Training for Short Sales & Mortgage Loss Mitigation to Stop Foreclosure

Do Disclose Short Sales in the MLS and Advertising

mls-70The fact that a property will be a short sale has to be disclosed in the MLS. You must disclose material facts, and the fact that a buyer will have to go through a short sale process is a material fact.

By the way, MLS is a registered trademark of Major League Soccer. We are not talking about that MLS, we are talking about the Multiple Listing Service.

The simplest way to disclose a short sale is to say something like “the sale is contingent on lender approval of a short payoff of the existing loan.” There are all sorts of other phrases to disclose this. “The sale is contingent on the lender’s acceptance of less than a full payoff for the existing loans.” I put this phrase in the Agent Only section of the listing in the MLS.

What about commissions? Since lenders frequently try to cut the commission, how does the listing agent deal with that possibility? If you specify a certain commission to be paid to the agent for the buyer, you will have to pay that amount at closing, unless the buyer’s agent volontarily lowers their commission. If you want to be able to adjust the commission, specify in the listing that the commission is subject to the lender’s approval and may be renegotiated. The listing agent can also specify that the commission to the buyers agent will be 50% of the total commission approved by the lender.

This commissionectomy by lenders discourages short sales. Agents for buyers need every dollar they can get in todays market. If they are going to have to make an offer on a short sale property and speculate on whether it will close based on the lender’s approval, there should be a bonus to the commission to compensate for that risk. Instead there may be a commission penalty, a risk that the sale won’t close, and a longer time for the buyer’s agent to work with the buyer holding the deal together. On the other hand, the listing agent is taking the same risk, doing much more work in submitting the short sale package and negotiating the decreased payoff and full release of the loans, not to mention explaining lien priority, tax consequences and other issues. So, it is not fair that the listing agent eat the entire commissionectomy. The new guidelines by Fannie Mae are a step in the right direction to prohibit renegotiation of the commission if the total commission is 6% or less.

Some Realtors feel that the fact that a property will be a short sale should be put in advertising. There is not enough room in most ads to put in every material fact about the property, so I do not see how that should be required. You do not have to put all the required disclosure statemtents in your advertising, so you should not be olbigated to say it is a short sale. Before a buyer makes any kind of offer on the property, the fact that this will be a short sale should be disclosed. Bringing this fact up in a counter offer is too late, as it would result in the buyers feeling they have been mislead.

Most short sales are sold “as is” because the bank wants to get the amount shown on the closing statement (HUD) that is presented at the time the lender approves the sale. Since the seller usually has no money, any repair costs would come out of the proceeds of the sale, reducing the payment to the lender. Do you have to put “as is” in the MLS and the advertising. I do not believe it is required, so it should be left to the negotiating abilities of the listing agent. If you want to frame the negotiations to start with the idea that the property is sold “as is”, put it in the MLS. If you want to deal with it as the negotiations proceed, that may be your preference, as you may be able to get some basic repairs done as a part of the transaction. For example, if the property does not meet the FHA standards, certain repairs are going to need to be made for the buyer to get FHA financing. The existing lender should realize that this is an expense that is necessary to get the sale to close and allow that charge on the closing statement. I have had an easier time convincing the existing lender to pay more in closing costs, then have the buyer pay that same amount for the repairs directly to the contractor. For some reason, adjusting closing costs is easier for the short sale lender to swallow than to pay for repairs. Since the amount of money for the buyer is the same by paying the repair cost instead of the closing costs, most buyers are happy work in this manner.

To set the proper expectation, you need to disclose that the house is a short sale. It does not make a pleasant surprise.

Comments

4 Responses to “Do Disclose Short Sales in the MLS and Advertising”
  1. morosani says:

    Hello. just stumbled on this site and it\’s a awesome

  2. michael p. says:

    Thanks for letting me know

  3. Thomas Smith says:

    Hello,
    I had a question regarding when the lender does cut the commission. Are the buyers ever required to pay the amount that has been cut? What if a real estate agent pressures and threatens the buyers of losing the home if they don’t pay the amount that has been cut. My friends were in a situation where the agent was double ending as the selling and buying agent, so they told the buyers to make up the 3% that was cut. From my understanding that is illegal, but if the agents really are unethical can they really destroy the buyers opportunity of getting the home once escrow has started?

    • Tim Burrell says:

      It depends on whether the buyers signed a buyers agency agreement where they made a commitment that the agent would receive a certain amount of commission. if they did not, I do not think the agent can force them to pay the amount of the reduction in the commission. Many short sales prohibit commission reductions if they are 6% or less, so they may want to look into whether the short sale is a HAFA, Freddie Mac or Fannie Mae short sale that prohibits the reduction in real estate commissions.

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