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.

“Don’t Cut Commissions” – Fannie Mae

fannie-mae1These are some of the most beautiful words in the Fannie Mae Servicing Guide:

Effective March 1, 2009, closing of preforeclosure sales may not be conditioned upon a reduction of the total commission to be paid to real estate agents to a level below what was negotiated by the listing agent with the borrower, unless the fee exceeds 6 percent of the sales price of the property in aggregate. Servicers are reminded that they must continue to obtain any approvals that may be required by interested third parties in connection with preforeclosure sales. (Part VII Section 504.02)

You need a translation from Fannie Mae speak to Realtor language. Preforeclosure is Fannie Mae’s term for a short sale. As long as the total commission is 6% or less, Fannie Mae as the investor is directing the servicer to leave the commission alone.

I have grabbed the microphone at REOMAC meetings to question the practice of cutting Realtors commissions. I have button holed Fannie Mae and Freddie Mac executives to discuss this practice. I lead an ovation for the Freddie Mac executive on a Short Sale panel who said they did not want the practice of cutting Realtor’s commissions to be allowed. I questioned a short sale panel that was so proud of paying a closing attorney extra money when the attorney worked to help loss mitigation, yet they condoned cutting the Realtors commission, and objected to me getting paid when I advised Realtors how to work their way through the short sale process.

Fannie Mae has said that Realtors are not to be treated like dogs.

Why is this important to the homeowners? Because it is the Realtor who is taking on the challenge of selling the home, getting the buyers to put up with the delays in a short sale review, and negotiating with all the lien holders. If the Realtor knows that the commission will be cut, they are much less likely to take on this task that is much more difficult than a traditional sale. If the Realtor knows that they will be properly compensated if the sale closes, there will be many more short sales with their benefit to the borrower, the lender and the neighborhood.

In an individual case, the bank will make more if it steals some of the Realtor’s commission. That is what CitiMortgage did to me in the short sale of a property on Crest Road in Rancho Palos Verdes, California. By negotiating in a questionable manner, they withheld approval of their short payoff until everyone else was up against a foreclosure deadline. Then, they would only approve a much larger payoff than allowed by the first and the second loans, so the only way to accomplish that was to have the Realtors pay CitiMortgage. Their negotiating trick left no time to get the situation corrected. In this one situation, they made more money. I have not done a short sale involving Citi since. Also, I disclose this experience to any Realtor that I educate on short sales. I will not do a short sale where Citi is involved unless they are representing a loan where Fannie Mae or Freddie Mac is the investor.

So, Citi made $25,000 more in this one situation. I will bet that they are losing many other short sale opportunities, where their total loss dwarfs the one time savings.

Fannie Mae has done an excellent job of emphasizing the long term benefit of short sales and eliminating the short term gain of stealing one commission. If Realtors know they will not have a commissionectomy, it is much more likely that they will do short sales.

Thank you Fannie Mae.

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