Providing you with the knowledge and tools needed to succeed with Short Sales
I am interested in others experiences and opinions. I negotiate many short sales in my little corner of the world and am seeing many other "negotiators", both lawyers and non-lawyers, changing the terms of the ratified contract when preparing the HUDs to be submitted to the short sale lenders, to reduce the funds available to those lenders. Often, once the lower amount is approved, the negotiator will take the difference as their fee. I have seen seller credits "inflated", transfer taxes paid by the seller, 100% when the contract says they are to be split, and even false liens added to the HUD to reduce the net. Is anyone else seeing these kind of things. If so, how are you dealing with it? Thanks
I know it happens and I completely do not approve of this tactic. It's called "Padding the HUD" and is taught by many other short sale trainers. The reasoning behind it is they are adding in items and/or higher amounts that they know the lender will strike in order to get other costs approved.
We teach to submit a very clean HUD that is as accurate as possible then fight to get it accepted. "Padding the HUD" is a trick perfected by weak negotiators. That's my opinion and I'm sticking to it :)
There are few issues you mentioned:
1. HUD not matching the purchase contract terms. So if the buyer was going to pay home warranty, you show that the seller is paying for home warranty.
2. Padding the HUD to inflate actual costs. So if a title policy will cost $800, you put $1100.
3. creating liens
4. using the difference between actual costs and approved costs to funnel the difference to the negotiator.
I have no problems with any of it as long as everything is disclosed to buyer and seller. However, I would structure the purchase contract in the buyer's favor. For example, if they didn't ask for home warranty, I will ask them to add it.
My take is that you should use all tools at your disposal to better negotiate the short sale between the seller, buyer, agents and the seller's lender.
By the way, where do you see the fraud?
I too negotiate many short sales and although I agree with Bryant in terms of keeping the HUD "clean" I also know from personal experience that sometimes some cost MUST be estimated to get the deal going (when a contract is presented, you don't have time to wait for an HOA estoppels to come back-or if you know there is a lien and have approximate values, you'd better estimate higher so that you aren't upside down at the end). Call it what you may but "padding the HUD1" so to speak so that there is enough funds to close the transaction smoothly is in my opinion a wise decision. The reality is you can be the BEST negotiator on the planet, but these days, the investors for the most part have their guidelines and the parties servicing these loans aren't going to waste their time fighting with you when they have other files to work on that are understanding of the process. The days of "beating up the banks" is an antiquated tactic in the world of short sale negotiations. With more of a cooperative approach truly understanding each parties motivations (and guidelines) and working towards an educated win-win produces far better results, and long term alliances at the banks.
Now, the deal about "slipping in" a negotiation fee:
Most HUD1's need to be approved before closing, and the closing compliance teams at the banks review these HUD1's and either "approve" or "deny" the final HUD1. Personally, our fees are disclosed up front on the first HUD1, so there is no slipping in our fees at the end, but the negotiators work hard for months on these deals and often their fees get cut so if they can get paid a little more on one than the other and the lender is "approving" this on the final HUD1, then what's the issue? There are many different ways to set up a deal...contract prices backed down on cash transactions so that the buyer's can absorb HOA or 2nd lien fees etc. I see nothing wrong with making the transaction something that "works" and being smart about it unless it's being fraudulent (aka, false liens I would deem as fraudulent)...
The reality is, the lender does a BPO...they counter the price; then in most cases (minus Wells Fargo of course lol); the investor guidelines stipulate the line items. Unlike 2008/2009 and beginning of 2010, these days there is minimal "negotiating" the investor guidelines (particularly with all the homeowner assistance programs) and most of the negotiations take place contractually (where in my opinion is where it belongs). Understanding how to pull a deal together and educating the parties on how it works is the name of the game. In my opinion, If you want to "fight the banks" take it up with the higher ups and get politically involved...put it where it belongs.
