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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Whatever the details of the short sale contingency itself, some thought should be given to how subsequent offers will be handled. Lender approval takes time. During that time, it is not unusual to get other offers. Indeed, it is often in both the lenders and the seller’s interest to try to get better offers. At the same time, short sales are uncertain enough for the buyer that introducing multiple offers into the mix can be very disconcerting.

A good short sale addendum will address the issue of subsequent offers. The old industry standby of taking “backup” offers doesn’t really work. A lender will not approve an offer in “first place” if there is a better offer in “backup.” Because a better offer will be more likely accepted, and result in less loss to lender and seller alike, it is often not in the seller’s interest to withhold subsequent offers from the lender. At the same time, passing on subsequent offers can cause hard feelings, contract disputes and increase marketing difficulties.

One way to handle the multiple-offer problem is to warn buyers right up front that the seller will continue to market the property and submit all offers obtained to the lender for approval. This will discourage low-ball offers. It may also, however, complicate the approval process and discourage some buyers. Another approach is to create contingent offers under which there is no contract at all until the lender approves. Such contingent contracts can be terminated by either party for any reason prior to approval. This solves some problems, like timing issues, at the expense of certainty.

Other approaches, for instance, having an open “offer period” designed to obtain the best offer prior to submitting an offer to the lender, are possible. Whatever the approach, it must be clearly understood by all the parties before offers are accepted. Multiple listing service rules about “pending” sales must be addressed. Short sales are not just deals with a “subject to lender approval” contingency. Careful preparation, including client counseling and proper disclosures, is key. So important is such counseling that Oregon form publishers attach a “Short Sale A Brief Summary” to their short sale addendum. Click here to find a sample Short Sale A Brief Summary form.

The contractual issue of continued marketing is separate from the MLS issue. Any seller is entitled to continue to market their property. Putting that fact in the contract is a matter of wise disclosure, not legal right. None of this has anything to do with the multiple listing services.

Multiple listing services typically have two categories of listings for member search purposes. One is “active” and the other is “pending.” Whether a property filed with the MLS is or should be carried as active or pending depends on the MLS rules. Parties cannot change these rules by contract. Brokers cannot change the rules either. It follows that whether a short sale is carried as “active” or “pending” is decided by the MLS, not the parties or individual brokers.

Some multiple listing services allow members to carry short sale listings as “active” until the short sale contingency is removed. Others simply enforce existing rules and carry short sales as “pending.” One way tends to favor sellers and lenders, the other buyers. Which is “best” is a political issue to be resolved by MLS rule.
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Standard sale agreement forms, and Oregon’s are no exception, contain time periods and deadlines that run from acceptance of the contract by the buyer and seller. In a short sale situation, the sale is uncertain until the lender approves. Buyers are therefore going to be very reluctant to do inspections, pay loan fees and so on until they know the creditors have approved. It is for that reason that short sale form and addendums usually suspend contract time and performance deadlines until creditor approval is obtained. However, the closing date is excluded from thi ssuspension.
A problem that can arise when suspending all contractual deadlines is what to do about the seller’s property disclosure statute? (ORS 105.465-490). The statute requires the seller to make the disclosure “to a buyer who makes a written offer.” That would, of course, normally be the date upon which the parties reach mutual agreement to the sale contract, not the date the short sale contingency is released.

Attempts to move the statutory seller’s disclosure deadline by contractual agreement raise serious statutory issues. Although a buyer can waive the disclosure, and their revocation rights under it, it is not clear that parties can by contract suspend the statutory deadlines themselves. If the buyer is considered to have waived rights under the statute by agreeing to deadlines other than those imposed by statute, they would have no statutory rights at all. On the other hand, if no waiver of statutory rights is intended, then the buyer can revoke anytime prior to actually receiving the disclosure.

It is far from clear that agreeing in a contract that the seller will not provide the disclosure until some date after the date offer automatically suspends the buyer’s rights under the statute. Fortunately, there is no real reason to delay the disclosure. The condition of the property does not depend on whether the sale is a short sale or not. As with any sale, it is wisest to give the seller’s property disclose and start the revocation clock.

Among the most important of contractual deadlines is the payment of earnest money and the closing date. Buyers may be reluctant to tie up earnest money on a deal that needs lender approval. At the same time, the seller will want to know the buyer is serious before getting into the short sale approval process. One solution is some earnest money upon acceptance and more upon lender approval. The closing date can be handled by simply agreeing to close a certain number of days after creditor agreement is obtained.

Common Oregon short sale addendums make clear that, although other time and performance deadlines are suspended while waiting for lender approval, the contract closing date is excluded from such suspension. The closing date now terminates the contingency, if not satisfied or waived by that time by the lender. If the seller and buyer want the contract to continue, they must agree to a new closing date in writing. This change in how short sales are handled in Oregon came about due to lenders delaying the short sale process. Prior to 2008, buyers could find themselves stuck in limbo waiting for lender’s approval since short sale forms favored the seller.

