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Monday, October 13, 2008
Friday, October 10, 2008
Short Sale Requirements, Questions & Answers - ARMLS
STATUS
Question: My “Short Sale” MLS listing has an offer on it that is being considered for approval by the lender; what status should my listing be in?
Answer: When a “Short Sale” listing has an offer, and is waiting for approval from the lender, the listing MUST be put into AWC-I status.
Who decided this? Your ARMLS Board of Directors (made up of appointed REALTORS® from your local associations) affirmed this policy decision in their last board meeting.
LIST PRICE
Question: What are the list price requirements for a “Short Sale”?
Answer: Rule 8.9 of the ARMLS Rules and Regulations states: Listing Price Specified. The full gross listing price stated in the listing contract will be included in the information published in the MLS compilation of current listings unless the property is subject to auction.
What does this mean? Currently the rule only calls for the listing agent to have the same price that was agreed upon in the listing contract. The price could also have been modified via a price change form.
Question: Isn’t the agent being unethical by listing the property for a price below what they or the lender will accept?
Answer: ARMLS Rule 16.3 states: Complaints of Unethical Conduct. All other complaints of unethical conduct or requests for arbitration shall be referred by ARMLS to the Association from which the Participant receives MLS services for appropriate action in accordance with the professional standards procedures established in the Bylaws for that Association.
What does this mean? ARMLS does not have jurisdiction over ethics issues, and has no comment on the ethics of this or any other situation. All ethics complaints must be made to your local association.
COMMISSION ISSUES
(The full Commission rule and all the rules may be found in the Subscriber area of http://www.armls.com/.)
Common Scenario: I brought a full price cash offer to the listing agent and the offer was refused. They have no intention of selling the home for the price listed.
Question: Am I owed the commission on this property?
Answer: ARMLS Rule 7.3 (1st paragraph) states: Arbitration of Disputes. By becoming and remaining a Participant, each Participant agrees to arbitrate disputes involving contractual issues and questions, and specific non-contractual issues and questions defined in Standard of Practice 17-4
of the Code of Ethics with MLS Participants in different firms arising out of their relationships as MLS Participants, subject to the following qualifications: (The remainder of the rule goes on to state at which association to file for arbitration given different scenarios.)
What does this mean? ARMLS does not have jurisdiction over any commission disputes. If you feel you are due a commission or a different commission, you may file for arbitration through your local association or AAR as the situation warrants.
Question: The lender requires that I, as the listing agent, reduce the commission depending on certain factors or conditions. How do I list the commission in the MLS listing and stay compliant with the MLS Rules?
Answer: ARMLS Rule 12.1 states in pertinent part: (Paragraph 1) Cooperative Compensation Specified on Each Listing. The listing broker shall specify, on each listing filed with the MLS, the compensation offered to other MLS Participants for their services in the sale (or lease) of such listing. Such offers are unconditional except that entitlement to compensation is determined by the cooperating broker’s performance as the procuring cause of the sale (or lease).
Rule 12.1 goes on further to state in paragraphs 2 through 4: The compensation amount shall be either a percentage of the gross selling price or a definite dollar (non-zero) amount. Compensation amounts that are not based on the gross selling price (i.e. the base price of a newly constructed home)must be shown as a fixed dollar (non-zero) amount. ARMLS shall not accept or publish any listing that does not include an offer of compensation expressed as either a percentage of the gross selling price or as a definite dollar amount, nor shall ARMLS include general invitations by listing brokers to other Participants to discuss terms and conditions of possible cooperative relationships. In filing a property with the MLS the Participant makes a blanket unilateral offer of compensation to other MLS Participants, and shall therefore specify on each listing filed with the MLS the compensation being offered by the listing broker to the other MLS Participants. Specifying the compensation on each listing is necessary because the cooperating Participant has a right to know what his compensation shall be prior to commencing his endeavor to sell. The listing broker retains the right to determine the amount of compensation offered to subagents, to buyer agents or to brokers acting in other agency or non-agency capacities, which may be the same or different.
This shall not preclude the listing broker from offering any MLS Participant compensation other than the compensation indicated on his listings as published by ARMLS, provided the listing broker informs the other broker in writing in advance of their producing an offer to purchase and provided
that the modification in the specified compensation is not the result of any agreement among all or any other MLS Participants. Any superseding offer of compensation must be expressed as either a percentage of the gross sales price or as a flat dollar amount.
What does this mean? All offers of compensation must not be conditional. You may not qualify the commission, in the remarks or anywhere else on the listing, to be less than what is in the commission field(s) on the listing. That commission is a percentage based on the Gross Selling Price of the property, or is a flat dollar amount that is guaranteed to be paid. The commission you enter is the contractual obligation that the listing agent makes with the buyer’s agent. ALL LISTINGS THAT HAVE CONDITIONAL COMMISSION LANGUAGE IN THE LISTING MUST REMOVE IT. Commission may be amended through agreement by the listing agent and the buyer’s agent, provided that the procedure laid out in paragraph 4 of Rule 12.1 is followed.
Question: I disagree with this rule. What, if anything is being done to address the special circumstances involved with Short Sale commission structures?
Answer: The MLS Committee and Board of Directors, made up of your appointed REALTORS® from each of the local associations, have been meeting diligently to discuss whether or not a rule should be added, changed or amended to allow for certain conditions to be allowed in
the case of properties for sale that involve Lender or Court approval.
If any change is made to the commission rule, ARMLS subscribers will be notified immediately.
Until such time as the rule is changed (though no assumption should be made that the rule will change), all subscribers MUST abide by the current commission rules as explained above, and in the actual language of rule 12.1.
Property Features Field Requirement
Question: Must short sales have “Lender/Corp Approval Required” selected as a property feature in the listing?
Answer: All short sales requiring lender or corporate approval of the offer MUST select and use the drop down feature “Lender/Corp Approval Required”, under the “Miscellaneous” subsection of the electronic profile sheet. While that field does not have an “R” (meaning required field) next to it, it is required to use those items in your listing if one or more of them apply. It does not have an “R” because not every listing has one of the conditions available for selection in “Miscellaneous”.
