Information about the economy and the real estate market surrounds us. Distressed sellers and properties are still abundant. And while many REALTORS^® have endeavored to assist these sellers and work with buyers interested in purchasing them, distressed home sales are often complicated.

The following questions have been recently submitted to the Wisconsin REALTORS^® Association in regards to distressed sales.

Disclosure of short sale 

The broker is listing a home and found out it might be going into a short sale. How should a broker let people know about a potential short sale? 

On one hand, as the agent of the seller, the broker does not want to compromise the seller’s chances of getting the best price possible for a home by disclosing the seller’s distressed condition too early. On the other hand, Wis. Admin. Code § RL 24.07(2) requires licensees to promptly disclose material adverse facts in writing to all parties to the transaction. Failure to disclose may lead to licensee liability. A transaction that might be a short sale may fall more squarely under § RL 24.07(3), which provides that a licensee is practicing competently when the licensee discloses to the parties in writing the information suggesting the possibility of a material adverse fact, recommends that the parties obtain expert assistance and, if directed by the parties, drafts appropriate contingencies to address this matter.

The fact that the transaction may be subject to lender(s) approval and apparently will not be able to close without such approval falls within the category of information that may be stated factually to buyers. If it is disclosed that lender approval will be needed, then the appropriate contingencies can be included in the offer to purchase for the protection of both the seller and buyer. 

MLS offer of compensation and short sales 

What can a listing broker do to protect against the lender in a short sale transaction requiring a reduction of commission as a condition of approving a sale of an MLS-listed property? Can the listing broker simply use the phrase, “Call for details?” 

Pursuant to the policies and procedures of the National Association of REALTORS^®, Multiple Listing Services cannot publish listings that do not include an offer of compensation expressed as a percentage of the gross selling price or as a definite dollar amount. In addition, they cannot include general invitations by listing brokers to other participants to discuss terms and conditions of possible cooperative relationships.

Through the MLS, listing brokers have the ability to disclose the possibility of a short sale to potential cooperating brokers. A short sale is defined in the MLS rules as a transaction where the sale price is insufficient to pay the total of all liens and costs of sale and the seller does not bring sufficient liquid assets to cure all deficiencies to the closing.

MLSs may, as a matter of local discretion, require listing brokers to disclose potential short sales when they know a transaction is a potential short sale. In any instance where a listing broker discloses a potential short sale, the listing broker may, as a matter of local discretion, also be permitted to communicate to other participants 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 brokers.

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.

Fannie Mae and Freddie Mac commission policies 

Can Fannie Mae and Freddie Mac loan servicers require brokers to reduce the listing commission as a condition of short sale approval? 

In February 2009, Fannie Mae reconfirmed its short sale commission policy and established a process for REALTORS^® to follow if issues arise (Fannie Mae sent Announcement 09-03). Loan servicers were instructed not to negotiate commissions on short sales below the amount negotiated by the listing agent unless the commission exceeds 6 percent. NOTE: Private mortgage insurance companies and second lien holders may still seek to reduce commissions.

If a REALTOR^® believes a servicer of Fannie Mae loans are unaware of this policy or believes it is not binding, Fannie Mae has established a process for NAR members when short sale commission issues arise.

Step 1: Determine whether the loan is owned or guaranteed by Fannie Mae. Only the holder of the loan is allowed to do this, so do so in the presence of your client or after obtaining your client’s written permission. Visit www.fanniemae.com/loanlookup or, if you do not have convenient Internet access, call 1-800-7FANNIE (8 a.m. to 9 p.m. Eastern Time)

Step 2: If the servicer is unaware of or disagrees with the policy, provide a copy of Announcement 09-03 to the servicer and negotiate an appropriate commission based on the listing agreement – up to 6 percent. (Announcement is available at: www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2009/0903.pdf.)

Step 3: Contact Fannie Mae at 1-800-7FANNIE or Resource_center@FannieMae.com if the dispute is not resolved directly with the servicer. Be prepared to provide the property address, name of owner and Fannie Mae loan number (if available).

On August 20, 2009, Freddie Mac confirmed in writing that its servicers are not allowed to renegotiate short sales commissions (Freddie Mac Single-Family Seller/Servicer Guide Bulletin 2009-22). According to the policy, as a condition of the servicer’s acceptance of a short sale offer, servicers cannot renegotiate the sales commission below the amount agreed to by the real estate broker and the seller/borrower. However, if the negotiated commission exceeds 6 percent, servicers are required to limit it to 6 percent.

This Freddie Mac policy is consistent with Fannie Mae’s policy. Again, private mortgage insurance companies and second lien holders may still seek to reduce commissions.

“As-is” short sales 

It seems that each short sale is “as-is.” Is there something that the buyer can include in the offer to purchase to address this possibility? 

WRA Addendum SSO includes optional provisions that may be used if the offer is “as-is.” In such cases, the buyer must be sure to include all necessary inspection and testing contingencies in the offer. The buyer may also decide whether to implement the inspection and testing contingencies right away or wait for lender approval before investing time and money. This is a catch 22 decision for the buyer because the lender will invariably want a speedy closing once lender approval has been given. Addendum SSO (2009) is available in hard copy from the Wisconsin REALTORS^® Association and on zipForm^®.

Short sale secondary offers 

The broker received several offers on a property that is subject to a short sale. All offers included Addendum SSO and a lender approval contingency. The broker believed that a seller could accept all offers as primary offers as long as they were contingent on lender approval, and then let the lender decide which one to select. The seller accepted and approved multiple offers in primary position. Now selling agents are calling the broker and asking how the seller could accept multiple offers in primary position. The agents are concerned that there are now four clients in primary position that are being “strung along” by the lender. Under normal circumstances, there would be one primary offer and multiple secondary offers, but in this case what should the broker do? 

It is very risky and ill-advised for a seller to accept more than one offer to purchase as a primary offer. Standard of Practice 1-7 to Article One of the Code of Ethics provides in relevant part, “REALTORS^® shall recommend that sellers… obtain the advice of legal counsel prior to acceptance of a subsequent offer except where the acceptance is contingent on the termination of the pre-existing purchase contract...” Clearly the safest practice from the seller’s standpoint is to make subsequent offers secondary offers – with each one also subject to the approval of the seller’s lender for a short sale. The seller can submit the offers to the lender at the same time for the lender’s consideration.

Accepting all of the offers in primary position is possible because they are all contingent upon lender approval from the same lender and the lender is only going to approve one offer. However, this may mislead buyers and their agents and could lead to multiple approved primary offers if communication errors are made by the lenders or agents and more than one buyer comes to believe the lender approved his or her offer. If a group of offers are all accepted as primary subject to lender approval, each individual buyer and agent may also believe that their offer is primary. At minimum, all buyers must clearly understand that there is a “pool” of primary offers and the fact that any particular offer is accepted as primary means nothing. There is no advantage because they are all similarly positioned. It would be prudent to alert all parties, in writing, that there are multiple accepted offers with the same bank approval contingency.

Although highly improbable, a bank could approve more than one offer. In that instance the seller would be obligated to sell the property to more than one buyer.

Accepting all of the offers as primary may also place the seller at risk for a breach of contract claim. Each of the offers is accepted with the parties agreeing to act in good faith and with due diligence to complete the terms of the contract. Any one of the primary buyers could allege that the seller cannot in good faith attempt to negotiate a short sale to meet the terms of their contract given there are multiple primary offers.