BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
New MLS Rule on Short Sale Compensation
At present, most MLS’s allow a listing agent in a short sale to make a “conditional offer of compensation,” meaning that the amount offered to the cooperating selling (buyer’s) broker is conditioned upon the total commission amount allowed by seller’s lender, and therefore can be reduced if the seller’s lender reduces the total commission to be paid in the short sale.
Thus, many listing agents have been writing in the confidential remarks something like “Short sale commission subject to lender approval. Any reduction in total commission shall be split __% – __% between listing and selling office.” (The percentage of the split between the two offices can be any percentage, but quite commonly the split is done evenly between the two participating brokerages.)
This conditional offer of compensation has been authorized by the CAR Model MLS Rule, which was adopted by most California MLS’s, which reads as follows (perhaps with minor changes by local MLS’s):
7.15.2 Lender Approval Listings. Compensation offered through the MLS to cooperating brokers on listings which require lender approval (commonly referred to as “short sale” listings) is for the amount published therein unless the listing broker indicates on the MLS the following: (a) the fact that the sale and gross commission are subject to lender approval; and (b) the amount or method by which the compensation offered through the MLS will be reduced if the lender reduces the gross commission. This section does not allow an additional reduction from the commission offered for items such as a short sale negotiator fee or other administrative costs of the transaction. Any reductions from the commission offered for such items should be factored in as a reduced amount the listing broker initially offers to a cooperating broker and may not be made a condition of the offer.
However, at the October, 2012 meeting of the CAR Board of Directors, CAR decided to remove the short sale conditional offer of compensation rule, and instead replace it with a mandatory disclosure of short sale status. This change was recommended because of the many abuses reported based on the above rule allowing for a conditional offer of compensation to short sale buyer brokers.
The new Model Rule provision reads as follows:
7.28 Short Sale (Lender Approval) Listings. Participants must disclose potential short sales (defined as a transaction where title transfers, where the sale price is insufficient to pay the total of all liens and costs of sale and where the seller does not bring sufficient liquid assets to the closing to cure all deficiencies) when reasonably known to the listing broker. This section does not allow Participants with short sale listings to place any reduction conditions on compensation offered through the MLS for items such as lender reductions of the gross commission, short sale negotiator fees or other administrative costs of the transaction. Any reductions from the commission for such items, if any, should be factored in as a reduced amount the listing broker initially offers to a cooperating broker and may not be made a condition of the offer.
This model rule is now being implemented by many local MLS’s. When, or if, your local MLS implements this rule, short sale listing agents will no longer be able to change the amount of compensation to a cooperating selling (buyer’s) broker based on the seller’s lender’s reduction in the total commission allowed.
In short, for MLS buyer broker compensation purposes, short sales will be treated the same as all other regular sales where there is a definite offer of compensation that will not change, and cannot be changed, based on the seller’s lender’s approval of a total commission in the transaction.
For more information on this change, see the CAR Legal Memo on the subject at:
http://www.car.org/legal/mls-folder/mls-comm-shortpay-probate/
PRACTICE TIPS:
1. Check with your MLS to see if, and when, they plan to implement this Model Rule change. Some MLS’s have already approved this change to the MLS rules.
2. If your MLS is not planning to change the current rule allowing for conditional offers of compensation in short sales, you may continue to advertise in the MLS Confidential Remarks that the buyer broker’s compensation will be reduced by the amount or formula specified.
3. If your MLS implements this new rule, arguably this change will require listing brokers to better project the likely total commission that will be allowed by the seller’s lender.
4. Based on that projected total allowable commission by seller’s lender and, if desired, the consideration of any expenses by the listing agent for a short sale negotiator, short sale listing agents will be required to make a judgment as to the amount to offer the cooperating broker.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
© Copyright Broker Risk Management 2012 11/02/12