Real Estate Agents: Beware of Killing a Short Sale Over a Commission.

By
Real Estate Broker/Owner with Jonathan and Associates, Inc

No one likes to take a job, expecting to earn compensation, and then learning that it isn't so. In the real estate world, it happens all the time. When representing a buyer, it's a few days from closing when the buyer learns they lost their job or that they're being transferred. Sorry for your hard work real estate agent but there's no pay day resulting from that.

One gripe that real estate agents have / had with short sales is that often when negotiating a short sale, the lender will come back and ask for a reduction in commission earned by the real estate agents. Some have fought to the death with the lender in the hopes of defending their income. At times, they were successful however on the other side, there have been real estate agents who have stood in the way of a short sale over compensation. On five occasions last year, sellers called into our office looking to switch agents after their current / former agent cost them a short sale approval because they weren't making enough money.

For 95% of real estate agents, the commissions earned is the only source of compensation. We're not reimbursed for gas, insurance, marketing...you name it as the list goes on and on. So compensation is a touchy subject and I totally get why some fight so hard. However, beware of fighting so hard as it may land you in a lawsuit.

Apparently, some lawyers are contacting homeowners who were foreclosed upon looking for a lawsuit. By examining the documents and issuing sopeanas to the lenders for recorded conversations and emails, they are getting a sense of what went on in the transactions and why it didn't go through.

The belief among some real estate commissions and local Realtor boards (including the Charlotte Regional Realtor Association) is that the listing agent and selling agent are taking on a short sale knowing the homeowner is in financial distress. As the fiduciary duty is to the seller, if the commission is reduced, they feel it is appropriate to split the balance among the two firms. An example of this would be an agent who took a short sale listing at 8% commission (where their firm paid the buyer agent firm 4%) but the seller's bank said they would only pay 3% total commission, they would each earn 1.5%. Most real estate compensation models for agents would result in that agent earning about .75% or less of the sales price before taxes.

Ultimately, in a tough market such as we are in currently, that means that the buyer's agent can (and they do) steer their client away from short sale properties out of the fear of being paid a reduced fee. The thought is that with so many opportunities on the market, why risk being compensated less? Buyers too tend to agree with their agent as they are faced, through a Buyer Agency Agreement, of paying any unearned income themselves should their agent choose to enforce the agreement.

The good news is that that vast majority of lenders have at least made the effort to at least pay up-to a 6% real estate commission without a fight....kinda. The latest trend among lenders is to hire a third-party to act as their loss mitigation team and pay them from the real estate compensation. I closed a HAFA short sale with Saxon in November 2010 where Saxon agreed to pay our fee of 6% provided that we pay 1% (or 16% of our income) to Zenta realty. Zenta isn't a real estate firm but rather a third-party hired by Saxon.

Commissions are cheaper than foreclosures.

The average foreclosure costs a lender $60,000 and that doesn't include the amount lost by the poor property condition, vandalism, etc. Therefore the argument from the real estate community to lenders is that by not paying up now, they are costing themselves money in the long run. However, I would recommend that agents take a different approach, which is the approach I follow:

No amount of compensation is worth a foreclosure...period.

While no one wants to work for months and earn nothing (and certainly my family and the family of the other agent would agree), putting ourselves ahead of the situation is out of place in every situation.

Short Sale Charlotte NC

Comments (46)

John Elwell
CENTURY 21 Bill Nye Realty, Inc. - Zephyrhills, FL
You Deserve a Full-Time Agent, Not Reduced Results

In reality, there are sometimes short sales that NEED to be killed. Sometimes over ridiculous commissions which in no way compensate the agents for all of the extra work and frustration involved with these monsters. Often, ramming your head against the wall for nothing is not the answer and it is better to end the agony and walk away. Not always, of course. But sometimes it is the best move one could ever make.

PS Keep in mind that not all relationships between seller and agent are Fiduciary in nature. Here in Florida we can operate as a Single Agent (Fiduciary) or as a Transaction Broker or Non-Brokerage Capacity. Neither of the later had fiduciary duties attached to it like Single Agency does. The level of responsibility is less and is clearly spelled out for sellers and buyers.

Jan 29, 2011 03:07 AM
Charita Cadenhead
eXp Realty - Birmingham, AL
Serving Jefferson and Shelby Counties (Alabama)

Boy did you open up a can of worms.  My question is why is it that the real estate agent is always expected to give up something. If sellers sign a listing agreement that compensates agents X amount of dollars, then it should be honored.  As for the sellers being cashed strapped, that may be true but what is also true is that

PEOPLE FIND A WAY TO DO WHAT THEY WANT TO DO

and distressed sellers are no different

Jan 29, 2011 03:46 AM
Mike Saunders
Lanier Partners - Athens, GA

Jonathan - I have seen more occasions for the commission to be lost because of a 2nd lien holder than the first. But, I do agree, when comes to the bottom line, our duty lies with our clients, on either side of the transaction.

