C.A.R. Issues Briefing Paper
October 16, 2008
MLS/Computer and Business Technology Committee
Additional Information on MLS Rules re REOs and a Proposed Working Definition of “Seller Concessions”
The following is for study only and has NOT been approved by the MLS/Computer and Business Technology Committee, Executive Committee, or the Board of Directors.
REOs, REOs, REOs – unfortunately, these properties still dominate our landscape and will continue to do so for the near future. This informational piece will build on previous discussions pertaining to MLS compensation based on the “net selling price.”
From all accounts, it appears to be the norm for the lenders/sellers of REO properties to compensate their listing agents based on the “net selling price” rather than the “gross selling price.” Listing agents on these properties then face the dilemma of being paid by the lender based on the “net sales price” or of operating under listing contracts where the lender instructs them to compensate the cooperating broker as a percentage based on “net sales price” but are required by MLS Rules to compensate cooperating agents based on the “gross sales 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).
C.A.R. has previously provided guidance for practitioners about trying to anticipate their differential and base their commission offer accordingly (i.e. a lower percentage offer or the percentage offered minus some fixed dollar amount ex: 3% minus $300). This approach seems to be working for many members.
In addition, NAR has just adopted a new MLS policy option giving MLSs discretionary authority to revise their rules to alter how they allow the offer of compensation to be expressed. It is important to note that while the REO crisis was the impetus for the optional rule change, the change itself is not limited to REO listings.
This new NAR option enables participants, in effect, to 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 (and it is not defined by law or regulation in California), and, to reiterate, this new pay-on-the-net option would not be limited just to REO properties but would be in place across the board.
C.A.R. staff has heard from many grappling with how best to navigate these and related issues and offers the following strategies:
1. If it aint broke don’t fix it. If your MLS and its participants have learned to make adjustments to the way they offer compensation and don’t wish to adopt new compensation rules, then there is no need to do anything. Even if not thrilled with the status quo, but you think the new NAR alternative is worse, then keep going as is.
2. Your MLS could adopt NAR’s new rule but would still have to define “seller concessions.” C.A.R. staff has drafted a tentative “working definition” as follows:
“Seller concessions are non-real estate items of value given or paid by a seller, or by a third party for the seller, on behalf of the buyer. Examples of seller concessions include interest rate buy downs, below-market rate financing; loan discount points; loan origination fees; closing costs paid by the seller or a third party for the buyer; payment of condominium, PUD, or cooperative fees or assessment charges; refunds of (or credit for) the borrower’s expenses; cash credits, home warranties, repairs, absorption of monthly payments; assignment of rent payments; and the inclusion of non-real estate items in the transaction such as down payment assistance, monetary gifts, builder incentives, or personal property given by the seller or any other party involved in the transaction.”
3. Your MLS could adopt NAR’s new rule with a sunset. This is appropriate if there are misgivings about the law of unintended consequences and how such a provision would play out with non-REO properties or in a different market. NAR’s new option would be in place for all listings, and while intended to assist with REOs in the given market, it is unknown what the actual impact on practice would be. The new “minus seller concession” standard would govern compensation offered in all listings. One way to mitigate the impact of this risk would be to adopt the new rule on an interim basis for a fixed time period. Such a sunset clause wouldn’t limit the applicability only to REOs, but it could time the new rule out.
4. If the MLS Committee expresses widespread support for NAR’s new net price option, it could entertain a motion to adopt it (with or without a sunset) as well as the definition of “seller concessions” into the C.A.R. Model MLS Rules.