If not using the standard OREF form, it is critical to the seller that the contingency be written so the deal automatically fails if the lender doesn’t approve. Otherwise, the seller could find themselves bound to convey title they cannot clear. You will see short sale contingencies that make this mistake by having an approval period that expires without spelling out the consequences of not obtaining lender approval. As with any contingency, it is often more important to spell out what will happen if the contingency is not met than it is to spell what happens if it is met.
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Short sale contingencies can be as simple as saying “subject to lender approval.” Such a shorthand contingency is, however, a very bad idea. Like any contingency, it is important to spell out both context and consequences. The context here is that the debt owing against the property is more than the purchase price. The consequence is that the lender must agree to take less than the loan payoff or there can be no sale.

Starting with context and consequences helps you see what the contingency must contain. The buyer and seller should acknowledge that the purchase price will not provide sufficient funds to payoff the loan and clear the title and that as result the transaction is contingent upon the lender approving of the sale. This is a third-party approval contingency because the lender is not a party to the real estate sale agreement.

As between buyer and seller, there is usually a binding enforceable contract upon acceptance. With a short sale, however, the contract is contingent on the seller’s creditors reaching approving of the sale. The time between buyer and seller acceptance of the sale contract and the lender’s agreement to take less than the loan payoff amount is a critical time.

In Oregon, during the short sale contingency, the most commonly used form for short sale addendums favors the buyer. OREF 027B allows for a buyer to terminate the contract with written notice, prior to the lender’s consent, for any reason. Absent such written notice, the contingency binds both seller and buyer until the lender approves the sale or the closing date occurs. Click here to view OREF 027B. If using another form, the nature of the contingency should be made clear: that the sale is contingent on the lender’s approval of the sale agreement on terms acceptable to both buyer and seller. Further, the form should include a deadline at which the buyer may withdraw if the bank is too slow in responding, so as to prevent being stuck in the contract at the lender’s mercy.
The short sale contingency will require some kind of written consent from the lender regarding the transaction and the seller’s obligation to the lender. Often lender consent will contain conditions that require the buyer and seller to modify their sale agreement. Lenders may demand as a condition of approval that the real estate commissions be reduced, that other creditors receive less than they are owed or that other transaction costs be reduced. Lender consent agreements are, therefore, key to a successful short sale. Click here to view a standard Lender Consent Agreement.
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A short sale deal is special in several important ways. The first, of course, is the lender approval contingency. The second is altering standard deal procedures and deadlines to accommodate the lender approval contingency. A third is dealing with the potential for multiple offers created by the lender approval contingency. This section will deal with each of these issues in turn.
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Marketing a short sale is just like marketing any property with one serious exception. That exception is that at some point the seller is going to have to disclose the short sale requirement to the buyer. When and how that disclosure is made is a big part of marketing a short sale property.

When to make the “short sale” disclosure depends largely on the numbers you developed with your seller. If the asking price minus the seller’s closing costs is more than the loan payoff, a full price offer will not result in a short sale. In such a situation, the disclosure would not be necessary, or usually made, until the seller was considering an offer less than the asking price that would result in a short sale. When a full price offer will not result in short sale, the property can be marketed just like any other property. No short sale notice would be needed until the seller countered an offer that did not generate sufficient revenue to clear the title.

The general rule here is that a short sale disclosure is required prior to entering into any contract under which the seller will not be able to deliver clear title. If the seller is going to counter with a short sale contingency, the counter itself will disclose the short sale. When, however, the asking price itself is less than the loan payoff, and the seller will not or cannot make up the difference, every offer will trigger a short sale situation. That raises serious disclosure timing issues.

Disclosing a short sale situation signals seller distress. Seller distress can reduce offers to below market value. In addition, the uncertainty of the short sale process may discourage potential buyers and their agents before they even see the property. A short sale disclosure can also attract the attention of market predators, “low ball” offers and real estate scams of every stripe.

Your seller must be prepared for the marketing down-side of short sales before agreeing to market the property as a “short sale.” The bottom line with a short sale is that the seller cannot accept an offer without a lender approval contingency. That means either inviting an offer with such a contingency or countering with the contingency. Either is a form of short sale disclosure.

Unless you use a short sale form, or your company has a standard short sale addendum, someone will have to draft the short sale contingency. Drafting such contingencies is well beyond the expertise of a real estate licensee. Nevertheless, knowing how such a contingency works is a big part of writing a short sale deal.