Question: Must the MLS listing state “Short Sale” (or other synonymous language) in the Public and/or REALTOR® Remarks of the listing if it indeed is a Short Sale?
Answer: It is not a current requirement that you designate that the listing is a Short Sale in either of the Remarks fields. You may include the information if you wish.
Posted 12/18/07 Arizona Regional Multiple Listing Service
Question: My “Short Sale” MLS listing has an offer on it that is being considered for approval by the lender; what status should my listing be in?
Answer: When a “Short Sale” listing has an offer, and is waiting for approval from the lender, the listing MUST be put into AWC-I status.
Who decided this? Your ARMLS Board of Directors (made up of appointed REALTORS® from your local associations) affirmed this policy decision in their last board meeting.
LIST PRICE
Question: What are the list price requirements for a “Short Sale”?
Answer: Rule 8.9 of the ARMLS Rules and Regulations states: Listing Price Specified. The full gross listing price stated in the listing contract will be included in the information published in the MLS compilation of current listings unless the property is subject to auction.
What does this mean? Currently the rule only calls for the listing agent to have the same price that was agreed upon in the listing contract. The price could also have been modified via a price change form.
Question: Isn’t the agent being unethical by listing the property for a price below what they or the lender will accept?
Answer: ARMLS Rule 16.3 states: Complaints of Unethical Conduct. All other complaints of unethical conduct or requests for arbitration shall be referred by ARMLS to the Association from which the Participant receives MLS services for appropriate action in accordance with the professional standards procedures established in the Bylaws for that Association.
What does this mean? ARMLS does not have jurisdiction over ethics issues, and has no comment on the ethics of this or any other situation. All ethics complaints must be made to your local association.
COMMISSION ISSUES
(The full Commission rule and all the rules may be found in the Subscriber area of http://www.armls.com/.)
Common Scenario: I brought a full price cash offer to the listing agent and the offer was refused. They have no intention of selling the home for the price listed.
Question: Am I owed the commission on this property?
Answer: ARMLS Rule 7.3 (1st paragraph) states: Arbitration of Disputes. By becoming and remaining a Participant, each Participant agrees to arbitrate disputes involving contractual issues and questions, and specific non-contractual issues and questions defined in Standard of Practice 17-4
of the Code of Ethics with MLS Participants in different firms arising out of their relationships as MLS Participants, subject to the following qualifications: (The remainder of the rule goes on to state at which association to file for arbitration given different scenarios.)
What does this mean? ARMLS does not have jurisdiction over any commission disputes. If you feel you are due a commission or a different commission, you may file for arbitration through your local association or AAR as the situation warrants.
Question: The lender requires that I, as the listing agent, reduce the commission depending on certain factors or conditions. How do I list the commission in the MLS listing and stay compliant with the MLS Rules?
Answer: ARMLS Rule 12.1 states in pertinent part: (Paragraph 1) Cooperative Compensation Specified on Each Listing. The listing broker shall specify, on each listing filed with the MLS, the compensation offered to other MLS Participants for their services in the sale (or lease) of such listing. Such offers are unconditional except that entitlement to compensation is determined by the cooperating broker’s performance as the procuring cause of the sale (or lease).
Rule 12.1 goes on further to state in paragraphs 2 through 4: The compensation amount shall be either a percentage of the gross selling price or a definite dollar (non-zero) amount. Compensation amounts that are not based on the gross selling price (i.e. the base price of a newly constructed home)must be shown as a fixed dollar (non-zero) amount. ARMLS shall not accept or publish any listing that does not include an offer of compensation expressed as either a percentage of the gross selling price or as a definite dollar amount, nor shall ARMLS include general invitations by listing brokers to other Participants to discuss terms and conditions of possible cooperative relationships. In filing a property with the MLS the Participant makes a blanket unilateral offer of compensation to other MLS Participants, and shall therefore specify on each listing filed with the MLS the compensation being offered by the listing broker to the other MLS Participants. Specifying the compensation on each listing is necessary because the cooperating Participant has a right to know what his compensation shall be prior to commencing his endeavor to sell. The listing broker retains the right to determine the amount of compensation offered to subagents, to buyer agents or to brokers acting in other agency or non-agency capacities, which may be the same or different.
This shall not preclude the listing broker from offering any MLS Participant compensation other than the compensation indicated on his listings as published by ARMLS, provided the listing broker informs the other broker in writing in advance of their producing an offer to purchase and provided
that the modification in the specified compensation is not the result of any agreement among all or any other MLS Participants. Any superseding offer of compensation must be expressed as either a percentage of the gross sales price or as a flat dollar amount.
What does this mean? All offers of compensation must not be conditional. You may not qualify the commission, in the remarks or anywhere else on the listing, to be less than what is in the commission field(s) on the listing. That commission is a percentage based on the Gross Selling Price of the property, or is a flat dollar amount that is guaranteed to be paid. The commission you enter is the contractual obligation that the listing agent makes with the buyer’s agent. ALL LISTINGS THAT HAVE CONDITIONAL COMMISSION LANGUAGE IN THE LISTING MUST REMOVE IT. Commission may be amended through agreement by the listing agent and the buyer’s agent, provided that the procedure laid out in paragraph 4 of Rule 12.1 is followed.
Question: I disagree with this rule. What, if anything is being done to address the special circumstances involved with Short Sale commission structures?
Answer: The MLS Committee and Board of Directors, made up of your appointed REALTORS® from each of the local associations, have been meeting diligently to discuss whether or not a rule should be added, changed or amended to allow for certain conditions to be allowed in
the case of properties for sale that involve Lender or Court approval.
If any change is made to the commission rule, ARMLS subscribers will be notified immediately.
Until such time as the rule is changed (though no assumption should be made that the rule will change), all subscribers MUST abide by the current commission rules as explained above, and in the actual language of rule 12.1.
Property Features Field Requirement
Question: Must short sales have “Lender/Corp Approval Required” selected as a property feature in the listing?
