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Offers of Compensation Are Not So Clear When It Comes to Short Sales

Written by on Monday, 29 August 2011 7:00 pm

One respect in which short sale listings differ from standard sales is that the compensation offered to potential buyer agents is conditional. This can be a cause of confusion, and sometimes a cause of conflict and consternation.

The reason a short sale offer of compensation is conditional is because, regardless of what the listing agreement, signed by the seller, may have said, ultimately the amount of commission allowed will be determined by the lien holder lender.

Suppose - to create an unlikely example - an agent has taken a listing on a house worth $300,000, which has a mortgage loan against it of $400,000. (This is not the unlikely part.) Suppose also that the listing calls for a commission of 8%. (This is.)

Now, when the property goes into escrow for $300,000 and the lender reviews the terms and conditions of sale, he may say something like this: “Look, I know I’m going to take a hit on this, because $300,000 is all it’s worth. So I will accept whatever proceeds are left after the normal costs of sale; but I am not going to let the real estate agents take out that much commission. The most they can have is 5%.” [The lender might restrict other sale costs as well.]

What if through the MLS (multiple listing service) the listing agent had offered a 3% commission to the buyer’s agent (intending 5% for himself)? If that had been an unconditional offer, the buyer’s agent would now be getting 3% and the listing agent 2%. Not a result that was intended.

For this reason, the model MLS rules of the National Association of Realtors® (NAR), and those adopted by many, if not all, of the states allow that, for short sale listings, the listing agent’s offer of compensation may be conditional. It will depend on what the lender allows. But it will also depend on how the listing agent intends to split whatever the lender allows.

The model rules do not specify exactly how the conditional offer of compensation is to be expressed. But NAR’s model rules do say this: “When disclosed, participants may, at their discretion, advise other participants whether and how any reduction in the gross commission established in the listing contract, required by the lender as a condition of approving the sale, will be apportioned between listing and cooperating participants.”

The California Association of Realtors® (CAR) goes on to say this: “As long as the nature of the conditional offer is communicated clearly, the specific language and display will largely be determined by the MLS and local practice. It is likely the required information will appear in the ‘remarks’ section or in a dedicated field created by the MLS.

For example, the remarks may contain language such as “Short Sale. Compensation subject to lender approval. Any reduction split 50-50.” [my emphasis]

Regrettably, the reluctance of organizations such as CAR and NAR to provide specific language or formulations for these situations has led to problems.

Consider the CAR example cited above. Many agents use exactly, or almost exactly, that formulation in their MLS comments to other agents. “Any reduction split 50-50.” But what, exactly, does this mean?

Consider the earlier example. The commission was reduced from 8% to 5%. The original offer of compensation to the buyer’s agent was 3%.

One -- probably the most common - interpretation of the comments would be for the listing agent to say this: “Well, I said the reduction would be split 50 - 50. The reduced commission is 5%, so we each get 2.5%.”

But another interpretation is this: “The reduction is what was going to be split 50-50, not the result of the reduction. The reduction was 3%, so we each take 1½% off of what we would have originally received. The buyer’s agent gets 1½% and the listing agent gets 3½%.”

I’m not kidding. This has happened. And arbitrations have followed.

It would be nice if MLS systems could do something to remove such ambiguity from short sale conditional offers of compensation. But MLS ships turn slowly. In the meanwhile, selling agents in the short sale environment want to be sure they understand exactly how reduced commissions will be divided.

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  About the author, Bob Hunt

Individual news stories are based upon the opinions of the writer and does not reflect the opinion of Realty Times.