On October 11, 2009, SB94 was passed into law.  For those two or three people out there who may have missed it, this is what the law was about:

 This bill would, until January 1, 2013, prohibit any person, including  

a real estate licensee, who negotiates, attempts to negotiate, arranges,  

attempts to arrange, or otherwise offers to perform residential mortgage  

loan modifications or other forms of mortgage loan forbearance, as  

specified, for a fee or other compensation paid by a borrower, from  

demanding or receiving any preperformance compensation, as specified,  

requiring any security as collateral for final compensation, or taking a  

power of attorney from a borrower, and would make a violation of that  

prohibition a misdemeanor or subject to specified fines. By creating a  

new crime, the bill would impose a state-mandated local program. 

 This bill would redefine the term “advance fee” to mean a fee,  

regardless of the form, that is claimed, demanded, charged, received,  

or collected by a licensee from a principal before fully completing each  

and every service the licensee contracted to perform, or represented  

would be performed, as specified.  

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For most brokers (and attorneys alike, except the scam law groups and law centers who tried to get creative and break their modification services into a series of separate retainers – which apparently does not pass legal muster) this law meant the death of trying to help homeowners navigate the confusing, frustrating, and time consuming loan modification process.  So much for freedom of contract thanks to a few bad apples out there.  As a result of SB94 many brokers have turned to short sales where advance fees don’t have to be charged, because the process is akin to the sale of a house where up-front or advance fees have not previously been charged.  Not too many people were willing to perform exhaustive loan modifications on a contingency fee basis it seems, and for good reason.  The SB94 law did not prohibit charging advance fees for short sales work as a short sale does not involve modifying a loan, or loan forbearance (at least this appears to be the meaning attached to this, and makes sense in light of the California State Bar article pasted below).  That being said, I cannot guarantee this interpretation and each person reading this is required to do their own research to determine legal compliance obligations.

The question I have is whether or not the short sale process warrants the charging of an advance fee, or whether these should be done just like a typical real estate listing transaction wherein the broker does not get paid until the deal closes.  The one catch that perhaps justify the charging of an advance fee for short sales is the reality that no matter how good you do the job, and regardless of how many offers you bring to the lender, you are still subject to lender/investor approval (just like those good ole loan modifications) and a stubborn second lien holder or back-room investor may not agree to your short sale offer even though it is more than fair.  In these circumstances, would it make sense to charge an advance fee for these services?  If so, how much.  I am throwing this question out there for debate.  

Recently it has come to my attention that the DRE may be approving advance fee agreements for short sale services.  Here is a copy of what I recently found on the California State bar website in regard to short sales (fraud) http://www.calbar.org:

Officials issue warning about short sale fraud

 The State Bar, Attorney General Edmund G. Brown Jr. and the state Department of Real Estate warned homeowners last month about an alarming rise in short sale fraud across California. “While short sales can provide homeowners with a last-ditch alternative to foreclosure, this market is rife with scam artists,” Brown said. “Homeowners and buyers, agents, and lenders should beware of short sale negotiators who operate without licenses, use straw buyers or charge illegal fees.”

 A short sale is an arrangement in which a homeowner sells his or her home for less than the outstanding mortgage, with the consent of the lender.

 With so many homeowners now considering short sales, an entire industry of so-called short sale negotiators has emerged. These individuals solicit homeowners by promising to expedite the process and help coax lenders into taking part in the transaction.

 The Department of Real Estate is investigating more than 40 complaints of short sale fraud, up from “virtually zero” cases only three months ago, a spokesman said.

 In April, the Obama administration launched a new initiative called the Home Affordable Foreclosure Alternatives Program, which encourages homeowners in financial distress — especially those who have failed to complete a trial modification or qualify for a loan modification — to consider a short sale as an alternative to foreclosure.

 Before working with — or paying — any short sale negotiator, homeowners should consider the following red flags:

 No License - With limited exceptions, only licensed real estate agents or attorneys can engage in short sale negotiations with a homeowner’s lender.

 Up-front fees - Licensed real estate agents wishing to collect up-front fees from homeowners for short sale transactions must first submit an advance fee contract to the DRE and receive a no-objection letter.

 Surcharges - With many distressed properties listed well below market value, negotiators and agents are charging potential buyers thousands of dollars in surcharges and hidden fees just to place an offer on a home. These illegal fees are frequently not disclosed and are paid outside escrow.

 Straw buyers and house flipping - In this scheme, short sale negotiators misrepresent the market value of a property to a homeowner’s lender by only submitting offers on the property from an affiliated straw buyer. After the home is purchased below market value, the fraudsters immediately flip it and pocket the difference.

 Short sale negotiators and agents use a number of titles, including debt negotiator, debt resolution expert, loss mitigation practitioner, foreclosure rescue negotiator, short sale processor, short sale coordinator and short sale expeditor.

 Homeowners can also learn more about avoiding mortgage and real estate fraud by visiting the DRE website at: http://www.dre.ca.gov/cons_alerts.html. A complaint form can be accessed online at: http://www.dre.ca.gov/frm_consumer.html.

 “Short sale fraud appears to be the fraud of the moment, and it is proliferating statewide,” according to Real Estate Commissioner Jeff Davi. “Consumers, licensees and lenders must all arm themselves with the tools necessary to avoid such scams.”

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What this tells me is the DRE may be reviewing, and possibly approving short sale agreements.  As some of you may know, my law firm has setup over 50 companies to legally perform loan modifications in California with approved advance fee agreements.  We were one of the first companies to have these agreements approved and we want to be on the forefront of short sale advance fee approvals if in fact the DRE is reviewing and approving these.  We have a call out to the top brass at the DRE to discuss this issue.  

In the meantime, if anyone wants to submit a short sale advance fee agreement to the DRE to seek approval to charge an up-front advance fee for California short sales work please contact my office to discuss.  (877) 276-5084.  We look forward to helping California brokers legally perform their short sale in the State of California as we did with loan modifications.  We also offer our “California Law of Short Sales” PDF with each purchase.