NAR considers new short-sale disclosure rules
Some MLSs have already adopted policies
By Glenn Roberts Jr., Thursday, April 24, 2008.Bookmarking Sites
In response to the rising tide of short-sale properties and foreclosures, a National Association of Realtors committee that meets next month is expected to consider new rules to better describe the status of properties in Realtor-affiliated multiple listing services.
Some local and regional multiple listing services have worked out definitions and disclosures about the status of properties and developed their own policies related to bank-owned foreclosure properties and short sales. Short sales are typically defined as transactions in which the lender agrees to accept less than the full amount due on a mortgage when a property is sold in order to avoid a costly foreclosure process.
There are some differences of opinion within the industry about how and when to characterize a property as a "short sale" property, and members of the National Association of Realtor trade group's Multiple Listing Issues & Policies Committee are scheduled to review and discuss policy recommendations on the issue during the association's annual conference in Washington, D.C., in May.
MetroList MLS, which has about 25,000 participants in the Greater Sacramento area, allows its participants to specify whether a property has a "short sale lender approval contingency," for example, among other categories.
The MLS, which serves several counties including national foreclosure hotspot San Joaquin County, requires participants to designate short-sale properties using a specific MLS data field, and to communicate to cooperating brokers whether the commission offered could potentially be reduced because of the required court or lender approval.
Most MLSs do have data fields that specify whether a sale is "subject to lender approval" or "subject to court confirmation" said Colleen Badagliacco, a Realtor in San Jose, Calif., who is serving as the chairwoman for NAR's Multiple Listing Issues and Policies Committee.
And in cases where the property has been bought back by the bank through a foreclosure process and is for sale as a real estate-owned or REO property, MLS participants can describe this status and the possible impact on commission in private comments to other participants.
"The (issue) that we've really been trying to focus on and pin down for discussion at the May meeting is: How do you define a short sale? Because technically you don't have a short sale until it comes to closing and there is not enough money to pay off the lender," Badagliacco said. "This can be a slippery slope."
For example, a house may be listed for sale at $500,000, and the outstanding loan amount may be $490,000. If the offer is above the loan amount then the property would not qualify as a short sale.
"What we've been grappling with is to come up with a consistent definition of a short sale," she said, and to determine when this short-sale possibility should be disclosed.
"It is a material fact that there is a potential here (for a short sale) and someone should be aware of it, but when should you disclose it?" she said.
Awaiting lender approval of offers on short-sale, foreclosure and REO properties can be a lengthy process because of the volume of distressed properties that banks and the asset management companies are working with these days, and agents may want to know up-front whether a property could be tied up in a court process or that they won't hear back for several weeks on whether an offer is approved.
In California, the status of properties is complicated by two types of foreclosure processes: the judicial foreclosure process and trustee sales, and each process has its own set of rules.
Some properties that are bank-owned or could end up as short sales are not publicly marketed as such, and the banks may have specific directives about how to advertise -- and not to advertise -- the status of properties to consumers. If a property is prematurely labeled as a short sale, that could potentially attract low offers, and Badagliacco noted that listing agents have a fiduciary duty to represent the sellers' interests.
On the flip side, prospective buyers want to know about the status of the properties that they could potentially purchase.
"We're trying to balance the disclosure to both parties," she said.
A working definition of a short sale, which could be considered at the upcoming meeting, provides that a short sale is a sale in which "the title transfers, the price is insufficient to pay the total of all the liens and costs of the sale, and the seller does not bring sufficient liquid assets to the closing."
Under that definition, Badagliacco explained, a sale could not be a short sale until the point of closing.
Trying to describe a "potential short sale" can also be dicey, she said. "Are you potentially pregnant?"
Many real estate professionals have taken crash courses in real estate short sales and foreclosures to better understand the process and to play a role in this growing real estate market segment, though there is a steep learning curve as many real estate professionals have joined the business in the past few years and have never experienced a down-cycle in the market, Badagliacco said.
"There has probably been some slightly inaccurate use of terms" relating to distressed properties in some cases, she said.
