Cutting commissions on a short sale has been a hot topic over the past few days. 

My thinking about commissions associated with short sales is that the listing commission should be negotiated up front with seller, listing agent and also seller's mortgage lender who is going to be asked to take a big hit to make the transaction happen.  Let all parties involved agree before any work is started.

How can a seller in a short position agree to pay a listing commission when he knows he can't pay off the mortgage?  I really don't think that is a valid contract.  Agreeing to something that you know you can't perform is fraud. So why would you knowingly enter into such a contract and expect a third party to respect your contract with the seller?

I haven't taken a short sale listing so I really have no idea if a bank will agree on a commission before the listing is taken or not.  But that just seems like the most logical thing to do.  If you can't work out a reasonable commission, then you shouldn't take the listing.

Here is a perspective that might make you see things from the bank's perspective  a little.

Let's say that you take on a short sale and the bank cuts your commission to practically nothing.  Since your listing agreement is not with the seller's bank, but with the seller, there isn't much you can do. You decide to go after your seller for the commission that they agreed to pay you after the closing of the sale that shortchanged you.

Let's say that the seller owns a second car worth $20,000 which just so happens to be what they owe you for your commission. You and the seller agree that the seller will sell the car and give you the proceeds in order to settle your claim against them for your real estate commission. 

They hire an attorney to arrange the sale of the car.  The attorney finds a buyer for the car for $20,000.  This is a very skilled attorney who has a lot of experience and isn't ashamed to charge what he thinks he is worth.  He charges the seller $18,000 for his services which leaves the seller only $2,000.    The seller is $18,000 short on your commission. This is the only asset they have left. 

You think to yourself that the seller is an idiot for paying the attorney $18,000 to sell a $20,000 car which then leaves only $2,000 for them to pay you.  You call the attorney and say that $18,000 is way too much of a fee to charge for selling a car and that the attorney needs to reduce his fee so that your seller has more money to pay you.  The attorney promptly reminds you that you have no right to interfere with the attorney's agreement with the seller.  The attorney has to run his business as he sees fits and it's only up to him how much he charges for his services.  He has the exclusive right to sell that car for the seller and he's not going to cut his fees one penny. 

You tell the seller that the $18,000 in fees to sell a car is way too much to spend and you can show them others who will do it for much less.   This will allow the seller to be able to pay a much bigger portion of the commission that they owe you.  The attorney says that you are illegally interfering with a contract between two other parties.

The seller says that his attorney has worked long and hard to find this car buyer and put together this deal.  His attorney has many expenses he needs to pay to stay in business.  Your seller goes into details about how expensive it is for attorneys to run a business.  The attorney says that the partners in his  firm actually take a big portion of the fee and he, himself, actually ends up with very little.

I guess my point is that a short sale is not a normal real estate transaction and if you choose to participate in it, be aware of what can happen and cover yourself accordingly.  If you can't get the bank to agree to an acceptable commission up front, then decide whether or not you want to spend your time in such a risky situation.