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California REALTORS® Change The Rules For Short Sale Offers of Compensation

Written by on Monday, 29 October 2012 7:00 pm

Directors of the California Association of Realtors® (CAR) recently voted to amend the state model MLS rules as they apply to short sales. Those rules had provided that the offer of compensation by the listing broker to potential cooperating brokers (i.e. buyers' agents) could be conditional.

So, for example, a short sale listing might have stated that a successful buyer's agent would receive a 2.5% commission, BUT that commission offer was conditioned upon the short sale lender's approval. The private agent-only listing remarks might have said something like this: "Commissions are subject to lender approval. If the commission is reduced by the lender, the reduced commission will be split 50-50." That way, if the lender would only allow a 4% commission, each would receive 2%. The listing agent wouldn't be bound by the offer of 2.5%, leaving her with only 1.5%.

In general, the offer of compensation through a multiple listing service (MLS) is not allowed to be conditional. As the California model rules put it: "The amount of compensation offered through the MLS may not contain any provision that varies the amount of compensation offered based on conditions precedent or subsequent or on any performance, activity, or event."

Over the years, exceptions have been allowed for such things as probate sales and bankruptcy proceedings, where a court may change the commission originally negotiated between the listing broker and the seller. In recent years, as indicated above, an exception has been allowed for short sales as well.

Now, however, the CAR directors have voted to remove this exception from the state's model MLS rules. Under those model rules, short sale offers of compensation must be unconditional. Short sale listing agents will just have to make their best estimation as to what the final approved commission will be and how much they want to offer to the cooperating broker.

Why would the CAR directors vote this way? In a nutshell, it is because those directors and their constituents are fed up with the manner in which many (certainly not all) short sale listing agents have gamed the system.

We have discussed this problem before (August 30, 2011). There are too many variations to enumerate here. What they have in common is that the language in the conditioning remarks is not only frequently misleading but also stated in such a way as to guarantee that, if a commission is reduced, the listing agent will receive the lion's share, often substantially larger than that of the buyer's agent.

In debate some expressed concern that requiring an unconditional offer of compensation would simply result in buyers' agents being offered a very low commission split. The response to that was simply that the buyer's agent could then make an informed choice as to whether he or she would show that listing. The practice also might lead to a wider use of buyer-broker compensation agreements.

Much has been made of agents' dissatisfaction levels with the behavior of lenders in short sale situations. What was revealed at the recent CAR meetings is that there is also a lot of agent-to-agent dissatisfaction in the short sale scene.

The change we have been discussing was made to California's model MLS rules. Local MLS organizations are not required to adopt those rules, though most probably do. Playing by the same set of rules facilitates interaction between the members of different MLSs, and, in some cases, adopting the model rules may be an issue affecting an MLS's ability to obtain insurance coverage.

The change in California's model rules will be considered by local and regional MLS organizations. The debates are likely to be heated and close. At CAR more than 600 directors participated in the discussion and vote. Only twenty-nine votes separated the yays from the nays.

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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.