The definition of an REO property is fairly clear and straightforward, she said. "It's the short sale that is problematic because it's a fluid situation. The trick is how are you fair to all sides: to a seller, to a potential buyer, and on the compensation side alerting the agent."
Though there will not be formal policy recommendations considered next month for MLS-listed properties that are scheduled for sale at auction, Badagliacco said that is another area of discussion for MLSs. Some MLSs do not have specific fields to designate auction properties and do not allow public remarks about auction sales, while other MLSs have specific data fields that describe a property as an auction process and allow agents to set a price or price range related to the auction.
This is not the first time that NAR has tossed around discussions about formal MLS rules for foreclosure properties.
"The last time it came up was in the early '90s," though the market turned around before formal policies materialized, Badagliacco said. "This has been a fairly protracted (market) contraction and so my guess is we will have at least a better handle on it."
James Harrison, president and CEO of MLSListings, a large regional MLS in the Greater San Francisco Bay Area, said MLSListings has about 4,000 listings listed as short sales in its database, and the MLS "made some changes so that we could accommodate them" in the description fields.
Short sales now represent about 20 percent of the actively listed properties in the MLS, he said. "This market has a lot of short sales and foreclosures."
MLS participants can specify for other members whether a property is a short sale and whether compensation is subject to change, and the MLS also allows participants to make public remarks about the short-sale status of a property.
MLSListings also has policies that require disclosure about properties scheduled for auction, and is also considering whether to add a field for foreclosure properties. The MLS treats REO properties much the same as standard property listings.
Robert Bustamonte, compliance officer for MLSListings, said the MLS requires price information and auction type and terms to be disclosed for MLS-listed properties scheduled for auction. The intent of the auction policy, he said, is "disclosure, disclosure, disclosure."
Sylvia Barry, a Realtor for Frank Howard Allen Realtors in Marin County, Calif., said her MLS, Bay Area Real Estate Information Services Inc., has added several new fields to describe property status, including "REO," "short sale," "in foreclosure," "offer as is," and "notice of default," among others.
She said she would like to see the MLS add a "contingent pending lender approval" field in addition to these descriptions to better explain the transaction. "Until the lender approves it we don't quite know," she said.
Barry said she describes a property's short-sale status in the private remarks section. The MLS does not allow participants to include public comments about possible short-sale properties.
Also, she said, "Some agents do not put short sale properties that have rectified contracts as contingent although our MLS rules require it."
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Submitted by Missy Caulk on April 24, 2008 - 4:46am.
I definitely think they should be exposed. We are discussing this at our board. I think it is only fair to the selling agents to know up front so if they have a client who can wait, they should know. I personally put it in my remarks, but not all do.
Missy Caulk
Ann Arbor, MI
Missy@MissyCaulk.com
www.AnnArborRealEstateTalk.com
www.SearchAnnArborHouses.com
Submitted by Derek Eisenberg on April 24, 2008 - 5:08am.
One important issue not mentioned is when the bank renegotiates the commission it will permit. For example a broker might sign with the seller at 6% and the bank often knocks it down to 5%. If the broker offers 3%, the warning in MLS subject to bank approval must be interpreted by buyer's brokers to mean the commisssion is also subject.
A better way would be a commission split where a listing broker could put in 50:50 or similar.
Derek Eisenberg
Continental Real Estate Group, Inc.
Submitted by Barbara Cohen on April 24, 2008 - 5:21am.
In addition to disclosure, NAR needs to address multiple offers. There are agents accepting multiple offers - signed and unsigned, sending them to banks, and letting the bank decide who wins. If the offers are signed; i.e., executed, it appears we need backup offer contingencies for all others - something that is rarely being done. Our company is attempting to treat lender approval as another contingency like inspection or loan approval and then negotiate with the first offeror (with the executed contract) if the bank declines or counters the first offer. If that fails, then we move to offer #2. If multiple offers are received prior to bank submission, then we have the seller select the strongest offer to go to the bank, making others backups if they desire. It seems that all contract principals are being ignored if it is a short sale leaving the agents open to significant liabilities. The E&O carriers should be clamoring for guidance on short sales to avoid inevitable litigation.
