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June 16, 2008 (revised)
 
Copyright© 2008, CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) Permission is granted to C.A.R. members only to reprint and use this material for non-commercial purposes provided credit is given to the C.A.R. Legal Department. Other reproduction or use is strictly prohibited without the express written permission of the C.A.R. Legal Department. All rights reserved.

The dynamics of short sales and REO transactions present distinct challenges to REALTORS®.  This is certainly the case in regard to making offers of compensation or even status changes on these properties in the MLS.  The below information should help all involved better clear the obstacles when placing these listings on the MLS.

Short Sales

Short pay transactions or "short sales" are transactions where the seller owes more on his or her home than the home is worth.  The distinct nature of these listings enable a third-party lender to intervene in the terms of sale and ask a listing broker to reduce the gross commission offered on the property.  
 
Currently, under the CAR Model MLS Rules, short sales or potential short sales are addressed in Rule 7.15.2 Lender Approval Listings.  This short sale commission rule is one of the only existing exceptions to the rule requiring the making of a unilateral contractual offer of compensation (Rule 7.12 Unilateral Contractual Offer).  Rule 7.15.2 allows the listing broker to reduce the commission offered in the MLS to the cooperating broker if the lender reduces the overall gross commission it pays to the listing broker.  This rule enables the listing broker to "hedge" his offer so that he does not end up owing more out to the cooperating broker than is approved by the lender.  In order to receive the protection of this rule, a listing broker is required to publish (a) the fact that the sale and gross commission of the listing is 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.

Other than Rule 7.15.2, the C.A.R. Model MLS Rules do not contain a separate stand-alone disclosure requirement for a listed property's short sale or potential short sale status.  Only if a listing broker utilizes Rule 7.15.2 is such a disclosure mandated.  However, at the May 2008 NAR meetings, NAR adopted a policy that allows a local MLS the discretion to adopt such a stand alone requirement mandating that the status of any reasonably- known short sale be disclosed.   Accordingly, local MLSs would be within NAR policy to adopt such a rule if they see fit.

One other short sale MLS issue that frequently rears its head in this market is when to change the listing status from active to pending or some other intermediate status.  A seller may have accepted a buyer's offer, but the parties then have to wait--often at great length--to hear back from the lender to learn whether the lender has approved the deal.  In the meantime, the lender may require the seller to continue to solicit other offers.  Legally speaking, however, once an offer has been accepted and signed by both buyer and seller, a contract has been formed.  The contract is contingent upon approval of the lender, but there has still been "acceptance" by the parties which is what triggers the requirement to change the status of a listing in the MLS.  While this requirement can be frustrating for the parties in the short sale context, to do otherwise would be misleading, as there is, in fact, an accepted offer in place for the property. 

Most MLSs have developed various subcategories of "active" and "pending" (ex: "active contingent," "pending show for backup," etc.), and they could certainly develop one specific to short sales.  Whatever the status options are in a particular MLS, the key is to create a true picture of the status of the property, and one with an accepted offer in place is not an unencumbered "active." 

REO Transactions

With a proliferation of REO properties on the market, it is important to understand the various compensation options available to licensees when placing these listings on the MLS, including a discussion of a newly permitted optional MLS policy which just came out of the May 2008 NAR meetings.

In the course of handling REO transactions, it is quite common for the sellers of REO properties to compensate listing agents based on the "net selling price" rather than the "gross selling price."  Although a seller may enter into an agreement to compensate a listing broker based on a net selling price, the listing broker cannot currently offer compensation in the MLS based on a net selling price.

The California Model MLS Rules require that the offer of compensation to MLS participants be stated in one or a combination of the following forms:  (1) a percentage of the gross selling price or (2) a definite dollar amount (Rule 7.12 Unilateral Contractual Offer).  The purpose of this rule is to allow cooperating brokers to determine their compensation with reasonable certainty before finding a ready, willing, and able purchaser for the listed property.

