Paying out of HUD-1 in short sale - Is it legal?

Asked by renysa, Los Angeles, CA Thu May 10, 2012

We have been asked to pay $20 000 to second lien in addition to $6 000 that the 1st lender is paying them, and out of the HUD-1. According to all the people that are working on the deal BoFA is not willing to change the amount going to 2nd lender (Green Tree), even though we have agreed to pay the money. We have been told this is "normal practice" these days. The question is - Is it legal? Should we walk away of the deal?

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Rebecca Keen…, Agent, Virginia Beach, VA
Tue May 26, 2015
In case this happens to anyone else - this is the advise I would give. I would send a cease & desist letter (also known as an infringement or demand letter) to the Real Estate Agent & inform them not to call again, thus doing so would constitute harassment. Also, that you intend to contact the licensing board for further inquiries. Only the Agents or their Brokers can agree for funds to come out of their commissions, so I am not sure why the Agent agreed then tried to seek repayment. As independent contractors, we decide. If the Broker informed the Agent that this would be done, more than likely it was given to them as the better option in lieu of leaving the brokerage. Any deals made outside of a contract and HUD-1, especially when there is a loan involved as would be considered fraud against the Lender, is considered a felony offense & violation - subject to legal action as well as the risks of the Real Estate Agent being fined, suspended and/or losing their license to practice.
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Also, (in reference to my previous response) - this goes for Attorneys and Settlement Agents as well - all parties to the contract. Google it and you will soon learn about Realtors, Settlement Agents and even Attorneys who, after being audited, were not only sentenced to jail time but lost their license to practice. Just because someone considers this to be "normal practice" does not mean that this is legal. Buyers - never be afraid to get a 2nd or 3rd opinion and if something seems suspicious it is best to seek outside advice.
Flag Tue May 26, 2015
renysa, Home Buyer, Los Angeles, CA
Tue May 22, 2012
we ended up calling Bofa - and protesting that it is illegal what they are asking us to do. They said that they are not authorized to talk to us as buyer, but they can talk to the seller. So we asked seller, that we have met before and he gave Bofa a call. What they talked about we do not know. May be exposure to the media was mentioned, may be not, but half an hour later we got a call that everything will be included in HUD-1. Long story short - we closed the transaction for less than a week.
Our RE agent and the seller's agent did not do a think to help this problem to be resolved, and if we did not take matters in our hands, we would have lost this place, that we waited for 7 months.
With all respect to the people that are working hard to help buyers and sellers with real estate - don't trust that the RE agent will do the work.

P. S. Because some of the fees and delinquent HOA payments were not disclosed properly till the last moment, the escrow people and negotiators decided that these money has to come out from the agents commissions ~$2200 each - seller's and buyer's. We still get calls from "our" ex-agent asking us to reimburse her the money.
Good Luck and Good Night!
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Jessica Hood…, Agent, Gambrills, MD
Mon May 21, 2012
The HUD1 is designed to give transparency to the consumer. There should not LEGALLY be an occasion that there is a side deal. And if this is a government loan, they will insist on full disclosure and make all parties to the contract, including the agents, sign a disclosure stating that everything is on there.
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Johnny James, Agent, Palmdale, CA
Wed May 16, 2012
All payments should be disclosed on he hud. Normal practice maybe, legal not at all.
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Nicole Lindl…, Agent, Los Angeles, CA
Wed May 16, 2012
No it is not legal, but unfortunately many unscrupulous lenders request that buyers do it anyway. Green Tree is notorious for doing this. Typically, the listing agent will have to escalate your case to a higher authority in Green Tree to see if anything can be done to remove this requirement. Hopefully it will not end your deal, but it is a very delicate situation. Your agent should always ask which bank(s) the short sale is being handled by before entering you into a contract. Most realtors know inherently which lenders are the most difficult to deal with beforehand so that the buyer is prepared.