Answer: All short sales requiring lender or corporate approval of the offer MUST select and use the drop down feature “Lender/Corp Approval Required”, under the “Miscellaneous” subsection of the electronic profile sheet. While that field does not have an “R” (meaning required field) next to it, it is required to use those items in your listing if one or more of them apply. It does not have an “R” because not every listing has one of the conditions available for selection in “Miscellaneous”.
Question: Must the MLS listing state “Short Sale” (or other synonymous language) in the Public and/or REALTOR® Remarks of the listing if it indeed is a Short Sale?
Answer: It is not a current requirement that you designate that the listing is a Short Sale in either of the Remarks fields. You may include the information if you wish.
Posted 12/18/07 Arizona Regional Multiple Listing Service
FAQs on Short Sales & Commissions
FAQs on Short Sales & Commissions
By K. Michelle Lind
The increase in the number of short sales has resulted in many questions pertaining to the unique nature of these transactions. Many of these questions concern commission issues. The following Q&A will answer some of the most common questions.
For purposes of this article, assume the following facts:
The property is listed in the MLS as a short sale subject to lender approval. The buyer submits an offer through the buyer’s broker. The listing broker submits the offer and short sale package to the lender. The lender responds that it will approve the short sale if the total commission is reduced by 2%. Both buyer and seller demand that the brokers reduce their commission to allow the transaction to close escrow.
Must the listing broker agree to reduce their commission to allow the transaction to close?
No. The listing broker has no fiduciary duty to the seller to reduce the commission to allow the transaction to close.
Must the buyer’s broker agree to reduce the commission to allow the transaction to close?
No. The buyer’s broker has no fiduciary duty to the buyer to reduce the commission to allow the transaction to close.
If the listing broker agrees to reduce their commission, must the buyer’s broker agree to
split the reduction? No. The buyer’s broker’s has no obligation to agree to split the reduction in commission. The buyer’s broker is entitled to the cooperative compensation offered in the MLS at the time the broker produced the offer. Standard of Practice 3-2, which requires the listing broker to communicate any changes in offers of compensation before an offer to purchase is produced, states:
REALTORS® shall, with respect to offers of compensation to another REALTOR®, timely communicate any change of compensation for cooperative services to the other REALTOR® prior to the time such REALTOR® produces an offer to purchase/lease the property. (Amended
1/94)
What if the listing broker and buyer’s broker get into a dispute over the lender’s refusal to approve the short sale unless the commission is reduced? A.A.C. R4-28-1101(D) states: “A licensee shall not allow a controversy with another licensee to jeopardize, delay, or interfere with
the initiation, processing, or finalizing of a transaction on behalf of a client.” However, the Rule is
clear that “[t]his prohibition does not obligate a licensee to agree to alter the terms of any employment or compensation agreement or to relinquish the right to maintain an action to resolve
a controversy.” Therefore, this Rule does not apply to a dispute arising from a refusal to reduce
the agreed upon commission; it applies primarily to procuring cause disputes. Thus, if the brokers
can not reach an agreement, neither will reduce their commission by the full amount demanded
by the lender, and the lender will not approve the short sale without the commission reduction,
the transaction simply will not close.
If the listing broker agrees to reduce the listing commission and instructs the escrow
company to reduce the buyer’s broker’s commission as well, can the buyer’s broker agree,
allow the transaction to close, accept the lower commission and then pursue the listing
broker for the reduction amount? No. If the buyer’s broker agrees to accept a reduced
commission amount, the buyer’s broker is bound by that agreement.
Isn’t the buyer’s broker in the above situation accepting the lowered commission under
duress? The buyer’s broker may be under duress in that the broker wants or needs to be paid,
but that does not constitute the type of economic duress that would invalidate the agreement to accept the reduced commission amount. As an Arizona Court explained: “[a] charge of economic
duress or business compulsion must be based on the acts or conduct of the opposite party and
not merely on the necessities of the purported victim, or on his fear of what a third person might
do, and the mere fact that a person entered into a contract with reluctance, or as a result of the
pressure of business circumstances, financial embarrassment, or economic necessity does not,
of itself, constitute business compulsion or economic duress invalidating the contract . . . Unless
wrongful, unlawful or unconscionable pressure is applied there is no business compulsion
amounting to duress . . .” USLife Title Co. v. Gutkin, 152 Ariz. 349, 732 P.2d 579 (1986).
Could the listing broker have avoided this issue by offering a split of the commission
approved by the lender (for example, 50/50), instead of offering a specific percentage of
compensation for buyers’ brokers when posting the listing in the MLS? No, offering a split
would conflict with MLS Rules. The NAR Model MLS Policy requires that the compensation
specified be a percentage of the gross selling price or a definite dollar amount. Therefore, the
listing broker could not offer to split the commission 50/50.
In conclusion, brokers who are involved in a short sale transaction must be prepared to address
the many issues these transactions present, including the potential of a demand for a reduction in
commissions. These situations should be handled professionally in all cases and any agreement
to alter the previously agreed upon commission structure should be reduced to writing to avoid
any misunderstandings or disputes after close of escrow.
By K. Michelle Lind
The increase in the number of short sales has resulted in many questions pertaining to the unique nature of these transactions. Many of these questions concern commission issues. The following Q&A will answer some of the most common questions.
For purposes of this article, assume the following facts:
The property is listed in the MLS as a short sale subject to lender approval. The buyer submits an offer through the buyer’s broker. The listing broker submits the offer and short sale package to the lender. The lender responds that it will approve the short sale if the total commission is reduced by 2%. Both buyer and seller demand that the brokers reduce their commission to allow the transaction to close escrow.
Must the listing broker agree to reduce their commission to allow the transaction to close?
No. The listing broker has no fiduciary duty to the seller to reduce the commission to allow the transaction to close.
Must the buyer’s broker agree to reduce the commission to allow the transaction to close?
No. The buyer’s broker has no fiduciary duty to the buyer to reduce the commission to allow the transaction to close.
