MFR Short Sale Rule Changed

Tuesday 22 July 2008

NAR passes new mandatory short sale rule

In a May, 2008 email Newsletter an article describing the MFRMLS policy regarding compensation for Short Sales was published (“MFRMLS Short Sale Policy”). The National Association of Realtors®, Inc.(“NAR”)has recently made changes to its model short sales rule (the “Model Short Sale Rule”) to be used by multiple listing services (“MLSs”). As a result of NAR’s changes, MFRMLS’ Short Sale Policy must be modified. The important points of the revised MFRMLS Policy are included in this communication, and we have provided links to additional resources that have been provided by MFRMLS attorneys regarding Short Sales.

What is a Short Sale?

The Model Short Sale Rule now defines a short sale 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…” (a “Short Sale Transaction”).

A “Potential Short Sale Circumstance” is one where the listing Broker reasonably believes the listing price or purchase price may not be enough to cover payment of all liens and costs of sale and the seller is unwilling or unable to bring sufficient liquid assets to the closing.

Model Rule Permits Short Sale Disclosure

The Model Short Sale Rule now requires that MLSs “… give participants the ability to disclose to other participants any potential for a short sale…” In other words, an MLS may permit disclosure of a potential short sale, or it may now require such disclosure, but an MLS may not prohibit such disclosure.

Why is it important to disclose a Potential Short Sale Circumstance on the MLS?

Short Sales are a controversial topic, and we understand the opinions regarding how Short Sales should be handled vary widely depending on an individual’s experience and what side of the transaction they represent. The spectrum of opinions within our own membership ranges from disallowing Short Sales in MFRMLS to not implementing policy regarding Short Sales.

MFRMLS was founded to provide an atmosphere of open cooperation where Brokers can easily share listing data and be guaranteed the offered compensation for their participation in a sale. MFRMLS believes that, in the interest of all of our members and their clients, short sales should be permitted to be listed in MFRMLS, and that it is a best practice to disclose Potential Short Sale Circumstances at the earliest possible time in the listing and sale process.

Since the Model Short Sale Rule now allows MFRMLS to do so, MFRMLS has made disclosure of Potential Short Sale Circumstances mandatory.

How to disclose a Potential Short Sale on the MLS

The Model Short Sale Rule states:

“…All confidential disclosures and confidential information related to short sales must be communicated through dedicated fields or confidential “remarks” available only to participants and subscribers.”

If you become aware of a Potential Short Sale Circumstance, MFRMLS’s mandatory disclosure rule has two provisions with which you must comply:

1. The Potential Short Sale Circumstance will be disclosed by selecting the “3RD Party Approval Req” drop down item from the “Realtor Info” field in “Listing Maintenance” in MLXChange.
2. If the “3rd Party Approval Req” drop down item is selected to designate the Potential Short Sale Transaction, one of the following disclosure options must be included in the “REALTOR® Only Remarks” and the “Public Remarks” sections of the listing:
   
   

   a. OPTION ONE: If the listing Broker DOES NOT want to bind the cooperating Broker to acceptance of a reduced commission amount as determined by seller’s lender(s), then the following remarks should be used:

   “Listing price may not be sufficient to pay the total of all liens and costs of sale, and sale of Property at full listing price may require approval of seller’s lender(s).”

   b. OPTION TWO: If the listing Broker DOES want the cooperating Broker to be obligated to accept a reduced commission amount as determined by seller’s lender(s), then the following remarks should be used:

   “Listing price may not be sufficient to pay the total of all liens and costs of sale, and sale of Property at full listing price may require approval of seller’s lender(s), and such approval may be conditioned upon the gross commission being reduced.”

How to Make Offers of Compensation in a Potential Short Sale Circumstance - Offers of Compensation in a Potential Short Sale Circumstance MAY be conditional

Generally, offers of compensation in an MLS are unconditional. The Model Short Sale Rule now permits offers of compensation - in Potential Short Sale Circumstances - to be made conditional upon the approval of a third party - even if the approval is given after execution of a contract for sale and purchase. The Model Short Sale Rule provides that when a Potential Short Sale is disclosed:

“…participants may, at their discretion, advise other participants whether and how any reduction in the gross commission established in the listing contract, required by the lender as a condition of approving the sale, will be apportioned between listing and cooperating participants…”

Thus, in Potential Short Sale Circumstances a listing Broker may state - as an allowed exception to the general rule that offers must be unconditional - that his or her offer of compensation to cooperating Brokers may be adjusted by seller’s lender. The offered compensation, even though conditional, must still be listed as a dollar amount, a percentage, or a combination of both. (It should be noted that it is against MFRMLS Rules and Regulations to discuss compensation in any field other than the designated “Compensation” field and, in Short Sale Circumstances, the “Realtor Only” and “Public Remarks” sections.)

