Seattle

[LB2012]

Is it typical for a home in bankruptcy to have a fee attached, payable to the trustee, that is based on the price of the home? This fee can not be rolled into the mortgage.

[willb]

We had this situation near a year or two back. House was a bankruptcy and required a fee, 5% if i remember. The explanation for it was something about being compensation for the trustee to work through the liquidation process. Wish I could be less vague. 

We didn't get the house. Our first offer was beat out, and when that buyer fell through six months later our second offer was accepted. Sat pending for two months and seemed like nothing moved anywhere. Eventually the bank scheduled a foreclosure auction and someone else bought it for cash. Curious, Is the initials of the listing agent in your situation JG?

[ChadDierickx]

Hi guys,

Great question. In my experience, yes, there is always a Trustee fee that is pretty hefty and cannot be rolled into a mortgage. This tends to be a huge barrier for many buyers for obvious reasons (aka - all of your cash goes toward your down payment and, since many of these homes are trashed, repairs), and most bail when they learn about the Trustee fee.

For many bankruptcy short sales, there will also be a negotiation fee paid by the buyer. They can add up quickly, but you can try to negotiate that the some of the fees be paid as a credit to the buyer from the lienholder in order to roll them into your loan, but that may open a can of worms for the lienholder, who wants all of the money they can get.

This is just my experience. Does anyone have more experience with this? It's a timely question -- I'm seeing more and more of these in Seattle.

[camiea]

Hi all,

I just had some experience with this today. I suggest having a teleconference with the listing agent and your agent before moving forward with anything. Depending on how the transaction is set up with the lienholder(s) and the bankruptcy court, you may end up having to pay 5% of the closing price + $3,250 to the court, plus the trustee fee (our trustee fee would have been 1.5%). We also found out that although the house needs extensive work, there was very little room for negotiation after the listing agent and trustee had set the price with the lienholder and the court, so an offer under the listing price would likely be rejected. Best of luck to anyone trying to go through this process!

[MoniqueL]

Trustees making money on bankruptcy homes that do not go towards the debtors???  How is this not a conflict of interest?  How is this legal?

[AdamMorrow]

Hello -

In short, yes, a trustee is entitled to a fee in the sale of a court ordered bankruptcy property (after all moneys are disbursed to the appropriate creditors). The fees are defined under section 326 of the Bankruptcy Code (Please see below)

§ 326. Limitation on compensation of trustee

(a) In a case under chapter 7 or 11, the court may allow reasonable compensation under section 330 of this title of the trustee for the trustee's services, payable after the trustee renders such services, not to exceed 25 percent on the first $5,000 or less, 10 percent on any amount in excess of $5,000 but not in excess of $50,000, 5 percent on any amount in excess of $50,000 but not in excess of $1,000,000, and reasonable compensation not to exceed 3 percent of such moneys in excess of $1,000,000, upon all moneys disbursed or turned over in the case by the trustee to parties in interest, excluding the debtor, but including holders of secured claims.

[Kevin_Lisota]

Bankruptcy trustees are not running a charity. They get paid for their disposition services. Bankruptcy law allows it and bankruptcy courts require it.

I've spoken to bankruptcy trustees about this and if they cannot demonstrate that they are being paid for their disposition services, the judge will not approve the sale. I've also been told that judges will sometimes want to see some portion of it allocated to unsecured creditors in the bankruptcy proceeding.

It is a hurdle for many when trying to buy a bankruptcy property, but there is a huge percentage of these that fail and get foreclosed on, so the trustee may only get paid on 10% of the properties they see.

Also important to remember that the bankruptcy trustee is effectively the owner of the property and given leeway in negotiating its sale, much like a typical seller. The experienced trustee will structure deals that will both get through the court approval process but also will be palatable to mortgage lienholders.

[PandorasBox]

That was ME last year!  Here is a link to that thread. http://forums.redfin.com/t5/Seattle/Chapter-7-bankruptcy-and-Short-Sales-Fee-s-that-only-show-up-at/...

In the end part of that fee POSSIBLY will be picked up by the bank holding the note on the house.  Ie if the fee is 15k  they pick up 5k and you pay 10k.   That is how my split landed and I did not know the final number on the fee until 2 days before I was to sign.

SOME banks will pay NONE, some will pay ALL, but most will pay about 5k or 1/3 of the fee.

The trustee doesn't keep the money for THEM- (yes they do get paid) it goes to spread to the other debtors in the Bankruptcy as the house is most likely the only major asset.

Another thing IF you have one of the company's that specialize in this type of sale handling the house as the seller, the have a PROVEN SYSTEM that walks you through the process and everything happens like clock work.  It is much better than a regular short sale that might or might not ever close.

The reason for this is the house is valued at xyz and the bank wants  as much back.  It knows the fees, closing costs *ASK FOR THEM up to 3 or 3.5%**** and that is going to take a fixed loss.  If the TRUSTEE says the price is fair, the bank usually goes along with it.  Most likely you will NOT be able to lower the price by much if at all on your offer- that IS the price the trustee approved.  You have to walk in knowing it's full price plus the full 5% and be happy with it or don't buy it.  The only break is if you ask for closing costs and it's granted.

You inspect- and approve- there is no lowering due to problems found- nickel and dime stuff.  Major then you might have a case if you still want it.  It's pretty much as is-where-is for advertised price.

It took about 70 days and in the end it was the best house in the area in my price this whole last year, so I am glad I bought it.  I really sat on the fence for that 5% and thought about what my closing cost would have been and the diff was only 3k.  I wasn't going to loose a good house for 3k out of my pocket.

[TedM]

There was some of that early on, but not so much now. Sometimes brokers who don't want to work through a short sale process will hire a "negotiator" to do it for them, and then pass the fee on to the buyers and sellers. We do our own short sale processing in house now at no extra cost; it's important to evolve your business model to suit the times!

[ReallyEstate]

Buyers typically know this up front and take it into consideration when making an offer.  The condition of the unit may also be in disrepair and you won't be able to put requests to fix things into your offer.  From what I know, you can't roll the fees into a mortgage.  It's kind of like your Costco card fee every year.  You have to pay it to shop. Same applies here but on a much more expensive scale.