New rules . . . and new tools!
| Have you ever had your buyers all set to close on the home of their dreams, only to find out that the closing was now delayed because the sellers did not yet have approval from their lender? Or as the listing agent, have you ever found out at the last minute that the seller's lender was reducing the real estate commission you were going to be paid? In today's real estate market, dealing with a growing number of short sales makes surprises like these all too common. | | Click here to view the new short sale forms. |
Even though the central Ohio market may not be as bad as in some other areas, the problems connected with short sales are so widespread that they have probably touched nearly every residential REALTOR® in some manner.
Realizing that the hardships and heartaches of short sales were becoming more and more of a problem in our MLS, CBR President Greg Hrabcak appointed a special task force on short sales. The task force, comprised of members of our Board of Directors and chaired by Gary Francis, was specifically asked to look at our current multiple listing service with an open mind and the idea that there might be some MLS rule or policy changes that would help REALTORS® deal with the issues surrounding short sales.
As a result, new rules related to short sale disclosures have now been adopted by CBR. Following is the process and information you'll find helpful in understanding these changes.
Defining the Short Sale
Fortunately, the task force had the benefit of a study very recently released by a National Association of REALTORS® work group that had been looking into the very same issues. The NAR group had put together a Short Sale Workflow, and one of the first important things they did was to define a short sale:
Short Sale -- where title has transferred; where the sales price was insufficient to pay the total of all liens and costs of sale; and where the seller did not bring sufficient liquid assets to the closing to cure all deficiencies.
The NAR group also realized that a second definition would be needed, for the time leading up to the sale, for the time during the process of listing and marketing of a property. The following second definition becomes even more important, because it relates to what REALTORS® must deal with in the MLS day to day:
Potential short sale -- where the listing agent reasonably believes the 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 theclosing.
In their report, the NAR group included recommendations for policy changes that they believed would be appropriate for all multiple listing services around the country. Their recommendations, approved at the NAR Mid Year Conference this past May, revolve around four basic principles:
- An MLS must give participants the ability to disclose the potential for short sale if they desire to; or alternately, an MLS may make such disclosure mandatory when the potential for short sale is reasonably known.
Disclosure is so important as we've all learned, because getting from contract stage to closing in most short sale cases will take much longer. Approval from the seller's lender may take weeks or even months, depending on the seller's situation and the lender involved. And often, buyers may be about to move out of a property they have already sold or from an apartment where they have already given notice, and need to find new housing right away. The short sale property may not be a good option for such buyers.
- MLS participants must be permitted to communicate how any reduction in the gross commission established in the listing agreement will be apportioned between the listing and buyer brokers.
Such disclosure is important because if the co-op compensation the listing broker has offered gets reduced below the buyer's agents agreement for compensation with their client, their client may need to either find a way to pay the difference, or move on.
- Disclosures related to short salesshould only be made using confidential "agent to agent" remarks fields. A seller's financial situation is naturally a sensitive issue, so every effort should be made on their behalf to maintain confidentiality.
- Short sale disclosures should be made only after the listing broker has obtained the seller's authorization to disclose. Due to the sensitivity, confidential information should never be disclosed unless the REALTOR® has been given specific permission.
New Rules for Short Sales in the Columbus MLS
After comparing our current rules with the new NAR rules, the task force felt strongly that our local rules required amendments.
The task force also felt strongly that, in consideration of all the hardships and other problems that surround short sales, the concern above all others ought to be for the protection of REALTORS® and their clients, regardless of whether the clients are the sellers or the buyers.
Because early disclosure of the short sale will help avert many of the problems, it was the task force consensus that our MLS should make disclosure mandatory when a property is subject to short sale.
New CBR MLS rules for short sales:
Based on NAR's four basic principals, CBR has adopted the following four rules which will be incorporated into the MLS Rules & regulations as appropriate. (The new version is available at www.ColumbusRealtors.com under MLS Reference Materials" which is password protected.) Also included below is rational for clarification.
The listing broker must disclose to other MLS participants the potential short sale status of a property when reasonably known.
The listing broker may disclose to the other MLS participants how any reduction in the gross commission established in the listing contract required by the seller's lender as a condition of approving the sale will be apportioned between listing and buyer brokers.