A listing Broker’s ability to pay a cooperating Broker compensation in a Short Sale Transaction which differs from the compensation listed in the MLS will depend upon the listing Broker’s disclosure as follows:

1. The listing Broker may use OPTION ONE to simply communicate and disclose to the cooperating Broker that seller’s lender must approve the contract. If the lender simply approves the contract and the sale is consummated, then the listing Broker is responsible for the compensation to the cooperating Broker as listed in the MLS.
2. The listing Broker may use OPTION TWO to simply communicate and disclose to the cooperating Broker that seller’s lender must approve the contract. If the lender conditions lender’s approval on the commission being reduced, then neither the listing Broker nor the cooperating Broker may be under any obligation to accept the lender’s suggested modification of the commission. In such an event, the contract may not be accepted, no closing would occur, and no commission would be paid to either Broker.
3. The listing Broker may use OPTION TWO to timely communicate and disclose to the cooperating Broker: (i) that seller’s lender must approve the contract AND (ii) that lender may condition lender’s approval on the gross commission being reduced. If the listing Broker uses OPTION TWO:
   
   

   a. BUT DOES NOT disclose to the cooperating Broker how that reduction will be apportioned between them, then upon a sale being consummated the listing Broker could be obligated to pay the cooperating Broker the compensation as listed in the MLS;

   b. AND ALSO discloses to the cooperating Broker how that reduction will be apportioned between them, then a sale could be consummated and the listing Broker would be obligated to pay the cooperating Broker ONLY the apportioned share of the reduced compensation. Thus, a listing Broker who wants to bind the cooperating Broker to accept a reduced commission amount - as determined by seller’s lender(s) in a Potential Short Sale Circumstance - must do two things:

   (1) The listing Broker must use the Option Two disclosure in the listing;

   AND

   (2) The listing Broker must disclose to cooperating Brokers how any reduction in the gross commission will be apportioned between listing and cooperative Brokers. If the listing Broker does not make this disclosure in the listing, then the manner of apportionment must be made to the cooperating Broker prior to the cooperating Broker producing an offer of purchase.

The following are examples of provisions which may be used to disclose the manner of apportionment:

• “…any adjustment will be split between the listing Broker and selling Broker [proportionally / in the same proportion as the gross commission bears to the initial offer of compensation]
• “…any adjustment will be split __% by listing Broker and __% by selling Broker
• “…any adjustment will be shared equally
• “…any adjustment will be borne solely by listing Broker [up to a maximum of $______ and any excess will be split/shared________________]
• “…any adjustment will be borne solely by selling Broker [up to a maximum of $______ and any excess will be split/shared________________]

IF THE LISTING BROKER ELECTS NOT TO DISCLOSE TO A COOPERATING BROKER HOW ANY REDUCTION IN THE GROSS COMMISSION WILL BE APPORTIONED BETWEEN THE BROKERS, THEN AT CLOSING THE LISTING BROKER WILL BE OBLIGATED TO PAY THE COOPERATING BROKER THE COMPENSATION STATED IN THE LISTING.

The full language of the Short Sale Listings rule (Article 4.1-1C) can be found in the MFRMLS Rules & Regulations»

Guidelines for Handling a Short Sale

MFRMLS has compiled a comprehensive guide that addresses the nuances of handling a Short Sale for both listing agents and buyer’s agents.

Pending Status of Short Sale Properties

Once a contract has been signed for a property in a Short Sale Transaction, even if the contract is subject to approval by a court, lender, or other third party, the status of the property listing must be changed to "Pending" within two business days. Because short sale properties may be more likely to fall through, we understand the temptation to keep a listing as "Active," but this does a grave disservice to your fellow real estate professionals that may continue to recommend your client's property, unaware that the property is under contract.

Disclosure of Short Sale Issues to Buyer

MFRMLS attorneys have created a “Disclosure of Short Sale Issues to Buyer” agreement that describes the terms and conditions that a buyer can expect to encounter when they place an offer on a property in a Short Sale Transaction.