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SHORT SALE LENDER CANNOT REDUCE COMMISSION TO BROKER

One of the great drawbacks to a broker taking on a short sale listing is the fear and often the reality that the short sale lender will demand a reduction in the broker commissions. This has created all sorts of contraptions to make the broker whole.

I have seen contracts that have inflated commissions designed to make the lender reduce it; I have seen deals to have the buyer guarantee the broker commission short fall. There are more and some not yet invented - I wrote about one 2 years ago in BUYER AGENT REMORSE - PREVENT A COMMISSION REDUCTION ATTACK!

This summer a case was decided in Iowa (and reported by the NAR) where the appellate court said the short sale lender could NOT renegotiate the commission and it is worth noting.

The case of Stewart v. All States Quality Foods decided May 29th has specific facts but I have seen this type of scenario several times and it is worth noting if you are a short sale broker.

In simplistic summary (you can read the case by the link above and it is not too complicated to understand even on a first read!), the broker brought a contract to the lender and in the contract the lender knew that the seller was to get a commission of 10%. The lender said it needed more money and made a counter offer of a specific amount. The broker got that counter offer. Then the lender said it needed to net more and the broker offered to cut its commission to help get part of the way to that number. The lender balked and denied the sale.

The broker sued on its contract for the commission based on bringing a buyer ready, willing and able who met the counteroffer price asked by the lender. The legal theory that won was interference with advangeous business releationship - the listing agreement.

The key issue here is that the lender actively participated in the transaction by making the counter offer request and it being met. Also important is the knowledge by the lender of the existing listing agreement.

In all short sales that we handle we provide a copy of the Exclusive Listing Agreement to the lender, so knowledge in our situations would be met. If the lender makes a counteroffer then the lender is bound to accept it or it has violated at least one legal theory - if you are in Iowa. However the law and doctrines cited by the Iowa appellate court are in comport with many other states caselaw, Florida included.

Be aware of the rights and obligations of the parties to a short sale - especially when the lender oversteps its position as a lender and becomes an active participant.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com New Website www.Florida-Counsel.com.

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TABLE OF CONTENTS - SHORT SALE AND LOAN MODIFICATION ARTICLES

Posted by Richard Zaretsky, Florida Real Estate Attorney on 10/12/2009 08:25 PM

Comments (60)

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Originally posted at: Z's Legal Short Sale Blog: SHORT SALE LENDER CANNOT REDUCE COMMISSION TO BROKER

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60 Comments on SHORT SALE LENDER CANNOT REDUCE COMMISSION TO BROKER

OCT

2009

Richard,

I think what we see is the activism of servicers or subcontractors negotiators who do it without the Lender even asking for that, or this is just my unsubstantiated feeling?

OCT

2009

Richard,

It won't take more than a case or two and lenders will know what they can't do and just turn down all offers where the commission is to high! All of the indignant gougers will scream how they're entitled to the bank's money.

All of this could end if the NAR or local boards took a stance requiring the banks to enter into the listing agreement when project net is insufficient to pay the liens.

You can't list community property with out all parties agreeing, it's only a small step to requiring the lender to join in when the owners can't or won't pay off the lender/s!

Bill

Richard, I saw this decision earlier. Looks like the good guys won this one. The way some of these lenders negotiate is beyond comprehension.

Richard. I battle hard for my commission and almost always get it through. I have been told many times that I had to reduce my commission and I just say "no" and continue on.

The court ruling is interesting and makes complete sense. FannieMae set good guidelines. Now if the lenders would just follow suit agents would be much more inclined to list and sell short sales.

Of course all of this is moot if we can't get the lenders to speed up the process. Short sales are getting ridiculously slow.

This would be a good article for the ShortSaleSuperStars site

Bill - Interesting concept to have the lender agree IN ADVANCE to the listing agreement.

BBT - Will do.

I believe it is now against Fannie and Freddie rules to reduce a short sale commission.

Thank you for the research and the information.

We see it often! 6% is a very common commission rate here but lenders always want to cut it back to 5%. Personally I think 6% should be the minimum given the extended marketing times and often times work that does not end in a sale. My understand was not all lenders are subject to the Fannie and freddie rule.

Richard - Good info for sure. Trying to squeeze the broker has been the low hanging fruit in the past.

I too wish they would go ahead and allow 6% commissions as the Freddie and Fannie loans do.

J. Phillip - I believe the 6% holds true only if Fannie or Freddie originated the loan. It is my understanding that about 1/3 of loans would not be bound to those guidelines. Honestly I have still had bank negotiators try to reduce the commission and play dumb when I told them they couldn't because the loan was held by Fannie or Freddie. Maybe they didn't know, maybe they did - the bottom line was unless I had done my homework they were going to try to reduce my commission.