A listing broker receiving compensation from a seller based on the "net" but required to offer compensation to cooperating brokers based on the "gross" will need to be cognizant of this difference when making an offer of compensation through the MLS.   One option for the listing broker is to anticipate the amount of likely seller concessions and adjust the offer of compensation in the MLS accordingly.  Let's say, for example, a listing agent has a $500,000 listing she wants to place in the MLS at 3% of the net selling price.  Assuming that the listing agent estimates the seller concessions to be $10,000 and the sales price to be $500,000, she should enter an offer of compensation in the MLS of 2.94% of the gross selling price (i.e. (($500,000 - $10,000) x 0.03)) ÷ $500,000).  Keep in mind that the difference between 3% of a $500,000 gross selling price and a $490,000 net selling price is only $300.  Alternatively, the listing broker could offer compensation in the form of a set percentage of the gross selling price minus a set dollar amount.  Under the scenario set forth above, the listing broker would offer 3% of the gross selling price minus $300.  Either method complies with MLS Rules.

Of course, the gross sales price can be changed during escrow.  If the parties to an agreement wish to restate the purchase contract so that the final sales price is a reduced amount to reflect any seller concessions, and the seller and buyer modify the purchase contract to that effect in writing prior to close of escrow, then the commission will be based on the final contractually agreed-upon sales price at the close of escrow.  To avoid any potential uncertainty regarding this anticipated scenario up front, it would be permissible for the listing broker to state in the MLS remarks or other appropriate section, "Commission is based on the final contractually agreed-upon sales price at the close of escrow."

Notwithstanding all that set forth above, at its recent May 2008 Meetings, NAR adopted a new MLS policy option directly related to the "net" vs "gross" dilemma.  NAR has now given MLSs discretionary authority to revise their rules to enable participants to also offer compensation through the MLS based on the net sales price in the following form: "a percentage of the gross sales price minus buyer upgrades (new construction) and seller concessions (as defined by the MLS unless defined by state law or regulation)."  No definition of seller concessions was provided by NAR, so it would be up to an MLS to define the meaning.  While it was with REOs in mind that this new option was created, if adopted by an MLS, offering commission in this format would be allowable for any type of transaction.

Finally, status change issues also occur in the REO context, although with a different twist from that occurring with short sales.  With REOs, sometimes the lender/seller communicates its intent to accept buyer's offer to buyer's agent verbally or via email but then a long period passes before the lender/seller actually provides its signed written acceptance.  In the meantime, the parties commence processing the transaction.   While there is no actual signed written acceptance yet in place, the parties are proceeding as if there were. 

What to do?  Signed written acceptance is the triggering event for changing a listing's status from "active" to some form of "pending," so until a formal signed document is provided, this has not yet occurred.  However, depending on the circumstances, accuracy and true picture concerns could arise if the listing agent makes no adjustment to the listing in the MLS.  If so, the listing agent should add information about the listing's current standing in the agent remarks or other relevant section of the MLS.

This legal article is just one of the many legal publications and services offered by C.A.R. to its members. For a complete listing of C.A.R.'s legal products and services, please visit C.A.R. Online at www.car.org.

Readers who require specific advice should consult an attorney. C.A.R. members requiring legal assistance may contact C.A.R.'s Member Legal Hotline at 213.739.8282, Monday through Friday, 9:00 A.M. to 6:00 P.M. C.A.R. members who are broker-owners, office managers, or Designated REALTORS® may contact the Member Legal Hotline at 213.739.8350 to receive expedited service. Members may also fax or e-mail inquiries to the Member Legal Hotline at 213.480.7724 or legal_hotline@car.org. Written correspondence should be addressed to:

California Association of REALTORS®
Member Legal Services
525 South Virgil Avenue
Los Angeles, California 90020

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The information contained herein is believed accurate as of June 16, 2008. It is intended to provide general answers to general questions and is not intended as a substitute for individual legal advice. Advice in specific situations may differ depending upon a wide variety of factors. Therefore, readers with specific legal questions should seek the advice of an attorney.