C.A.R. MLS Policy Committee Short Sale Compensation – Work Group Report and Recommendations
This Issues Briefing Paper is for Study only and has not been approved by the MLS Policy Committee, Executive Committee, or the Board of Directors.
WORK GROUP MEMBERS:
Mark Marquez, MLS Vice Chair, Weichert Realtors Elite (San Diego) Bruce Engels, Realty World (Citrus Valley) Era Polly, Era Polly Real Estate (Santa Maria) John Hughes, Guidant Realty (Sacramento) John Pinto, Realty World (Santa Clara) John Schulte, First Team (Inland Gateway) Leslie Kilpatrick, Willis Allen (Coronado) Michelle Bassett, Bassett & Associates (Hemit) Patrick Prince, Keller Williams (Fresno) Sally Han, Alain Pinel (Oakland)
C.A.R. STAFF MEMBER:
Elizabeth Miller-Bougdanos, Senior Counsel, MLS Committee Coordinator
In response to concerns raised by many REALTORS® and AORs/MLSs, a proposal to consider changing the C.A.R. Model MLS short sale rule [7.15.2 Lender Approval Listings] to remove its conditional offer of compensation capability in short sales was presented to the C.A.R. MLS Committee at the May, 2012 C.A.R. meeting. The MLS Committee opted to pass the matter onto a Work Group for further consideration.
Following the May, 2012 C.A.R. meeting, a Work Group consisting of the members identified above (several from distressed property hotspots) was assembled by MLS Committee Leadership. The Work Group studied the Issues Briefing Paper prepared by C.A.R. staff. Prior to our meeting, the Work Group members also conferred with fellow REALTORS® in their respective locales, both on the listing and the buying side of short sale transactions, to discuss the pros and cons of the proposal and get feedback. This Work Group met via conference call over the summer. At the conclusion of the meeting, the Work Group unanimously recommended revising the C.A.R. Model MLS Rules to (a) remove the short sale compensation exemption to the unilateral compensation rule, (b) mandate that short sale status be disclosed by participants and (c) place the mandated disclosure into Tier One of the C.A.R. Model Citation Policy.
C.A.R. has been receiving complaints about agents with short sale listings resorting to a variety of ways to make their offers of compensation to cooperating agents appear more generous on the MLS than they actually intend to honor. In these instances, agents are using the MLS short sale commission rule to provide cover for practices that were not intended when the rule was adopted.
C.A.R.’s short sale commission rule (7.15.2 Lender Approval Listings) is one of the only existing exceptions to MLS Rule 7.12 Unilateral Contractual Offer which requires the making of a unilateral and unconditional contractual offer of compensation for all listings submitted to the Service. Rule 7.15.2 allows the listing broker in a short sale to reduce the commission offered in the MLS to the cooperating broker if, in the course of approving the sale, the lender reduces the overall gross commission it pays to the listing broker. The short sale commission rule enables the listing broker to “hedge” his commission offer so that he does not unexpectedly end up owing more to the cooperating broker than he intended in the event of a lender reduction. 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.
C.A.R.’s short sale commission rule pre-dates the current economic downturn. It was adopted to protect listing agents during the previous real estate short sale cycle in the 1990’s when commission arrangements approved by lenders in the short sale environment were unpredictable and left listing agents over-exposed on their commission offers in the MLS. It was thus already in place to govern short sale commissions when the current short sale cycle hit.
It is important to note that under NAR policy, an MLS short sale conditional commission rule allowing a listing agent to reduce commission in the event of such a lender reduction is an allowable –
but not mandatory - provision an MLS can adopt.
As set forth above, the MLS short sale compensation rule was initially put in place in the last market down turn at a time when lenders were being rather unpredictable. Now, REALTORS® seem to report that commission ranges lenders will approve are fairly predictable. However, many have been troubled by manipulation of the short sale commission rule in ways that were not intended. Some listing agents have used it to spike up their commission in the listing agreement to a rate that is beyond the range market forces would typically bear so as to trigger the short sale compensation rule when they know (1) the seller will not be paying the commission as it is a short sale and (2) the lender will reduce it to a market rate. In these instances, a cooperating agent may be unpleasantly surprised to get a lesser commission than reasonably anticipated from the MLS listing.
To illustrate this scenario, using purely hypothetical numbers in a real estate fantasy land, here’s how it plays out: let’s say that market forces bear a gross commission of around 10% in the listing agreement, and short sale listing agent has offered a 5% commission to cooperating agents on the MLS with a 50/50 split of any lender reduction of the gross commission. However, short sale listing agent has written up his short sale listing for an unlikely 14%. Unsurprisingly, lender then reduces commission to 10%. Now listing broker splits the 4% reduction and reduces cooperating broker’s commission to 3%.
Rather than candidly offering a lesser commission amount up front (which listing brokers are perfectly free to do; they can choose an even split or some other apportionment), these listing brokers employ the short sale commission rule to create the appearance of a higher commission offer than they are realistically planning to provide. A cooperating agent may see what looks to be a satisfactory commission offer in the MLS with the representation that the listing broker will offer a 50/50 split of any lender reduction of the gross commission, yet at the end of the transaction, discover that the gross commission, and therefore the lender reduction of it, was unexpectedly high, providing cooperating agent with much lower compensation than the impression listing agent initially created in the MLS.