I used to think the bank would walk if we didn't bow to them....no more. Not one bank has walked when I refused their reduction tatics - what the seller and I have agreed to for commission is more than fair for the months of work I put into getting one of these deals closed, the bank can pay it.

I see daily on the MLS here in Maine, brokers saying that brokers commission may vary depending on the lender. Interesting...

Richard - I read the case. What argument could a short sale lender use, if any, then to limit what they paid for commission? Could they not say they "would cover x percent" and the homeowner should cover the rest? Does this case say that the fact they became a "participant" they accepted the commission in the listing agreement?

The short sales Ive done myself and with other brokers have sometimes been reduced a bit, I never thought to say no because I didnt want to risk it for my clients. Next time I will remember this post.

I agree with Bill (#2), I can't believe that lenders wouldn't want to be on that listing. If anything, just for the fiduciary relationship with the listing agent. I currently have a short sale listing and an interested buyer client on the deal. The seller cares little about the offered terms and the lender isn't my client. Makes dual agency a little easier. However, I am prepared for the lender to request my commission cut, especially if I double end.

Good news

Thanks for the information I have always known that they are not the principle and should not be able to change the commission.

Nothing like working your keester off only to get to the finish line and have your paycheck axed! Good to hear that someone is on the watch for these infractions!

I'm so glad to see this featured. Short sale listing agents need this ammunition (at least on the loan sources involved) in order to encourage participation from selling agents.

I've found that most banks state what they pay on their websites or when I calll the REO departments to get pre-approval of a short sale I always ask what their commission rates are ahead of time, before I submit any offers so I avoid any commission issues that could arise. Normally what I see is 6% paid for two different agencies and 5% if its dual agency here in Arizona, however there have been a few that only pay 3% for dual agency!!!

Not only are commissions the issue but Ive seen the banks decline a short sale offer and forclose on a home then list the home for less than the short sale offer go figure all those wasted dollars....Costs the banks tons of money to forclose on a home..

Good someone is keeping check on these banks...

Richard: This is ground-breaking ... expensive litigation that may cause the banks to play nice. Paying reasonable and customary commission is "nice." Where would the banks be without all the hard-working agents who bring the buyers? What if we just all said NO! Imagine that!

Richard, This is good news. I've never worked so hard in my life as I have on a short sale, wondering all the time if I'll even be paid. I don't mind working hard but we need some sort of equal playing field. I just wish the lenders would insist that their staff "be nice." The ones I've talked to act like we're enemies. We need to work together to help our clients and customers. The American Dream is turning into a nightmare for too many people.

the biggest fear for me is not the reduction of my commission that is second if anything its the bank allowing the home to go to foreclosure then losing the listing losing the client and the clients are not very understanding when that happens after being patient for months this has happened at least 3 times this year once on my listing and then twice with lisitngs with other brokerages. Most people do not know or realize that many times the banks actually profit by just letting it go to foreclosure and are better off than trying to do a short sale.

Richard - thanks for the information. From now on I will be fighting harder for my commission on short sales!

on my local mls short sales always read "commission split 50% of whatever bank approves" give me a break!

Richard~ Thanks for the ammo!! I am not a high volume agent and a .5 of a percentage point can really affect the bottom line!! With the amount of time we spend working on some of these files...5-6% can seem like a joke!

Take whatever commission the bank allows, sell the damn home and move on. It's not about us. It's about selling your clients home and completing the transaction and getting them out of the jam they're in. 3% or 2.5% or 2% whatever. Do the deal, be done with it and move on. It's funny how no matter what happens in any transaction, it somehow always seem to become about the agent and not the clients. I see it over and over again, and this is just another example. Just my opinion. (also shared by many clients, unfortunately)

Richard

Thanks for your Blog. It was very helpful and interesting. It helped to answer a few questions.

Thanks

Joe

This is just another example of the banks trying to make their own rules. They figure that if no-one challenges them, then it is ok. It is similar to them requiring that they be used for financing on the new home purchase. That goes against the spirit of the anti cohersion documents included in the loan packages. Banks think they are the rule makers, but thankfully, there was a judge that saw it for what it was.

Gosh, it makes me glad we don't have the huge foreclosures that other states do. The few we do have here don't seem to be as difficult as some of the things I read about other states.

