Fees not illegal, just onerous...

Lately there's been a rather heated running debate among real estate agents over a new practice that has cropped up concerning foreclosed properties. It seems that some REO (the acronym for Real Estates Owned - not anything to do with Real Estate One the company) agents are adding a fee to the listing, most of them in the $400-600 range, to cover their property management costs for the foreclosed properties. In some cases these fees are added to the MLS wording without the knowledge or approval of the bank that owns the property. The banks generally get nothing out of those fees, which flow directly to the listing agent.

The debate has raged over their legality and over what happens if a buyer refuses to pay the fee. Recent legal opinions in Michigan would seem to indicate that the fees are not illegal, nor is it illegal for the buyer to cross them out on any contract paperwork and see if the bank will accept the deal without them. Since the banks get nothing from them anyway they usually would still accept the deal. Remember that the Purchase Agreement is a contract between the buyer and the seller. The agents are not parties to the contract. However, the courts have held that if the buyer signed the contract with those fees in place, then he/she is liable for them and cannot disavow them later.

The real controversy comes from the behavior of some of the REO listing agents, if the fees are removed. There are stories of threats not to present offers to the banks or to hold back offers until other, maybe better offers, can be found and presented. Basically the rub is in unethical behavior on the part of some REO listing agents. Most of the discussion has been between buyer agents ranting about what to do about this issue. I recently weighed in on this issue in an agent forum with the thoughts that are below.

I would think that our job, as buyer agents, is to advise the buyer on his/her offer price, advise on any and all addendum's that might be necessary to add to the offer to protect our buyers interests; and, then on any fees or charges that might or might not have the blessing of the bank and might or might not have any bearing on whether the bank will accept the offer.

Our advice might include a warning that some sleazy REO operators add those fees without the bank's knowledge and that those same operators may threaten to hold up submitting the offer if you delete their illegal fees. We can relate the opinions of recent legal challenges to those fees; but the fact remains that the buyer is at risk of those same sleazy operators holding up their offer and submitting others. We would likely have a hard time making a case for damages in a court, if that happened; since there is no transparency in the whole REO process right now.

If the buyer feels strongly about not paying the fee, then let him cross it out and we should go ahead and submit it, as is our duty. If the buyer feels more strongly about getting the house than worrying about a few hundred extra bucks for the REO agent, then leave the fees in the offer and submit it. We’ve done our duty fiduciary duty by informing the buyer of his/her options and about what legal information that you may have. It is not our duty to steer the buyer into a decision, just because we may have our own strong feelings about this sleazy practice.

If that sounds a bit like a cop-out, I suppose it is. The fact is that the whole REO market is like the Wild Wild West of real estate - there are no rules. While normal contract law still applies, there appears to be little in the way of policing of the ethics of the operators in that business and there is absolutely no transparency to the decision making process. One throws an offer into a black hole and waits to see what comes back - a wait that can last days, weeks or months. Much of the time even the listing agent has no idea what the status of the deal is either - where it is, who has seen it and what bank committee has still to pass on it.

What is frustrating for buyers and their agents is that the normal expectations of the seller side are out the window, too. We can’t tell if the listing agent is playing games and holding on to a contract that he/she doesn’t like. We can’t tell if our offer has ever been submitted to the bank or not. We can’t tell if the listing agent has a friend or investor that he/she is sharing information with, so that our offer is somehow just a few dollars less than the winning offer of that friend. All of those sleazy practices appear to be going on in this market and all of it largely unregulated by the normal agencies or authorities that watch over regular owner-occupied real estate transactions. Once a home becomes “bank-owned” all ethical bets are off.

Now this is not to say that the whole REO market is run like that. In fact most of the banks and REO agents run very honest and straightforward operations. But, like any business with few official rules and no policing agencies, there are always marginal operators willing to cut corners or ignore ethics to make a buck. It’s those folks who are causing most of the issues. They likely started this REO fee business, which many other companies have jumped upon. So, apparently this is just another slimy practice that we’ll all have to put up with for a while. Hopefully buyer resistance will force a re-think of this practice.