If the listing broker agrees to reduce their commission, must the buyer’s broker agree to
split the reduction? No. The buyer’s broker’s has no obligation to agree to split the reduction in commission. The buyer’s broker is entitled to the cooperative compensation offered in the MLS at the time the broker produced the offer. Standard of Practice 3-2, which requires the listing broker to communicate any changes in offers of compensation before an offer to purchase is produced, states:
REALTORS® shall, with respect to offers of compensation to another REALTOR®, timely communicate any change of compensation for cooperative services to the other REALTOR® prior to the time such REALTOR® produces an offer to purchase/lease the property. (Amended
1/94)
What if the listing broker and buyer’s broker get into a dispute over the lender’s refusal to approve the short sale unless the commission is reduced? A.A.C. R4-28-1101(D) states: “A licensee shall not allow a controversy with another licensee to jeopardize, delay, or interfere with
the initiation, processing, or finalizing of a transaction on behalf of a client.” However, the Rule is
clear that “[t]his prohibition does not obligate a licensee to agree to alter the terms of any employment or compensation agreement or to relinquish the right to maintain an action to resolve
a controversy.” Therefore, this Rule does not apply to a dispute arising from a refusal to reduce
the agreed upon commission; it applies primarily to procuring cause disputes. Thus, if the brokers
can not reach an agreement, neither will reduce their commission by the full amount demanded
by the lender, and the lender will not approve the short sale without the commission reduction,
the transaction simply will not close.
If the listing broker agrees to reduce the listing commission and instructs the escrow
company to reduce the buyer’s broker’s commission as well, can the buyer’s broker agree,
allow the transaction to close, accept the lower commission and then pursue the listing
broker for the reduction amount? No. If the buyer’s broker agrees to accept a reduced
commission amount, the buyer’s broker is bound by that agreement.
Isn’t the buyer’s broker in the above situation accepting the lowered commission under
duress? The buyer’s broker may be under duress in that the broker wants or needs to be paid,
but that does not constitute the type of economic duress that would invalidate the agreement to accept the reduced commission amount. As an Arizona Court explained: “[a] charge of economic
duress or business compulsion must be based on the acts or conduct of the opposite party and
not merely on the necessities of the purported victim, or on his fear of what a third person might
do, and the mere fact that a person entered into a contract with reluctance, or as a result of the
pressure of business circumstances, financial embarrassment, or economic necessity does not,
of itself, constitute business compulsion or economic duress invalidating the contract . . . Unless
wrongful, unlawful or unconscionable pressure is applied there is no business compulsion
amounting to duress . . .” USLife Title Co. v. Gutkin, 152 Ariz. 349, 732 P.2d 579 (1986).
Could the listing broker have avoided this issue by offering a split of the commission
approved by the lender (for example, 50/50), instead of offering a specific percentage of
compensation for buyers’ brokers when posting the listing in the MLS? No, offering a split
would conflict with MLS Rules. The NAR Model MLS Policy requires that the compensation
specified be a percentage of the gross selling price or a definite dollar amount. Therefore, the
listing broker could not offer to split the commission 50/50.
In conclusion, brokers who are involved in a short sale transaction must be prepared to address
the many issues these transactions present, including the potential of a demand for a reduction in
commissions. These situations should be handled professionally in all cases and any agreement
to alter the previously agreed upon commission structure should be reduced to writing to avoid
any misunderstandings or disputes after close of escrow.
Short Sales – Revised Forms And New Resources
SHORT SALES – REVISED FORMS AND NEW RESOURCES
By K. Michelle Lind
Posted: August 2008
By K. Michelle Lind
Posted: August 2008
A short sale is a real estate transaction in which the sales price is insufficient to pay the liens encumbering the property and sale costs, but the seller is unable or unwilling pay the difference. With the current market conditions, short sales continue to be commonplace and a much discussed topic in the industry. These transactions raise numerous issues, such as:
• How brokers can adequately represent their clients
• What should be disclosed about the short sale and when
• How the property should be identified in the MLS
• What the brokers can do to deal with commission reductions
• How brokers can more effectively communicate with lenders
• What terms should be included in the contract to structure the transaction
• When subsequent offers should be submitted to the lender
These issues are difficult to address because documentation and eligibility criteria for short sales vary depending on specific lender and investor guidelines. Further complicating the issue, many lenders are struggling with staff that have a lack of experience with short sales. Thus, many brokers report that short sale transactions are often difficult and many fail to close escrow.
Improving the Short Sale Process
Nonetheless, there are things that a listing broker can do to increase the chance of a successful short sale transaction. First, remember that generally speaking, the lender seeks to obtain fair market value for the property. Second, be aware that most lenders will not agree to a short sale unless the seller is insolvent or will either agree to make a cash payment or execute a promissory note at closing. In addition, a listing broker should:
• Obtain all pertinent information from the seller regarding their situation with the listing
(liabilities, liens, trustee’s sale date, etc.)
• Perform a comparative market analysis to determine the property’s fair market value
• Calculate all costs of sale
• Advise the seller to explore their options other than a short sale (retain the property, loan modification, deed in lieu of foreclosure, foreclosure, bankruptcy)
• Advise the seller to obtain legal and tax advice
• Incorporate the AAR Short Sale Addendum to the Listing Contract in the listing agreement
• Obtain written authorization from the seller to contact the lender and immediately contact the lender’s loss mitigation department for short sale package instructions
• Advise the seller to draft a hardship letter and to gather the necessary financial documentation for the short sale package
• Check the MLS rules regarding short sale disclosure requirements
• If an offer is received, insure that the AAR Short Sale Addendum to the Residential Resale Purchase Contract is incorporated into the contract
• Notify the lender of any contract and subsequent offers
• Ensure that the escrow agent is aware that the transaction is a short sale
• Communicate and follow-up on details frequently
AAR Revised Short Sale Addenda
The AAR short sale addenda will also assist in educating the parties and improving the process. AAR was one of the first associations in the nation to develop standardized short sale forms. These forms have been used since August 2007 and have been very effective overall. However, an AAR short sale workgroup, chaired by James “J.T.” Tsighis and comprised of short sale “experts,” suggested a few improvements to the forms, which have been adopted. The revised forms will be available for use on August 1, 2008.