Jan 29, 2011 04:11 AM
Jerry Morse
The Morse Company - Janesville, WI
BBA,GRI

I agree getting the deal done for our clients is the moral thing to do.  But their has to be a point where we say, I am helping the parties to the transaction and this is my bottom line.

Jan 29, 2011 04:28 AM
Anonymous
Anonymous

I agree with you that the main concern should be for those we represent and not the commission. In any business there are times things just don't work out to what you expect or hope for. If we keep our clients interest first in the long run this will be far more beneficial to us then if we try to maximize commission, no matter the cost (lost sale-ultimately). Sellers and buyers remember and tell their friends and acquaintances about what they thought about the agent they worked with and a good reputation will lead to much more income then a bad reputation.

Jan 29, 2011 04:40 AM
#29
Jonathan Osman
Jonathan and Associates, Inc - Charlotte, NC
Charlotte House Hunter Group

I don't think anyone is advocating running a real estate business like a charity.  However, sometimes you have to see the forest through the trees and when you do enough of these types of transactions, things happen.  While it's never good to compromise on a reduction in pay, I don't take any pride in sending a homeowner to foreclosure because I thought I deserved an extra $1000.  At times where it has happened (less often than expected), the seller has rewarded my team with referral business and more than made up for any loss.  

As far as Bryan, if I were in his part of Florida and needed a short sale, that's the type of guy I'd want showing up to my door.  

Good comments all.  

Jan 29, 2011 04:47 AM
Tom Branch
RE/MAX Dallas Suburbs - Plano, TX
Broker, CDPE, SFR, ACRE, Plano TX Ambassador

Charita #26,

"If sellers sign a listing agreement that compensates agents X amount of dollars, then it should be honored."

While I agree with you in principle, It all depends upon the listing agreement.

Our addendum reads:

"Commissions-In the case of a short sale it is understood that the seller is experiencing financial hardship and they will not be responsible for any commissions or fees to the listing brokerage. Any commissions will be paid by the seller's mortgage company as part of the proceeds of the sale."

We don't see banks asking to reduce often these days. 

Tom

Jan 29, 2011 04:52 AM
Tom Branch
RE/MAX Dallas Suburbs - Plano, TX
Broker, CDPE, SFR, ACRE, Plano TX Ambassador

John #25,

In Texas, we don't have transaction brokers. I take my fiduciary responsibilities seriously and always try to get sales to close.

I have a sale that's been on-and-off as the bank screwed around. The client already has a lawyer ready to do a forensic audit if they foreclose.

We use a Hold-Harmless Agreement with our listing agreements but I suspect they will be attacked if we were to do something negligent.

Tom

Jan 29, 2011 04:55 AM
Stephanie Sandoval
Arizona Cash Back Brokerage , Stephanie Sandoval - Queen Creek, AZ
REAL ESTATE BROKER Scottsdale & Phoenix & Gilbert

Excellent post ! 

Jan 29, 2011 05:21 AM
Dave Leiderman
Keller Williams Realty of Delmarva - Ocean City, MD
ABR, SRS, SFR - Realtor - DE & MD Beaches

Excellent post Johnathon.  I can see this issue a number of ways.  First, as Realtors we are essentially self employed, so every client and opportunity is a choice that we make.  Having said that, we all know, or should know, that when working a short sale there is the possibility of getting paid less than what the stated commission is on the listing.  On the one hand I say defend your position and fight for waht you believe you're owed; on the other I say you should've known this could be an issue and if you didn't want to take a reduction in income then you shouldn't have persued listing or selling a short sale property in the first place.

Secondly, real estate is an incremental industry as much as it is anything else.  Putting our income before the client's needs does not represent them well.  I've had deals where I've walked away with only a few hundred bucks but because I put my client's needs first and handled the transaction as a professional, I've received referrals from those clients.  So the few hundred dollars I made became incrementally more by working with her friends and family.

I agree that we're not running a charity but I'd agree more that we shouldn't allow the commission to kill the deal.

 

Jan 29, 2011 05:28 AM
Bryan Robertson
Los Altos, CA

I have done one short sale and it was on a listing that had the price drop so much it turned into a short sale.  The sellers came up with cash to make up the shortfall so while it was a technical short sale, we didn't have to go through all the usual hoops.  I direct line to underwriting helped make it workable.

That said, I will never, never, never, work on a short sale.  If a listing were to turn into one, I'd refer it out.  If a client wanted to buy one, I'd refer it out.  Why?  Because I dont' make enough to warrant the work.  It's a charity case and I'm not in that business.