Sellers who have investment properties or primary homes that are now rented and may be classified as investment present a more difficult challenge. It is in their best interest to continue to receive offers to obtain the highest bid offsetting some of their 1099 exposure. Changing the MLS status to Contingent generally discourages more offers which isn't in the seller's best interest, but not changing the status violates our MLS rules. Our MLS is also challenging remarks that commission is subject to lender approval & will be split equally between listing & selling brokers as a violation of the commission agreement. Anyone who has processed a short sale as a listing agent isn't about to agree to a hit on their side of the commission only - the work is enormous, frustrating, complicated, and carries significant legal liabilities. We are dealing with the financial status and future of our clients.
Strong guidance is needed from NAR as most agents are lost in the process and are being encouraged to go forth and make lots of money by the 2 hour short sale guru experts!
Submitted by Jay Thompson on April 24, 2008 - 6:14am.
Our MLS has a "lender approval required" field. The problem is, a lot of people don't use it. But that's an MLS enforcement issue, not an NAR issue. Our state association also has a very good Short Sale Addendum to the purchase contract.
Others have already pointed out further problems with shirt sales. One I'd like to point out is pricing. The practice of putting ridiculously low list prices into the MLS needs to stop. Yes, it is difficult to impossible to know what a lender may accept in advance, but listing a home at $99K when the market value is in the $350K range is nothing but a snarky bait & switch tactic. You know darn well the lender isn't going to accept an offer at $0.30 per $1 on the market value.
Jay Thompson
Broker / Owner
Thompson's Realty
Blog: www.PhoenixRealEstateGuy.com
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Submitted by Dan Homan on April 24, 2008 - 6:20am.
NAR has too much on their plate to deal with this, they are just tryng to appear relivent. Instead of wasting valuable time and resources on something that is a matter of state law, I would ask what is happening with the DOJ lawsuit? What happened to the health insurance initiave? What about ethics complaints about out of area Realtors? If you practice in Miami and a Realtor comes in from Ankorage to transact business and goes back home, why should the injured party have to fly to Ankorage to make a complaint against the orher agent, and eventually have to drop it because the other agent postpones the hearing 3 times after you have paid for airfare and taken time off your business to be there.
NAR has enough house cleaning to do, and should let the local state boards set MLS standards consistant with their own state laws.
Submitted by Lenn Harley on April 24, 2008 - 6:46am.
Our MLS has a field to identify a listing as a "Short Sale". However, many are simply labeled Short Sale, but it isn't a Short Sale until the bank says it's a Short Sale. The suggestion that the listing BROKER have a policy that only Sellers that have been accepted as Short Sale sellers would help.
Jay Thompson's MLSs feature "lender approval required" field is a wonderful feature. We spend endless hours researching so called "Short Sale" listings only to find that the Seller doesn't qualify.
These listings are not good public relations. A buyer isn't impressed when they tour homes, find a home they like, make an offer only to find out 45 days later that the seller didn't qualify.
The banks could do us all a favor by having publicly available Short Sale guidelines.
These homes have presented a real challenge to our industry. Some of us have don't short sales for years, but never in the volume as today.
Submitted by Tom Scaglione on April 24, 2008 - 7:22am.
The Mid-Florida Regional MLS which is owned by 13 different Realtor(r) Associations and serves more than 35,000 users has adopted the following Short Sale Rule. This Rule was created through a Short Sale Taskforce, our attorney and NAR's approval back in January of this year. The taskforce meet and discussed this over about a 6 month period.