Short Sale Addendum to Listing Contract
A major change to the Short Sale Addendum to the Listing Contract form is the addition of the
following language, which should be initialed by the seller:
“Seller acknowledges that Broker is not qualified to provide financial, legal, or tax advice regarding a short sale transaction. Therefore, the Seller is advised to obtain professional tax
advice and consult independent legal counsel immediately regarding the tax implications and
advisability of entering into a short sale agreement.”
The Addendum also:
• Defines “short sale” and requires the seller to acknowledge that there may be
disadvantages to a short sale.
• Notifies the seller that a short sale may adversely affect their credit score.
• Informs the seller that even if the creditor agrees to a short sale, the creditor may not
agree to forgive the debt entirely. Therefore, the seller is advised to consult independent
legal counsel and be certain of the terms of any short sale agreement before making a
decision.
• Advises the seller that a short sale in which the debt is forgiven is a relief of debt and may
be treated as income for tax purposes. Therefore, the seller is advised to obtain
professional tax advice.
• Obligates the seller to cooperate with the listing broker and lender to determine the
amount of debt owed on the property.
• Obligates the seller to promptly submit all requested documentation to obtain the lender’s
approval of a short sale.
Finally, the seller is advised to explore options other than a short sale.
Short Sale Addendum to Residential
Resale Purchase Contract
When the parties execute the Short Sale Addendum to the Residential Contract, they are agreeing that the contract will be contingent on an acceptable short sale agreement. This contingency is similar to the buyer’s financing contingency. However, both parties acknowledge that it may take weeks or months to fulfill the contingency by obtaining the lender’s approval of the short sale. Due to the questions about the seller’s right to accept back-up offers while a contract is being evaluated by the lender, the following language was added to the Addendum:
Nothing shall limit a Seller from accepting subsequent offers from subsequent buyer(s) and submitting the back-up contract(s) to Seller’s creditor(s) for consideration. All parties understand and agree that Seller’s creditor(s) may elect to sell the Premises to the holder of the Contract with terms and conditions most acceptable to creditor(s).
The Addendum also obligates the seller to submit a copy of the contract and any other documentation required by the lender for approval of the sale within five days after contract acceptance. The seller agrees to diligently work to obtain short sale approval (again, similar to the buyer’s obligation to diligently work to obtain loan approval) and promptly provide the lender with all additional documentation, including an appraisal at the seller’s expense, if required. If the seller and the lender enter into a short sale agreement, the following terms apply:
• The seller must immediately deliver notice to the buyer that the seller and the lender have entered into a short sale agreement. This notice is defined in the Addendum form as the Short Sale “Agreement Notice.”
• The date of seller’s delivery of the Short Sale Agreement Notice to the buyer is deemed the date of contract acceptance for purposes of all applicable contract time periods. In other words, although the parties have entered into an enforceable contract, the time periods do not begin to run until the seller has delivered the Agreement Notice. Thus, all time periods provided, including the Inspection Period, begin on the day following delivery of the Agreement Notice.
• The buyer is obligated to promptly open escrow and deposit the earnest money upon receipt of Agreement Notice.
• The buyer will be responsible for all loan costs.
• The buyer waives the seller’s warranties, except that the seller warrants to maintain and repair the premises so that at close of escrow the premises will be in substantially the same condition as the date of contract acceptance.
• Unless otherwise provided, close of escrow will occur thirty days after delivery of the Agreement Notice.
• A new provision was added to the revised form in which the parties agree to cooperate with the lenders and sign additional disclosures and addenda required by the lender as a condition of approval of the short sale, provided that neither party incurs additional costs or liability.
The notice to the seller regarding obtaining legal and tax advice was emphasized in the revised form. The provision, which must be initialed, now reads:
Seller acknowledges that Broker is not qualified to provide financial, legal, or tax advice regarding a short sale transaction. Therefore, the Seller is advised to obtain professional tax advice and consult independent legal counsel immediately regarding the tax implications and advisability of entering into a short sale agreement.
The Addendum provides that the buyer is entitled to cancel the contract at any time before receipt of a Short Sale Agreement Notice from Seller. And, in the event that the seller and lender are unable to reach an acceptable short sale agreement, the seller must notify the buyer and the contract is cancelled due to the unfulfilled short sale contingency.
NAR Short Sale Resources
The NATIONAL ASSOCIATION OF REALTORS® (NAR) has also recently introduced resources to assist with short sales. The NAR Risk Management Committee formed a national Short Sale workgroup of which “J.T.” Tsighis was an active member. The workgroup developed the Short Sale Blue Print and the Short Sale Workflow presentation. These educational tools are designed to assist brokers in handling short sales. The Short Sales Workflow is intended to give brokers a comprehensive overview of the short sale process (listing, marketing, negotiating and closing properties subject to a potential short sale). The Blue Print is a guide to the short sale process.
These resources along with the Short Sale workgroup report are at
www.realtor.org/MemPolWeb.nsf/pages/shortsales .
Additionally, the NAR board of directors approved recommendations to the NAR Model MLS
Rules and Regulations and to Multiple Listing Policy Statement 7.23 addressing short sales. The
MLS policy changes, which are optional, may also be reviewed on the NAR website at the above
link.
K. Michelle Lind, Esq.
Michelle is general counsel to the Arizona Association of REALTORS® (“AAR”) and a State Bar of Arizona board certified real estate specialist. She serves as the primary legal advisor to the association, provides legal direction in the development of standard forms, is involved in legislative advocacy, and assists in the association’s educational efforts. Please note that this article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.
Thursday, October 9, 2008
Short Sale Transaction
Short Sale Transactions
By K. Michelle Lind
Posted: July 2007
Unfortunately, some homeowners today owe more on their home than what the property is worth. Some programs that were intended to make it easier to obtain financing and increase homeownership resulted in loans that required small or no down payment, interest-only loans that do not build equity, and other loan programs that require such small payments that the loan amount actually increases rather than decreases. As a result, some homeowners have negative equity in their homes. Stagnant or decreasing property values add to the problem. Homeowners who financed their homes with loan programs with low initial rates of one percent to two percent will experience dramatic increases in their monthly payments when the loan resets to the market rate. These and other factors have contributed to a striking increase in home loan defaults and foreclosures.
