Short sales put pressure on commissions. It is just a fact of life. In short sales, there is not enough money to go around. The seller is in serious financial trouble. Foreclosure or bankruptcy may be on the horizon. The buyer is looking for a deal and the lender is losing money. Getting a fair commission in such circumstances can be an ordeal.
A seller in serious enough trouble to qualify for a short sale is not going to question the real estate commission. They don’t really care how much the lender has to discount the loan as long as they don’t have to pay. The lender, however, is going to care. And, if the seller is going to get a 1099 for the debt forgiven, they should too. So, real estate commissions are going to be an issue right off the bat.
Lenders are not opposed to paying real estate commissions. They are, however, much more business oriented than the average home owner. That means they will almost certainly negotiate the commissions paid. Agents can deal with this fact in two ways. One is to list the property at the commission rate typical for their area and expect to negotiate with the lender later. The other is to decide on a commission rate that is appropriate for the professional services provided to put together a successful sale and stick to it.
If the seller has hired, or is themselves, a foreclosure consultant or mitigation expert of some kind, you will want to carefully read the section on Dealing with Foreclosure Consultants.
Whatever the approach you choose with respect to listing side commission, thought needs to be given to the selling side. Multiple listing services have strict rules about offers of compensation. Basically, you must state the compensation as a dollar amount of a percentage of the sales price. This MLS policy can cause real problems in a short sale when the lender starts making approval contingent on commission reductions.
The MLS offer of compensation is an offer of a unilateral contract. A unilateral contract is one that is accepted by performance, not promise. The performance required to accept a unilateral offer of compensation in the form of a coop real estate commission is procuring a buyer ready, willing and able to purchase on terms acceptable to the seller. As a general rule, a buyer is procured when they write an offer that is accepted by the seller. That means a unilateral offer of compensation is accepted by the selling agent when they submit an offer that is accepted by the seller.
Once an offer is accepted, it can be changed only by mutual agreement. Put that in the context of a unilateral offer of compensation and you can see that once you have a deal the coop commission cannot be changed other than by agreement of the selling broker. This can be a real obstacle when the lender demands commission reductions as a condition of approving a short sale. If the selling brokerage is willing to risk the deal, they can refuse to reduce the selling side and thus place the entire reduction of the listing broker.
Multiple listing services as a rule will not allow listing agents to qualify their offer of compensation. You cannot offer “half of whatever I eventually agree to” in the MLS. Such an offer would not qualify as a unilateral offer of compensation because the payment term would be indefinite. You also cannot put “commissions subject to reduction by lender” or other qualifiers in the remarks section and use that to unilaterally reduce the commission split offered in the MLS. It is never a good idea to make real estate commissions a contingency of a sale as that can put the agents’ interests in conflict with their clients.
One way to deal with the coop commission issue is to put information in the remarks section that warns the coop broker that lender approval may be conditioned on renegotiating the commissions. Such a warning is not binding and does not change the unilateral offer of compensation, but it will at least put agents on notice. The only other way to deal with the problem is to reach an agreement with the coop broker before they have procured a buyer.
Residential real estate agents tend to favor blind offers. Often the first anyone knows of a buyer is when their offer shows up on the listing agent’s fax machine. It is difficult at that point to renegotiate the commission split. Renegotiation works much better if done before there is a written offer.
One way to get to the selling broker before there is an offer is to demand showings by appointment. When the agent makes the appointment, the listing agent can explain the situation and get their agreement to participate in any commission reduction that may be demanded by the lender. This agreement to participate can be memorialized with a simple email. That way, when the time comes, the agents will be on the same page and in agreement on how to proceed.
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