Disclosures regarding the short sale property are to be made only in the confidential Agent-to-Agent remarks not available to the public. See sidebar at below.
Disclosures regarding short sale property must be made as soon as the circumstances are known and the seller has authorized the disclosure. See sidebar below.
New Rules and New Tools . . Now What?
Knowing the rules for how short sale listings are to be displayed in the MLS is very important. And having the right standard forms to make sure both you and your clients are protected during the short sale process is just as important.
However, the most important thing to remember is that while these rules and tools can help get all of us to the closing table, REALTORS® handling short sales need specialized knowledge about how short sales work.
REALTORS® are encouraged to seek some of the training in dealing with short sales now available, such as the Foreclosure Intervention Specialist (FIS) courses offered from time to time by CBR's Education Committee.
Additional Information
The NAR Short Sale Workflow discussed above as well as all the new short sale forms can be found in the CBR Member Service Center, and the new forms are being added to CBR's Forms-On-Line.
Agent-to-Agent Remarks
The Agent-to-Agent section in the MLS is an extremely valuable tool that many agents fail to check. This field is there for the express purpose of describing circumstances not appropriately included in public remarks. Examples of comments that might be entered in agent-to-agent remarks include:
"Property may be subject to short sale. An accepted offer may also require third-party approval."
"Property is subject to short sale. Any accepted offer will also require Lender or other third-party approval."
"Any reduction in commission required by Lender as a condition of short sale approval will be shared ____."
What if the seller will not give me permission to disclose?
The listing agent/broker will have little defense when a buyer suffers damages as a result of not knowing, in advance, that the property was a short sale. The buyer could bring suit or file an ethics complaint based on the agent's failure to disclose pertinent information about the property or transaction; and the listing broker risks arbitration over any difference in commission from what was offered in the MLS.
Any listing for which the seller won't permit proper disclosures could be compared to stigmatized property in that, if the seller won't authorize disclosure, then it may be a listing you really don't want.
When is the short sale "In Contract"?
MLS rules for In Contract status for short sales now apply exactly as in any other transaction. That is: when there is a signed purchase contract between buyer and seller with any contingency, the property is IN CONTRACT -- Contingent! It is the responsibility of the listing agent to then report the In Contract - Contingent status to MLS using the CONTC option, entering an explanation clause such as "Lender Approval." Once the lender's approval and/or other contingencies are removed, the listing status changes to In Contract.
Previously, MLS policy had permitted not reporting accepted offers on short sale properties and continuing to show the listing in active status until the lender approval was received. The market has become much more challenging because of the influx in the short sale market and warrants this policy change. This policy change means both honest disclosures and compliance with MLS policy.
New Standard Forms for Short Sale Transactions
Both the MLS and Standard Forms Committees quickly set about developing the handful of new forms that REALTORS® will need when working on the short sale transaction. The new forms were created to help, not hinder, the short sale process. The Board of Directors, MLS Committee, and Standard Forms Committee all worked together to make these forms available for agents' use as quickly as possible.
Although the forms were not officially approved at press time, we'll have them in the CBR Member Service Center and incorporated in the online forms as soon as possible.
Understanding Short Sales
This two-page form contains general information about short sales, and provides an important, convenient way for sellers' and buyers' agents to document that they have advised a party to seek financial or legal counsel. While not mandatory, use of this form is strongly recommended.
Seller's Authorization for Release of Information
When signed by the seller, this form authorizes the lender or other lien holders to release otherwise confidential information to the REALTOR® and other persons designated on the form. This one-page form should be considered mandatory, to be used by the listing agent.
Short Sale Addendum to the Listing Agreement
When signed by the seller, this one-page form obtains the permission of the seller to disclose in the MLS that the property is subject to short sale. It should be completed by the listing agent before entering any short sale disclosure remarks in the MLS.
Short Sale Addendum to the Residential Purchase Contract
This two-page form is an important step in the purchase contract writing process. When signed by both seller and buyer, each acknowledges the property's status as a short sale and time period issues. The form also establishes a path of duties for the seller to pursue lenderapproval and notify the buyer of progress.
Notice of Short Sale Termination
This one-page form, when signed by buyer and delivered to seller, terminates the contract if the time period for receiving Notice of Short Sale Agreement between Seller and Seller's Lender is not met.
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