers and Sellers may be required to certify to secure theSeller’s Lender’s approval of the Short Sale. In the past, Sellers have been required to certify under penalty of perjury that the property is being sold for FMV. More and more Lenders are now requiring that the Buyers also execute comparable certification documents. Misrepresentations, perjury, and/or the subornation or perjury, have serious legal, criminal and/or disciplinary consequences. Also, any “artificially lowered” purchase price would not prevent the taxing authorities from assessing the taxable value of the property at FMV. If that occurs, additional liability exposure may be created for the Brokers, depending on their involvement in a fraudulent scheme.
(e) As discussed above, the SSN’s fee that is charged to the Buyer might not be part of the “negotiations” between the principals. Rather, it may be a requirement of the sale according to the Listing Agents’ comments in the MLS and/or on any pre-sale “terms of the sale” sheet distributed by the Listing Agent or SSN to prospective Buyers’ Agents. The latter may be effectively told that their clients’ offers will not even be considered (i.e., at times not even presented) unless the offer contains the required terms, including the credit and/or the requirement that the Buyers and their Agents must sign the SSN Addendum. Since the SSN is a service provider that should be paid through escrow, if no real or added services are actually performed for the Buyer, requiring the Buyer to pay that “extra” fee(s) also appears to constitute an unlawful "junk" fee under the federal law known as RESPA. (f) If the SSN’s fee is paid outside of escrow, so that the fee is not disclosed on the HUD-1, the concealment may be in violation of federal law. In addition, depending on their involvement, all of the parties to that transaction (Sellers, Agents, Buyers and Escrow holders) could be alleged and be found to have participated in a conspiracy to violate federal law by agreeing to structure the deal to include "hidden" payments outside of escrow. (g) The SSNs may claim that the Buyers are not really paying them a fee because the SSN’s fee is coming out of the 3% credit from the Seller to the Buyer for NRCC. Negotiators are often able to have the Lender approve such a credit on their “Term Sheet”. As discussed above, there may be Lender fraud issues involved in the redirection/misdirection of the credit, and this could also be the basis for a deceptive and unfair business practice lawsuit. If the Buyer is authorized by the Seller’s Lender to receive the credit as specified in the Purchase Contract with the Seller, but the Buyer is compelled to and must give up some or all of the credit to pay the SSN (or others), then the SSNs may be involved in a “shell” game. If that occurs, the Buyers’ interests might not be properly protected by either the SSN who may owe them fiduciary duties (as discussed above) or their own Agent who has those same fiduciary obligations. Breaches of fiduciary duties have consequences in terms of civil liability and license discipline.
(h) Finally, it must be noted that many of the Addenda or other documents used to require payments to SSNs may contain hold harmless language that may give real estate licensees a false sense of security as to the propriety of such transactions. . It should be noted that because there is usually no separate consideration paid for the hold harmless language, the enforceability of the obligation to hold the signers harmless is problematic. Conclusion There are many complexities in the area of Short Sales transactions. As noted above, fraud in this area is growing. The varieties of fraud continue to evolve. While examples of fraud and questionable and unlawful practices are discussed above, the discussion is not exhaustive, as fraud purveyors continue to modify their schemes and methods of operation. When dealing with the myriad issues arising with respect to Buyers being compelled to pay a “junk” fee(s) to an SSN, real estate licensees must understand how truly unsafe and problematic this practice is in terms of potential license discipline and civil and criminal liability.
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