Short Sales
A homeowner in default who owes for example, $300,000 on a property that is worth $250,000, may be able to convince the lender to allow the home to be sold for less than the loan amount, or even accept less than the amount owed as payment in full. This is known as a short sale. A lender may agree to a short sale to save the costs associated with a trustee’s sale, such as attorney’s and trustee’s fees, eviction, and resale costs. Additionally, a lender may agree to a short sale because if the property is foreclosed upon, the loan becomes a "non-performing" loan on the accounting books, which may affect the funds that the lender can obtain from the Federal Reserve for other loans.
Seller Considerations
When considering a short sale, the seller must first determine how much is owed on the property. For example, in addition to the delinquent loan, there may be a home equity loan, past due homeowner’s association fees or unpaid property taxes. Then, the seller must add the costs of a sale, such as closing costs, escrow fees and brokerage commissions. All of the seller’s debt and costs must be factored in before determining whether a short sale is feasible.
The seller should also be aware of some of the downsides to a short sale. A short sale could affect the seller’s credit score. Further, even if a lender agrees to a short sale, the lender, the VA, or the FHA may require the seller to pay the difference as a personal obligation. The outstanding debt could result in a subsequent collection action. Therefore, the seller should be certain of the terms of any short sale before making a decision and obtain any debt forgiveness agreement in writing.
Also, a short sale is a relief of and may be treated as income for tax purposes. A lender who forgives a debt must submit a 1099 form to the IRS indicating the amount the borrower has been forgiven. (Note: The NATIONAL ASSOCIATION OF REALTORS® supports proposed legislation that would change this tax law.)
Different lenders have different short sale department names, so contacting the person who has the authority to authorize a short sale on behalf of the lender may require some tenacity. The appropriate department may be called the loss mitigation, work-out, foreclosure, loan modification or loan reinstatement department. To accomplish a short sale, the seller must convince the lender that it will fare better by agreeing to a sale for less than the outstanding loan amount. A short sale may involve more documentation than the original loan application since the seller must “reverse qualify” and prove that the seller is financially incapable of paying the loan.
Purchase Contract Considerations
The purchase contract in a short sale must be contingent upon a short sale agreement acceptable to both the lender and the seller. AAR is currently working on a short sale contingency clause to add to the Additional Clause Addendum or a separate form to address short sales. In the meantime, the following short sale contingency clause may be used as a guide:
CONTINGENT UPON ACCEPTABLE SHORT SALE AGREEMENT: Buyer acknowledges that Seller owes more for the Premises than the purchase price and the Premises are encumbered by a loan(s) in excess of the purchase price. Therefore, this Contract is contingent upon an agreement between the Seller and Seller’s lender(s), acceptable to both, to sell the Premises for less than the loan amount(s). In the event that Seller and Seller’s lender(s) are unable to reach an acceptable agreement, this Contract shall be deemed cancelled and all Earnest Money shall be returned to Buyer. Seller is advised to obtain legal advice regarding the terms of any such short sale agreement with lender(s) and professional tax advice regarding the tax implications of any such sale.
However, the listing agent and the buyer’s agent should consult with their brokers or managers before drafting a contract in a short sale transaction or using the foregoing clause because there are other issues that should be addressed.
Brokerage Commission Considerations
A lender may demand that the real estate brokers in the transaction reduce their commission as a condition to any short sale agreement. However, the brokers cannot be forced to reduce the agreed upon commission, even if the lender refuses to agree to the short sale unless the brokers do so. A.A.C. R4-28-1101(D) states:
A licensee shall not allow a controversy with another licensee to jeopardize, delay, or interfere with the initiation, processing, or finalizing of a transaction on behalf of a client. This prohibition does not obligate a licensee to agree to alter the terms of any employment or compensation agreement or to relinquish the right to maintain an action to resolve a controversy. Therefore, even if the transaction will not close unless the brokers agree to reduce their commission, the brokers have no duty to do so.
Similarly, if the listing broker agrees to reduce the listing commission, the buyer’s broker’s commission is not affected by the listing broker’s agreement. Unless the buyer’s broker also agrees to reduce his or her commission, the listing broker is obligated to pay the buyer’s broker the amount of commission offered in the MLS, regardless of any agreements between the listing broker and the seller or lender.
Also, the purchase contract should not be used to address commission issues even in short sales. Any commission agreements should be handled by separate signed writings to avoid misunderstandings, disputes or potential violations of either the Commissioner’s Rules or Article 16 of the REALTOR® Code of Ethics.
Consult With Your Broker or Manager
Short sales can be very complex and risky transactions for everyone involved. Unless you are confident in your ability to handle such a transaction alone, consult with your broker or manager for advice and guidance.
Thanks to Martha Appel, Jerome King, James Tsighis, and Mark Ross for their input on this subject.
By K. Michelle Lind
Posted: July 2007
Unfortunately, some homeowners today owe more on their home than what the property is worth. Some programs that were intended to make it easier to obtain financing and increase homeownership resulted in loans that required small or no down payment, interest-only loans that do not build equity, and other loan programs that require such small payments that the loan amount actually increases rather than decreases. As a result, some homeowners have negative equity in their homes. Stagnant or decreasing property values add to the problem. Homeowners who financed their homes with loan programs with low initial rates of one percent to two percent will experience dramatic increases in their monthly payments when the loan resets to the market rate. These and other factors have contributed to a striking increase in home loan defaults and foreclosures.
Short Sales
A homeowner in default who owes for example, $300,000 on a property that is worth $250,000, may be able to convince the lender to allow the home to be sold for less than the loan amount, or even accept less than the amount owed as payment in full. This is known as a short sale. A lender may agree to a short sale to save the costs associated with a trustee’s sale, such as attorney’s and trustee’s fees, eviction, and resale costs. Additionally, a lender may agree to a short sale because if the property is foreclosed upon, the loan becomes a "non-performing" loan on the accounting books, which may affect the funds that the lender can obtain from the Federal Reserve for other loans.
