Introduction

Short pay transactions or "short sales" are transactions where the seller owes more on his or her home than the home is worth.  Probate sales are transactions where the final disposition of the property may be subject to court approval. The distinct nature of these listings enable a third-party lender or a court to intervene in the terms of sale and ask a listing broker to reduce the gross commission offered on the property.  As such, NAR policy gives local MLSs the choice to allow listing brokers to condition their offers of compensation on lender or court approval for these types of transactions.  They are the only allowable exceptions to NAR's policy prohibiting conditional offers of compensation in the MLS.

This legal article addresses the rules for MLSs that choose to allow conditional offers and those that do not allow conditional offers.

Q 1. May a lender request that the brokers reduce their compensation as a condition of approval of a short pay transaction?

A Yes. Just like any principal in a transaction may request that the brokers reduce their compensation, a lender can also request the brokers to reduce their compensation in a short pay transaction. However, since the lender is not a party to the listing agreementbetween the seller and the listing broker, the listing broker is not obligated to reduce or modify his or her commission agreement with the seller. Even so, since the lender's approval is typically required in a short sale for the transaction to be successful, the brokers have a business decision to make as to whether or not to reduce or modify their compensation in order to close the transaction.

Q 2. If a listing broker wants to make the compensation offered to the cooperating broker through the MLS contingent on a lender's approval, can he or she do so?

A It depends on whether your local MLS allows conditional offers of compensation.  NAR policy gives local MLSs the choice of allowing listing brokers to condition their offers of compensation in the case of short sales on lender approval, or in the case of probate sales on court approval. (See NAR Handbook on MLS Policy, principally Section G on Commission/Cooperative Compensation Offers, section 1, note 2.)C.A.R. has adopted such an allowanceinto the C.A.R. Model MLS Rules--see section 7.15 on Estate Sale, Probate, Bankruptcy and Lender Approval Listings--however, since NAR does not mandate that all MLSs adopt such a policy, you should consult your local MLS prior to submitting a listingwith a conditional offer of compensation.

Q 3.  What information is the listing broker required to communicate to potential cooperating brokers in order to condition an offer of compensation on lender or court approval ?

A Under the N.A.R. policy statement, compensation payable to a cooperating broker may be reduced upon the request of a lender or court if the following information is disclosed by the listing broker through the MLS prior to presentation of an offer by the cooperating broker: 1) the fact that gross commission is subject to court or lender approval (e.g. "short sale-subject to lender approval"; and 2) the potential reduction in compensation payable to the cooperating office (e.g. "potential reduction of 1%"), or the method by which anyreduction in compensation will be allocated between the listing and cooperating brokers (e.g. "any reduction to be absorbed by cooperating broker").

Q 4. Is there any specific language that is required by the NAR policy, and where should information regarding conditional compensation be displayed in the MLS?

A NAR has provided guidance only as to what information must be made known to cooperating brokers. As long as the nature of the conditional offer is communicated clearly, the specific language anddisplay will largely be determined by the MLS and local practice. It is likely the required information will appear either in the "remarks" section or in a dedicated field created by the MLS. For example, the remarks may contain language such as "Short Sale. Compensation subject to lender approval. Any reduction split 50/50." The MLS may also choose to create a separate field which allows a listing broker to note that a particular listing is a short sale; compensation is subject to lender approval; and the allocation of any requested reduction. This could be accomplished by text or some form of code (e.g. "SS-75/25" means the listing broker will absorb 75% of the reduction). Keep in mind the allocation of any requested reduction is at the sole discretionof the listing broker. However, the cooperating broker must always be given notice of any conditions on the offer of compensation.

Q 5.  What if your local MLS does not allow conditional offers of compensation?

A The listing broker will be obligated topay the compensation offered, even if a request is made by a lender to reduce the gross commission. If a lender does make such a request, the listing broker can ask the cooperating broker to accept a reduced commission; however, under the C.A.R. Model MLS Rules (7.16), the cooperating broker is not obligated to accept a reduction. If the cooperating broker refuses to work with the listing broker in reducing his or her part of the compensation, the matter is similar to any other sale where the principalscannot agree on price and they ask the brokers to reduce their commissions. The listing broker then has a business decision to make as to whether or not to take the entire cut in commission or whether to refuse to take the cut, thereby making it unlikelythe sale will go through. Therefore, the listing broker cannot assume the cooperating broker will take a proportionate cut of what has been offered in the MLS.

Q 6. If the listing broker has indicated in the MLS that it is a short sale due to the lender's involvement in approving the sale, what can a cooperating broker do to protect against getting a minimal amount of compensation?

A One option is for the cooperating broker to enter into a buyer/broker compensation agreement. This will assure that thecompensation will come from either the buyer or what is offered through the MLS, or a combination of both. Another option is for the cooperating broker to communicate to the listing broker the minimum floor to which they will agree. It is best to confirmthis in writing and in advance.

Q 7. How can brokers resolve their disputes if it is unclear whether the brokers agreed to modify their commission agreement in a short pay transaction?

A Such disputes can be submitted to local Association mediation orarbitration in accordance with local rules.