Well said. I would just add that I would also do backed down contract prices on financed loans where buyer has cash reserves. Maybe even make the cash purchases financed in order to get closing costs.
I think maybe I am naive. Typically, I, as negotiator, do not get a copy of the contract until the deal is already negotiated and the contract is ratified. If the contract shows that the transfer taxes are to be split equally, but the negotiator unilaterally prepares a HUD with the taxes being paid 100% by seller, in order to reduce the net available for the lender, isn't that a fraud on the lender? If the contract states that seller is to credit purchaser $3000 at closing and the negotiator unilaterally shows a $6000 credit on the HUD, again to reduce the lender's net proceeds, fraud or no fraud.
The HUD you are submitting is an estimate only.
So, let's say in your example, the foreclosing lender denies the transfer taxes but accepts the 6k closing credit to buyer.
If that info (approved terms) is communicated to the parties, I do not see any fraud.The seller and buyer then can then go back and counter any terms between them based on this information and provide you (the negotiator) with a more accurate picture of the terms and costs so you can update the HUD. For example, Maybe the buyer will now pay all transfer tax and increase his closing credit by the number needed to pay for the seller's share of transfer tax. The rest of the unused closing credit can go back towards the seller's lender. So they now tell you that the transfer tax is resolved by putting the entire cost on the buyer side HUD and to reduce the buyer's credit from 6k to $3500.
If you go back and say that the transfer tax of $500 was approved along with the 3k in closing credit so that you (the negotiator) or the listing agent can pocket the difference, then that is wrong.
I don't see how padding expenses on an estimated HUD can be considered fraud. Leaving padded expenses on the final HUD and then disbursing the difference outside of the HUD might be fraud. ;)
It would be fraud if it were on the final HUD, the HUD being submitted is preliminary and most likely will recieve alot of changes.
Of course, but then again with practices like that with as tightly regulated as the title companies are these days, they wouldn't be in business long. One complaint would have them shut down...People who are stupid enough to follow practices like that would likely be in and out of business quickly. I'm not hearing much of this anymore, but heard it a lot in '08-'09 and begining of 2010.
There's a huge difference between making sure you have enough money to cover taxes and HOA fees to adding in bogus fees that don't exist.
I have heard all of the explanations for "HUD Padding" and none make any sense to me. An experienced short sale negotiator should know from the get go what will fly and what won't fly. Then all we have to do is find a buyer that will work for the deal we need to put together.
I know there are many ways to handle short sales. I don't see the padding of a prelim HUD as fraudulent. I do however see it as completely unnecessary.
Ahhh...now there is the key...as a Realtor, doing on a good month 3-5 short sales a month, how do they know the difference between an experienced short sale negotiator and just a smooth talker??? These cruddy negotiators would go away if the Realtors knew the difference...Sounds like a great topic to do a feed on! In a perfect world Realtors would make themselves experts, but the reality is not all Realtors are going to embrace short sales as we do (let's face it, we kind of junk out on this, do we not??? lol)...so for those that only do the here or there deal (which is the majority of Realtors in Palm Beach, Martin, Broward and Dade County at least) let's talk about how to select a good negotiator? I think your Realtors on here would find that pretty helpful.
So with you here. I list, work and CLOSE my own Short Sales. I don't want another pair of hands in there..but MOST of the Realtors I know here in the Palm Springs Valley know zip about handling Short Sales. Nor do they want or intend to learn..
Before being licensed and before May of 2006, there was a main reason to add line items and increase actual costs to create equity, mainly in a flip scenario. The only reason why a real estate agent might want to add in line items on HUD now is to offset costs that the negotiator might cut. For example, in California we have an escrow fee. Sometimes lenders limit the escrow fee. So what we do is create line items, like "loan tie in fee" or whatever in hopes that if the actual escrow fee gets reduced, escrow will still be OK or we can even apply that to the buyer's side. The department of corporations has made some adjustments because of short sales, so even those are now being standardized to lessen scrutiny.