What can (and cannot) be done to address these increasing instances of abuses of the short sale commission rule?
NAR Policy and Antitrust Law
First of all, it is of utmost importance to understand that NAR policy and the antitrust law on which it is based clearly prohibits the MLS from fixing or regulating commissions in any way. See C.A.R. Model MLS Rule 7.21:
7.21 No Control of Commission Rates or Fees Charged by Participants. The MLS shall not fix, control, recommend, suggest, or maintain commission rates or fees for services to be rendered by Participants. Further, the MLS shall not fix, control, recommend, suggest, or maintain the division of commissions or fees between cooperating Participants or between Participants and non-Participants.
Moreover, the MLS shall not disclose in any way the total commission negotiated between seller and the listing broker. Pertinent NAR policy on Commissions is set forth below:
Division of Commissions Section 5 Compensation Specified on Each Listing:
The listing broker retains the right to determine the amount of compensation offered to other participants (acting as subagents, buyer agents, or in other agency or nonagency capacities defined by law) which may be the same or different. (Amended 11/96) … Note 1: The association multiple listing service shall not have a rule requiring the listing broker to disclose the amount of total negotiated commission in his listing contract, and the association multiple listing service shall not publish the total negotiated commission on a listing which has been submitted to the MLS by a participant. The association multiple listing service shall not disclose in any way the total commission negotiated between the seller and the listing broker.
Sharing prices between horizontal competitors by a trade association poses serious, even criminal, antitrust risk.
Thus, no potential solution to the problem at hand can involve, in any way, MLS disclosure of the total commission negotiated in the listing agreement. This would include a requirement that the split percentage of the total commission be disclosed. For these reasons, tinkering with the existing rule to keep the short sale compensation rule in place but require some type of commission disclosure would be an impermissible option to consider.
Buyer Broker Agreements
Cooperating agents can better protect their end of the commissions by greater use of Buyer Broker Agreements.
Violation of MLS Rules/COE
Cooperating agents who believe they can make a case that listing agent made misleading representations and failed to present true picture can instigate a rules violation hearing. It may be hard to prove; they will need to develop evidence, perhaps show a pattern of reduced inflated rates such that listing agent “should have known” this tactic would be misleading to cooperating agents, or have a seller testify that the contracted rate was disingenuously inflated, or locate a smoking gun email or admission of listing agent that he knew his amount was inflated so he could recover more on the backend. This is not an easy burden, but an avenue of possible relief for a determined cooperating agent.
Removal of the Short Sale Compensation Provision
As already indicated, the Work Group has recommended eliminating the portion of the short sale rule which allows a listing agent to reduce commission offered to other participants in the event a lender approving the sale reduces the gross commission established in the listing contract.
What are the implications of removal? Should the short sale compensation rule be removed, listing brokers will have to stand behind what they offer on the MLS, and if the bank reduces the gross commission, they have to absorb it or renegotiate with the cooperating broker (as in any traditional seller-request of a reduction, there are some ways to do it but the cooperating broker can always say no). Removal of the short sale compensation rule would require listing brokers to better project the likely commission that will be received and go ahead and make a judgment on the amount to offer the cooperating side.
While removal of the rule would help curtail manipulation and abuse of the system, it could also leave listing agents holding the bag in some settings. If a lender ends up reducing the gross commission more than listing broker expected, she could be on the hook to compensate cooperating broker for a greater share than she intended. The result could be one that listing broker considers unfair.
In the end, though, the Work Group concluded that commission ranges lenders will approve have become fairly predictable and that short sale listing agents are generally in a reasonable position to anticipate what to expect, thus greatly reducing the need to maintain the rule. On balance, in evaluating the question of whether maintaining the short sale compensation rule was more helpful – or more hurtful – to members, in light of increasing instances of abuses, the Work Group sided with the latter and presents the below recommendation to the Committee.
WORK GROUP RECOMMENDATION:
That, upon final approval by NAR, C.A.R. Model MLS Rules be revised to (a) remove the short sale compensation exemption to the unilateral compensation rule, (b) mandate that short sale status be disclosed by participants and (c) place the mandated disclosure into Tier One of the C.A.R. Model Citation Policy - as set forth in redline fashion below:
7.15 Estate Sale, Probate,
and Bankruptcy and Lender Approval Listings.
7.15.1 Estate Sale, Probate and Bankruptcy Listings. Compensation offered through the MLS to cooperating brokers on estate sale, probate or bankruptcy listings is for the amount published therein as long as the cooperating broker produces the contract which is ultimately successful and confirmed by the court, if court confirmation is required. In the event the contract produced by the cooperating broker is overbid in court and the overbid contract is confirmed, the original cooperating broker shall receive the amount of compensation specified as "unconfirmed cooperating broker's compensation" or "u.c.b." in the property data profile sheet and on the MLS. For estate sale or probate listings, the compensation offered through the service under these rules and this section shall be considered an agreement as referred to in California Probate Code Section 10165 and will therefore supersede any commission splits provided by statute when there is no agreement. This section contemplates that estate sale, probate and bankruptcy judges have broad discretion and therefore are not intended as a guarantee of a specific result as to commissions in every probate or bankruptcy sale.
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.
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.
[Note: the mandatory disclosure obligation of the new rule is to be placed into Tier One (the least severe level of violations) of the Model Citation Policy as that is where other failure to complete or update listing information offenses are located].