Richard... This is great information on short sale commission. Thanks for sharing

In the end is is it about the commission or helping the clients. If we are all to concerned about the commission, then we are putting our own interests before the interest of our client - who possibly wanted to put this ordeal of losing their home behind them.

Remember:( at least in CA) Commissions are not part of the Sales Contract because we as Realtors need to put the interest of our clients before our own.

Great information if you want to fight for your commission. My personal inclination is to help the client resolve their situation as soon as possible. The lost commission is returned in spiritual equity.

Honestly, I haven't had any luck with getting them to pay what is on the listing ticket.

Of course I have tried, brought up Fannie and Freddie and they still say NO.

I just give in for the sake of my sellers, who desperately need to get it off their backs.

I know it is not right....guess I need help. :)

Hi Mr. Zarestsky.

I am curious how this will affect present business in Florida as I am in Tampa Bay. So far many lenders try to be a party to the contract... thus reducing our commission. However my clients who have an attorney have a significant advantage.

~ Lana

I would like to know if anyone has lost a deal over their commission. Has any lender refused 6% and the broker refused to accept the reduction, resulting in foreclosure?

Andrew, ALex and Nikki,

I don't think the post of this post was to gripe about our commission but the power the banks are trying to wield in a transaction. While I will admit they have the power, it is our right to stand up for ourselves.

In the end it is about the client but if you are not paid for your time how long will you be here to take care of that client? The commission is being paid by the bank and that is the ONLY reason they are negiotating on it; if it was being paid by the client the bank would NOT care.

Try seeing if your doctor or attorney is willing to cut his pay because you need him to do so because of your circumstances. Would you ask him to? Why then do you think it is ok to ask the Realtor to cut their commission? If you go on a listing appointment where a seller asks you to cut your commission do you do so? If not, why? You would be helping the client to do so.

So I think we ALL agree it is about the client BUT in the end the agent wants to get paid for their work. If they are devoting more time to short sales than normal sales how long will that continue if the pay is not there. An agent has to exist and that is based upon if they can continue to offer their services for the amount of money they are making. If you think 2% is ok, you must not consider your time to be very valuable as these sales take a lot of time and expertise to complete not to mention frustration. My time and expertise is worth every penny I am paid. How much work do you do that you are not paid for? I would think a fair amount unless you are charging your buyers a fee.

If there is little or no money on a short sale, then who will handle the short sales? Any takers for lots of work, lots of frustration, little pay?

Good news indeed. Thanks for the reference.

I am beginning to flat fee on shorts. We will see how that works out!

Great blog and very interesting...thanks for keeping us posted!

I personally believe these asset mangers for banks are not educated on the short-sale process themselves. Don't you wonder where they get these people? Not all are bad and uninformed. Some just seem genuinely uninformed on the process. (like they just left working at McDonald's last week.)

Renee... Sounds interesting.. Would love to hear more about this. BTW.. you mentioned you may be contacting me soon ??

I'd love to hear more about anyone flat-feeing on short sales. Sounds like the time may have come...

Great post, I do a lot of Short sales and have been very fortunate so far. Saved a lot of homes from foreclosure. The banks do make it a much longer process than what seems like a reasonable amount of time to review the financials and offer.

Ah........so I see it didn't take long to get the "heck with the commission lets look out for the client" crowd. Fighting for our commission has NOTHING to do with not looking out for our customer/clients. My customers want me to get paid. They appreciate all I do for them and are thrilled that I'm doing it all on a contingency basis. Fighting for our commission does not mean we won't close the deal when we have fought and lost. It just means we chose not to just roll over because the banks want us to.

GMAC actually has a written policy that they will only pay x% yet surprising I have received more on every GMAC deal I've done. Why? Because I stood firm and it turned out it wasn't a big deal after all.

I LOVE helping people through these difficult times BUT I am not a charity. I work to make money and will stand my ground whenever possible.

Of course everyone has to decide on their own how they want to handle their business. If you don't want to fight it...then don't. Just don't criticize other's that do.

Excellent Info, thank you!

Thanks for the post. Between your information and all the comments from the other agents I have now determined that I am not fighting hard enough to keep them from cutting the commission. I have a current lender who is saying they won't pay more than 4% which is a new low!

I wish the lenders had the sense to see that those of us who are willing and capable of doing a short sale listing are saving them from loosing so much money. Many Realtors walk away from shorts and the homeowners go into foreclosure as a result.

As for me, I'll keep fighting the good fight and helping these homeowners out. It's good for them, it's good for business and it's good for my neighborhood market.

Great post - thanks for the information! Very helpful.