Contacting a lender is not as easy as it once was. The bundling and selling of real estate loans on the securities markets has greatly complicated mortgage lending. It has also made finding the actual holder of a mortgage more complicated. It may take a number of phone calls to find the mortgage holder- or worse yet, mortgage holders.

Once you find the mortgage holder, you will need to find the person within that organization who has the authority to authorize a short sale. This can be a daunting and, depending on the number of lenders and their relationship, sometimes impossible task. Most lenders, however, will have a “short sale,” “workout” or “mitigation” department. In that department, once you find it, there will be one or more supervisors with real decision-making authority. These are the people you are trying to find.

The first step once you find the people you need to deal with is to provide them with a written Letter of Authorization. A Letter of Authorization is a letter from the property owner(s) authorizing the lender to disclose personal information about the seller and the property. Such letters contain the property address, loan number, owner’s name, agents name and contact information, the date and the authorization statement. Click here for sample Letter of Authorization. Offering the lender a Letter of Authorization early in the process will help you establish credibility.

Once you have found the people you need to deal with, given them your letter of authorization, and received from them any loan data you need, you can present your plan for marketing the property as a short sale. Remember, you represent the seller, not the lender. You probably won’t get any commitment from the lender at this point, but you can establish your credibility, explain the situation, set out your marketing plan and get the lender’s understanding and acquiescence. That way, when you get an offer and send it in for approval, the lender will know what is going on. Now all you have to do is market the property.
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Sellers, quite naturally, see a short sale as a way to protect their income and assets. Lenders don’t see it that way at all. In fact, lenders see ALL the seller’s income and assets, not just the property, as a potential source of funds to pay them what is owed on the loan. This is true even though most lenders cannot take default judgments on most residential property in Oregon. Most lenders will want the seller to provide proof the seller lacks the income and assets to payoff the loan at closing before they will agree to reduce the payoff on their loan.

Your seller client should anticipate that the lender will ask for information about savings accounts, investments, other real estate, cash, money market accounts and the like. Tax returns are, of course, always something lenders like to see. Having this information available upfront will not only speed up the short sale process, but go a long way toward convincing the lender they are dealing with a competent professional. Having in hand a financial statement that shows the seller doesn’t have the ability to pay off the loan, makes a successful short sale a lot more likely.

You can also make a short sale more likely by talking to your client about a “hardship letter.” The letter will explain how the seller got into the financial situation they find themselves in. Job loss, illness and other “but of the grace of God” explanations of financial distress make a better impression than asset mismanagement, real estate speculation and so on. It’s not that a lender will never agree to a short sale where the hardship was self-imposed; it’s just that like all people lenders tend to be more sympathetic when people are caught up in circumstance beyond their control. The lender will also be able to use the hardship letter to assess the likelihood of the seller filing bankruptcy. If that is a possibility, they may be more open to working toward a short sale. Click here for a discussion of bankruptcy laws.

Talking to your client about finances and hardship may suggest that marketing the property as short sale is not really their best option. Ethical agents will at this point suggest the seller explore other options. A good source of reliable information about foreclosure can be found on the website of the Department of Housing and Urban Development at: www.hud.gov/local/or/homeownership/foreclosure.cfm. Once you have talked to your client and have a financial statement and hardship letter, it is time to contact the lender.
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Short sales, like all real property sales, should start with a broker’s price opinion (BPO) backed by a Competitive Market Analysis (CMA). Click here for a detailed discussion of BPOs and CMAs. Lenders are not going to discount their loan so a buyer can acquire the property for less than its actual value. That means you have to know the actual value of the property. Market value is the number the lender will start with, not the loan payoff or even the offered price.

Your CMA and BPO will give you what the property should bring on the open market. Market value, unlike sales price, does not depend on the seller’s financial condition or need to sell. Such factors may motivate a seller to reduce their asking price below market, but that is initially of no interest to a lender. To the lender, it is simply a matter of figuring out what process is likely to result in the most money in their pocket. To get there, they have to start with the actual market value. Sure, they are going to have to discount that number, but first they need the number.

Once you have market value, you can do a preliminary net sheet for your seller. The net sheet will tell you, the seller (and eventually the lender) how much money an offer will actually make available. You have to figure the unpaid balance of the loan(s), any late fees, real estate commissions, necessary repairs, closing costs and the like. What you are looking for is cash to the seller at closing. That number will be negative in a short sale situation.

How negative the number you arrive at tells you how “short” the sale will be for a given purchase price. It is the amount you are going to ask the lender to eat. You can compare that number with the rule of thumb twenty-five percent of market value recovery in foreclosure to get an idea of whether a short sale is going to be attractive to the lender. If you are going to have to ask the lender to give up more than they can expect in foreclosure, they are going to say no. If your numbers says you are in the ball park, it is time for a serious conversation with your client.
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