Seller Considerations
When considering a short sale, the seller must first determine how much is owed on the property. For example, in addition to the delinquent loan, there may be a home equity loan, past due homeowner’s association fees or unpaid property taxes. Then, the seller must add the costs of a sale, such as closing costs, escrow fees and brokerage commissions. All of the seller’s debt and costs must be factored in before determining whether a short sale is feasible.
The seller should also be aware of some of the downsides to a short sale. A short sale could affect the seller’s credit score. Further, even if a lender agrees to a short sale, the lender, the VA, or the FHA may require the seller to pay the difference as a personal obligation. The outstanding debt could result in a subsequent collection action. Therefore, the seller should be certain of the terms of any short sale before making a decision and obtain any debt forgiveness agreement in writing.
Also, a short sale is a relief of and may be treated as income for tax purposes. A lender who forgives a debt must submit a 1099 form to the IRS indicating the amount the borrower has been forgiven. (Note: The NATIONAL ASSOCIATION OF REALTORS® supports proposed legislation that would change this tax law.)
Different lenders have different short sale department names, so contacting the person who has the authority to authorize a short sale on behalf of the lender may require some tenacity. The appropriate department may be called the loss mitigation, work-out, foreclosure, loan modification or loan reinstatement department. To accomplish a short sale, the seller must convince the lender that it will fare better by agreeing to a sale for less than the outstanding loan amount. A short sale may involve more documentation than the original loan application since the seller must “reverse qualify” and prove that the seller is financially incapable of paying the loan.
Purchase Contract Considerations
The purchase contract in a short sale must be contingent upon a short sale agreement acceptable to both the lender and the seller. AAR is currently working on a short sale contingency clause to add to the Additional Clause Addendum or a separate form to address short sales. In the meantime, the following short sale contingency clause may be used as a guide:
CONTINGENT UPON ACCEPTABLE SHORT SALE AGREEMENT: Buyer acknowledges that Seller owes more for the Premises than the purchase price and the Premises are encumbered by a loan(s) in excess of the purchase price. Therefore, this Contract is contingent upon an agreement between the Seller and Seller’s lender(s), acceptable to both, to sell the Premises for less than the loan amount(s). In the event that Seller and Seller’s lender(s) are unable to reach an acceptable agreement, this Contract shall be deemed cancelled and all Earnest Money shall be returned to Buyer. Seller is advised to obtain legal advice regarding the terms of any such short sale agreement with lender(s) and professional tax advice regarding the tax implications of any such sale.
However, the listing agent and the buyer’s agent should consult with their brokers or managers before drafting a contract in a short sale transaction or using the foregoing clause because there are other issues that should be addressed.
Brokerage Commission Considerations
A lender may demand that the real estate brokers in the transaction reduce their commission as a condition to any short sale agreement. However, the brokers cannot be forced to reduce the agreed upon commission, even if the lender refuses to agree to the short sale unless the brokers do so. A.A.C. R4-28-1101(D) states:
A licensee shall not allow a controversy with another licensee to jeopardize, delay, or interfere with the initiation, processing, or finalizing of a transaction on behalf of a client. This prohibition does not obligate a licensee to agree to alter the terms of any employment or compensation agreement or to relinquish the right to maintain an action to resolve a controversy. Therefore, even if the transaction will not close unless the brokers agree to reduce their commission, the brokers have no duty to do so.
Similarly, if the listing broker agrees to reduce the listing commission, the buyer’s broker’s commission is not affected by the listing broker’s agreement. Unless the buyer’s broker also agrees to reduce his or her commission, the listing broker is obligated to pay the buyer’s broker the amount of commission offered in the MLS, regardless of any agreements between the listing broker and the seller or lender.
Also, the purchase contract should not be used to address commission issues even in short sales. Any commission agreements should be handled by separate signed writings to avoid misunderstandings, disputes or potential violations of either the Commissioner’s Rules or Article 16 of the REALTOR® Code of Ethics.
Consult With Your Broker or Manager
Short sales can be very complex and risky transactions for everyone involved. Unless you are confident in your ability to handle such a transaction alone, consult with your broker or manager for advice and guidance.
Thanks to Martha Appel, Jerome King, James Tsighis, and Mark Ross for their input on this subject.
You have no business doing a short sale unless… You know what you are doing
You have no business doing a short sale unless...
You know what you are doing. And how do you know if you know what you are doing? Well, for starters, make a diligent effort to qualify your competency and knowledge on the subject of short sales by honestly answering the following questions:
DEFINITION: Can I define a "short sale" to my client seller or buyer? Can I communicate it clearly? How do I know if my client understands what has been communicated? Can I prove it?
Do I know the difference between a potential short sale, pre-foreclosure and a foreclosure? Do I know how to explain and distinguish a short sale from other "normal" transactions?
PROCESS: Do I know the process involved in a short sale transaction? Am I able to provide a detailed written step by step procedure of what will transpire? Do I know what documents will be required by a lender? Do I know if those documents will be the same or different if there is more than one or two lenders involved? Have I anticipated extraordinary and frustrating circumstances related to working with a lender such as: finding the right decision maker; getting phone calls returned timely or even at all; experiencing inordinate time delays for lenders response to an offer; Am I capable of educating my clients to make sure they understand upfront all the delays and potential difficulties that await them?
REMEDIES: Am I familiar with other remedies that may be explored before I promote the short sale alternative? Can I name them? And if so what are they? Do I have a list of resources for my clients to view to help educate them in this endeavor? Have I spent enough time familiarizing myself with these resources to know which may be helpful and which may be harmful to my clients? Do I know how a short sale will impact my seller’s credit rating? Do I tell my client or do I refer that conversation to my clients’ CPA or attorney?
SEMINARS: Have I attended more than one seminar on short sales which focuses my learning on how to assist my client rather than how I can make "a buck" on their misfortune? What will it take for me to feel competent to perform a short sale for my buyer or seller client?
LAWS: Have I become familiar with recent changes in the law that affects potential deficiencies as a result of a short sale? What am I obligated to disclose to my seller or buyer? What are the consequences for working outside of my area of competency? What liability and confidentiality issues occur in a short sale transaction? What are the serious adverse legal, tax and economic consequences in a short sale?