Tni and Bryant (comments 24 and 8) made this point. 8 months for a $106 commission?!  It's not worth it.  I see agents in my area working for months on end to make $2000.  That's a poverty wage in the Bay Area.

My hats off to agents who work in short sales but it's definitely not for me.

Jan 29, 2011 05:32 AM
Aaron Vaughn, REALTOR© 830-358-0455
eXp Realty - Canyon Lake, TX
My knowledge is your power | eXp Realty

I look at it differently. When dealing with short sales, I am clear about the fact that a foreclosure is still possible, and one of the factors that may cause it would be if the lender/seller tries to cut my commission. I am not the one who got into the situation; I am simply trying to help. I work hard and expect to be compensated. If a lender tries to cut my commission, I tell them the deal dies. I find that the first lien-holders are not typically the problem, but the second lien-holders are real a**holes much of the time. They often ask us to break the law and give them back commission off the HUD. Not going to happen, my friend. If a lawsuit ever takes place, it's those second lien-holders who are going to be in real trouble.

Jan 29, 2011 06:55 AM
Bill Gillhespy
16 Sunview Blvd - Fort Myers Beach, FL
Fort Myers Beach Realtor, Fort Myers Beach Agent - Homes & Condos

Hi Jonathon,  Interesting post and comment thread.  Will you share the source for the "... foreclosure costs a lender $60,000..." statistic ?  Thanks in advance !

Jan 29, 2011 07:08 AM
Justin Dibbs
Pearson Smith Realty - Ashburn, VA
REALTOR® - Ashburn Virginia Homes for Sale

That's why I try to get a retainer up front so I don't get screwed on the back end.

Jan 29, 2011 09:51 AM
Jackie Hawley
Coldwell Banker Professionals - Oxford, MI
Southeast Michigan Real Estate

I have to admit that first- I don't go after short sale listings and second haven't had too many instances where we were asked to reduce the commission. My listing agreement is between the seller and my brokerage and it states X per cent. If the bank doesn't approve X then it is up to the seller to pay the difference unless otherwise written in the listing agreement. I have been thinking about charging a higher commission on short sales - if I had a regular listing that took that much of my time and caused as many headaches I would charge more. I don't see any reason to charge short sale sellers less than any other client. That would be discrimination.

Jan 29, 2011 10:23 AM
Joe Pryor
The Virtual Real Estate Team - Oklahoma City, OK
REALTOR® - Oklahoma Investment Properties

It is rare for me that this happens, however I am closing on on Monday that we are not fighting since from the time of contract to closing is 3 weeks, and for me if I walk away from a short sale because I can't get the extra 1% then shame on me for possible putting someone into foreclosure. However, I don't make a habit of it and yes I will protest.

Jan 29, 2011 11:07 AM
Jonathan Osman
Jonathan and Associates, Inc - Charlotte, NC
Charlotte House Hunter Group

@Bill, my attorney Jaime Kosofsky - who is a foreclosure trustee for a number of larger banks in town, came up with that figure.  He went through and examined his files and discovered that the legal fees, commissions, evictions, lower sales price due to damage, load modification attempts, mediation, and overall carrying costs, it averaged $60,000 per property. 

Jan 29, 2011 11:32 AM
Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M

This is a touchy subject.  We have a duty to our clients, and yet we do need to be compensated for our work.  It's important to do our best for all parties.

 

 

Jan 29, 2011 01:42 PM
eRealty Houston Real Estate
Buy, or Sell Homes in Corpus Christi - Corpus Christi, TX
Brokerage
Short sales are not fun but it is today's market. If you are in the market long enough you will have to do one sometime or another. My problem is the commission doesn't come up until the very end and most banks act like we don't earn our commission at 3-4%.
Jan 30, 2011 07:15 PM
Anonymous
YA WHATEVER

 

 In my opinion Most Realestate agents are sharks be careful

Realestate agents are trying to make a killing on shortsales charging the seller 7% , receiving 3% from lender and also getting a commish from the buyer. You need to read the documents carefully your dealing with pure greed here.  In Real Estate your better off with a Realestate Attorney and doing most of it yourself. There alot of Sharks out there just because they have a license doesn't mean they won't screw you as long as everything is legal and you sign and agree on there small print paper work- doesn't matter how much they make there in the industry of pure fear and greed. I was in it  for quiet a few years I know -don't believe the bs read the paper work.  See and figure out where they get paid I caught a Realestate agent lining himself up to make 10%-17% on one short sale. I caught him he told me I should find somebody else to do the short sale. The 2nd realtor did the same  I read the paperwork carefully and confronted them.  There playing off of your desperation and the 3% they make is good enough they will bs there cost accrued nothing but bs they pull in 50% profit on that commish if not more.

Mar 16, 2011 09:13 AM
#46