Nicole Lindler
Prudential California Realty
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Brian Selem, Agent, Los Angeles, CA
Fri May 11, 2012
Do not walk away from the deal and do not do anything without full disclosure to all parties. Failing to notify is not legal. The listing agent should continue to negotiate a lower amount going to the 2nd Trust Deed and at the same time attempt to have Bank Of America allow more money to the 2nd Trust Deed.
Having the second take less is more likely as the Bank Of America lien is probably an investor loan and investors are not as smart about the Short Sale process and tend to be more willing to go to foreclosure.
If your agent needs more insights please have them contact me.

Brian Selem
Short Sale Expert - Over 20 Years Experience
Coldwell Banker
11999 San Vicente Blvd 100
Los Angeles CA 90049
310-442-1644 Office
310-995-9562 Cell
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Ron Escobar -…, Agent, Beverly Hills, CA
Fri May 11, 2012
if you like the deal, the value is there and you have the money... it is possible to do it... Your buyer's agent should be in the position to advise you. Everything is negotiable in a real estate transaction... government is not really in the business of telling people how to contract with each other... they do have consumer protection laws, but I am not aware of any of them to prevent you from paying a lien on anyone's property if you want to do it.

How you do it is very important... you have to make sure your cash is protected in case something goes wrong with the deal... again having you buyer's agent look up for your best interest is paramount.

Ron Escobar, MBA
(310) 557 2100
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Emily Knell, Agent, Huntington Beach, CA
Fri May 11, 2012
An experienced short sale listing agent would have warned you up front if it was discovered by them that Green Tree is the 2nd lien not servicer. They STINK! And always ask for quite a bit more than other 2nd lien holders.

What you need to ask yourself is: Can I afford this? Is the purchase price of the home an awesome deal even with the $20K I need to pay to Green Tree & do I still want to move forward?

I always prep buyers up front if I know Green Tree is involved & it is only in this situation I don't offer the home for sale to FHA buyers, I'm only looking for larger down or cash buyers when Green Tree is involved because I know what's coming.

I would be curious to know, in your situation, what $20K represents? Is this 20% of the 2nd lien balance or does it represent 5% of the purchase price? Luckily I haven't had to deal with Green Tree for a long time, but they used to demand 5% of the purchase price no matter what was owed to them.

Shoot me an email directly if you'd like to talk to me some more. I don't look back on this same Trulia thread for answers posted after mine.
562-430-3053 c
Realtor Since 1996
Main Street Realtors
Short Sale Expert - And I can Prove it! -
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Mike Dressler, , Long Beach, CA
Fri May 11, 2012
It certainly is not uncommon for a second to request additional funds. During a short sale, all lien holders will try to negotiate for as much payoff as they can get. That being said, any time you have questions regarding the legality of any aspect of a real estate deal, short sale or otherwise, you should contact a real estate attorney. Realtors are prohibited from giving legal and tax advice, especially with short sale situations. If you would like the names of some reputable real estate attorneys, don't hesitate to get in touch.

Mike Dressler
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Douglas Perez…, Home Buyer, Los Angeles, CA
Fri May 11, 2012
No, it is not legal. "Normal practice" does not necessary means it's a legal practice. It could be legal if BofA agrees. Don't walk away. Negotiate with both. Eventually, both will get into agreement as to what amount.

Good luck.
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Richard "RJ"…, Agent, Beverly Hills, CA
Thu May 10, 2012
If you are paying to the 2nd, escrow will show it on your side (Buyers) of the hud. This is common and not done outside of escrow. However, sometimes there are payments "outside" of escrow, like to the seller... that is not allowed. All payments should be reflected on the hud and the hud is separated and itemized with a Buyer side and a Seller side.
Good luck.
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We were specifically asked to wire the money outside of the escrow...and they will not show in the HUD-1..Thanks!
Flag Thu May 10, 2012
Michelle Gon…, Agent, Los Alamitos, CA
Thu May 10, 2012
Yes, this does happen quite often. The truth is, every penny should be disclosed on the HUD and can be considered as defrauding the lender. This is because the 1st sees it as they could have gotten 20,000 more than they did. It's your decision, if you are still concerned you may want to seek legal advice.
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Thank you Michelle! Isn't that a RE agent job to negotiate the price and make things happen legally?
Flag Thu May 10, 2012
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