I've hard 15 years in the legal business -- as a paralegal / legal assistant. Tort, civil lit, complex lit . .. and what I found the MOST interesting in all the above (your blog and comments) was that the court upheld the cause of action. GOOD!! I realize lawyers can't stand when the staff think they know it all. I know I don't . . . ;-) Kinda like buyers thinking they're a "realtor" just 'cause they found a property on the Internet . . .

With that said . . . I've ALWAYS thought -- always, ever since short sales became a large portion of the transactions -- that it was blatant tortuous interference with a business contract.

Since Realtor(s) aren't allowed to "negotiate" contractually (after the listing agreement is signed -- contracted -- with the listing brokerage) why should the lenders be able to?

Unethical is still unethical . . . no matter if it's a member on a co-op fee split NAR COE issue, or . . . a private business.

Anyway to pinch us in the pocket. Looks like we have to fight for every penny we make. Good post.

This is interesting news on the short sale front and I have had lenders ask too reduce my fee but I let them know it's my standard fee and as with them it is BUSINESS afterall.

Works most of the time.

Our brokerage is in a situation now where the lender is trying to reduce the commission from 6% to 3% and the two sides are represented by two different brokerages. Ridiculous.

It sounds like an interesting case. I don't know how it's going to work out as it's on a state level.

If banks offer a counteroffer, they should be willing to stick by it.

Interesting to know that. One more tool to use during negotiation. Thank you for the info!

OCT

2009

Everyone - The KEY element here is that the bank told the broker, "Get us $XXXX price". He did and they balked on the commission contract already in place with the seller. By ambushing the deal at their given price for a commission break the interfered with the existing commission agreement with the owner seller. That was a "tort" (ie: a wrong) for which they became liable for damages, which the court set at the size of the commission earned.

I just closed on a short sale in which I was the listing agent. Yes, you guessed it, my commission was reduced. I was able to secure a buyer who offered more than the asking price with no closing help request. I wasn't happy but for the sake of my sellers and the buyers, I wanted the deal to go smoothly. It did and we were able to close the deal fairly quickly.

OCT

2009

Lana

Having an attorney represent the Seller in the lender short sale negotiations probably helps. The seller needs to be on the side of the Broker so the Seller can say "No" to the Lender demand for a reduced commission.

Just because the lender asks for a commission reduction does not make the lender part of the transaction. In the case cited the lender "inserted" itself by dealing directly with the lender and gave the Broker a counteroffer - which the Broker got accepted by the Buyer. That was the key element in the case.

If these facts fall into your scenario, the case law and logic in the legal opinion should be used by you with the lender - they are not going to risk a lawsuit that may lose over 1%.

FEB

2010

From the desk of David Dee,

Richard, this is good information. I have read about this. Shortsales do take a long time and for the banks to cut the commission is outlandish.

MAY

2010

I am the buyer's agent on a current short-sale transaction. We have been going back and forth with the bank on counter-offers. All along the bank has stated its commission as 5% total. I can live with that (2.5% to me and my brokerage).

Yesterday, the bank finally agreed to my buyer's offer with the commission cut in half. Yes, that's 1-1/4% to each broker/agent. Unbelievable!

What's worse, the offer worksheet included a note from the bank that says "Any changes to the offer will result in a decline of the transaction". Apparently, the bank has issued its final offer and intends to hold firm.

1-1/4% is a new low that I've heard of. My client understands me when I say I'm not willing to do it. Unfortunately, though they are willing to pay me (and my brokerage, of course) the difference out of pocket, they can't on this transaction because they just aren't willing to go any further. Of course they look at the extra commission as part of the total home price and they have hit their personal limit.

Now I have to be the bad guy?! and say no, which is going to result in a failed transation. Now I'm debating whether it's worth it to continue looking with this client in hopes of a fair deal for ALL parties.

JUN

I Just had Green River Financial(Bank United) pay 1% of my commisison to Green River Realty Group who had nothing to do with the deal. Horrible, I almost feel like telling them NO but..... a bird in the hand is worth two in the bush!!!

Eric Chavarria P.A.

www.PrestigeFloridaHomes.Com

JUN

Eric - don't worry- you can sue them after the fact for interfering with your client business relationship by having this uninvolved and related entity receive a portion of your commission. the amount of money is not big, but you can get other damages for the "tort" - such as punitive damages.

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Richard Zaretsky, Florida Real Estate Attorney

West Palm Beach, FL

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Richard P. Zaretsky P.A. - Board Certified Real Estate Atty

Address: 1655 Palm Beach Lakes Blvd, Suite 900, West Palm Beach, Fl, 33401

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