FORMS: Have I read, studied and understood the content of state forms available for listing a potential short sale or selling a short sale property? Do I have a detailed checklist and time line for the documents needed in a short sale?
NEGOTIATIONS: Am I aware that my fee may be negotiated downward in a short sale transaction? Do I know how to handle this negotiation and how it may impact a cooperating broker’s compensation? Am I familiar with MLS requirements on inputting a listing agreement and reporting a short sale? What happens when a lender insists on paying a reduced fee to make the short sale work? Are all short sales "as-is"? How are repairs paid for and handled? What happens when a lender requires the owner to keep the property on the market, even after the owner and buyer have agreed to the terms of a proposed purchase contract? Who is really in control of the short sale transaction? Absent legal counsel representation on behalf of the seller is it my job to negotiate with the lender or that of my seller? Do I have the temperament and stamina to withstand the financial and emotional stress my clients’ are experiencing? How do I protect and preserve the best interests of my client, myself and that of my company?
Now that you’ve had a chance to silently address some of these questions to qualify your competency, how are you feeling about taking on the short sale challenge? If you’re still unsure, lease just "don’t do it" and expose yourself and your clients to unnecessary liability and potential litigation in the future. Statutory obligations aside, pursuing something you know little about can be a very costly to you and detrimental to your clients. Be smart. Do the right thing. Refer your client to someone who is an expert at short sales.
On the other hand if you’re feeling somewhat confident and sense you can handle whatever comes your way because you’re a fast-study or simply because you really need the money, just "don’t do it" unless you discussed it first with your broker. See if they want to support you. Find out what they know about short sales. Ask them if they have the expertise to supervise you; to monitor every step of this unique process. If your broker is unwilling or unable to help you ask them to recommend someone in your firm who may agree to mentor you for a reasonable fee. Make sure that person, if another agent, has done multiple (more than five) short sale transactions and/or is someone who is capable of sharing their expertise such as an Office Manager or Sales Manager.
June 3, 2008 by James J. Tsighis, GRI, CRS, CRB, ABR, e-PRO, Master Real Estate Society,
TAR Forum
You know what you are doing. And how do you know if you know what you are doing? Well, for starters, make a diligent effort to qualify your competency and knowledge on the subject of short sales by honestly answering the following questions:
DEFINITION: Can I define a "short sale" to my client seller or buyer? Can I communicate it clearly? How do I know if my client understands what has been communicated? Can I prove it?
Do I know the difference between a potential short sale, pre-foreclosure and a foreclosure? Do I know how to explain and distinguish a short sale from other "normal" transactions?
PROCESS: Do I know the process involved in a short sale transaction? Am I able to provide a detailed written step by step procedure of what will transpire? Do I know what documents will be required by a lender? Do I know if those documents will be the same or different if there is more than one or two lenders involved? Have I anticipated extraordinary and frustrating circumstances related to working with a lender such as: finding the right decision maker; getting phone calls returned timely or even at all; experiencing inordinate time delays for lenders response to an offer; Am I capable of educating my clients to make sure they understand upfront all the delays and potential difficulties that await them?
REMEDIES: Am I familiar with other remedies that may be explored before I promote the short sale alternative? Can I name them? And if so what are they? Do I have a list of resources for my clients to view to help educate them in this endeavor? Have I spent enough time familiarizing myself with these resources to know which may be helpful and which may be harmful to my clients? Do I know how a short sale will impact my seller’s credit rating? Do I tell my client or do I refer that conversation to my clients’ CPA or attorney?
SEMINARS: Have I attended more than one seminar on short sales which focuses my learning on how to assist my client rather than how I can make "a buck" on their misfortune? What will it take for me to feel competent to perform a short sale for my buyer or seller client?
LAWS: Have I become familiar with recent changes in the law that affects potential deficiencies as a result of a short sale? What am I obligated to disclose to my seller or buyer? What are the consequences for working outside of my area of competency? What liability and confidentiality issues occur in a short sale transaction? What are the serious adverse legal, tax and economic consequences in a short sale?
FORMS: Have I read, studied and understood the content of state forms available for listing a potential short sale or selling a short sale property? Do I have a detailed checklist and time line for the documents needed in a short sale?
NEGOTIATIONS: Am I aware that my fee may be negotiated downward in a short sale transaction? Do I know how to handle this negotiation and how it may impact a cooperating broker’s compensation? Am I familiar with MLS requirements on inputting a listing agreement and reporting a short sale? What happens when a lender insists on paying a reduced fee to make the short sale work? Are all short sales "as-is"? How are repairs paid for and handled? What happens when a lender requires the owner to keep the property on the market, even after the owner and buyer have agreed to the terms of a proposed purchase contract? Who is really in control of the short sale transaction? Absent legal counsel representation on behalf of the seller is it my job to negotiate with the lender or that of my seller? Do I have the temperament and stamina to withstand the financial and emotional stress my clients’ are experiencing? How do I protect and preserve the best interests of my client, myself and that of my company?
Now that you’ve had a chance to silently address some of these questions to qualify your competency, how are you feeling about taking on the short sale challenge? If you’re still unsure, lease just "don’t do it" and expose yourself and your clients to unnecessary liability and potential litigation in the future. Statutory obligations aside, pursuing something you know little about can be a very costly to you and detrimental to your clients. Be smart. Do the right thing. Refer your client to someone who is an expert at short sales.
On the other hand if you’re feeling somewhat confident and sense you can handle whatever comes your way because you’re a fast-study or simply because you really need the money, just "don’t do it" unless you discussed it first with your broker. See if they want to support you. Find out what they know about short sales. Ask them if they have the expertise to supervise you; to monitor every step of this unique process. If your broker is unwilling or unable to help you ask them to recommend someone in your firm who may agree to mentor you for a reasonable fee. Make sure that person, if another agent, has done multiple (more than five) short sale transactions and/or is someone who is capable of sharing their expertise such as an Office Manager or Sales Manager.
June 3, 2008 by James J. Tsighis, GRI, CRS, CRB, ABR, e-PRO, Master Real Estate Society,
TAR Forum
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