Section 1C: Short Sale Listings: In instances where the listing broker becomes aware that the listing price may not be sufficient to permit seller to fully satisfy all encumbrances and pay seller’s closing costs, including the listing broker’s offer of compensation (a “Short Sale Circumstance”), the listing broker may:
(1) Obtain seller’s informed written consent (in either the listing agreement or an addendum thereto) to disclose the Short Sale Circumstance to cooperating brokers, buyers and the public;
(2) Clearly and promptly disclose the Short Sale Circumstance to all cooperating brokers and, when and if appropriate, disclose that the sale of the listed property may be conditioned upon the approval of a court, a lender, or other third party. Such disclosures may occur at any time, but it is suggested they occur at the time of MLS input, if known, or within one (1) business day upon receipt of knowledge. Such disclosure may be included in the “Realtor Only Remarks” and the “Public Remarks” Sections of the listing. If after the initiation of negotiations the listing broker receives knowledge of the existence of a Short Sale Circumstance, or that the sale of the listed property may be conditioned upon the approval of a court, a lender, or other third party, then such disclosures may be made in writing in the “Realtor Only Remarks” and “Public Remarks” Sections of the MLS listing and in either the Contract for Sale and Purchase or an addendum thereto. This disclosure must be word-by-word and disclosed at the time of input, if known, or within one (1) business day upon receipt of knowledge.
“Listing price may not be sufficient to cover all encumbrances, closing costs, or other seller charges and sale of Property at full listing price may be conditioned upon approval of third parties. Call for details.”
An offer of compensation to cooperating brokers which states that it may be adjusted after execution of a contract for sale and purchase by a third party without the consent of the cooperating broker, is not an unconditional offer of compensation under these rules.
Contracts which are subject to approval by a court, lender or other third party must be reported as “pending” consistent with Article 4 Section 15 of these Rules.
If you have any questions please email or call me. As you can see our position is disclosure and that the coop compensation to the Selling Broker can't be negotiated down by the Listing Broker's office. Fact is a third party is not a party to the contract and can't do that either. The offer of compensation is Unconditional. The third party approval is nothing more than a contingency like any other contingency that needs to be met by the contract terms.
If the third party does not accept the offer as presented they will counter to the listing broker as to what they will receive and just like a price adjustment is made to a contract if the property does not appraise then the contract price is increased to meet the cost of selling the property. The buyer can then accept or reject the counter not unlike the seller can accept or reject the lowering of a price to meet the appraised value.
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Sincerely,
.
Tom Scaglione, ABR®, e-PRO®, REALTOR®
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Avalar Realty of Tampa Bay, REALTORS®
1761 W Fletcher Avenue - Tampa FL 33612-1820
.
Off: (813) 969-0801 - Fax: (813) 969-0467 - Cell: (813) 310-8200
.
mailto:Tom@RealEstateTom.com
http://www.RealEstateTom.com
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Serving the Tampa Bay Area
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Everyone Is Buying Real Estate
Some For Themselves
Some For Their Landlord
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2006/2007 President, Mid-Florida Multiple Regional Listing Service
2001 District 6 Vice President, Florida Association of REALTORS®
2000 President, Greater Tampa Association of REALTORS®
2000 Director, National Association of REALTORS®
2000 & 2001 President, Rebuilding Together Tampa Bay
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Submitted by Elizabeth Weintraub on April 24, 2008 - 7:28am.
Our Metrolist has done an excellent job by providing new categories for Active Short Sale and Short Sale Contingent, plus providing confidential agent comments regarding lender approval.
However, I understand the dilemma facing NAR. Part of the problem, too, is that the so-called short-sale prices are made up, often plucked from thin air, and buyers find that misleading.
One solution may be to bring the mortgage balance front and center and list the home at the amount owed with variable pricing. That would present a more complete and accurate picture of the situation.
Submitted by Jillayne Schlicke on April 24, 2008 - 7:53am.
I applaud NAR for looking at this issue. The MLS Rules are an MLS issue, and not all MLS' are members of NAR. State laws also vary.
MLS' can follow Tom's lead in Tampa.
I give an ethics case study in all my classes, not just the "required" NAR class every 4 years, and the Short Sale class is no exception.
Any professional code ought be a living document that can change over time. NAR's Code is just that. NAR can now bring their members great value by addressing the following issues:
When ought a short sale be disclosed to everyone? By "everyone" I mean the general public, not just MLS members.
Yes, this might not be to the seller's advantage, however, we are starting to see that there are some buyers who are specifically interested in buying short sales. An argument can be made that by disclosing the short sale terms to the general public, we ARE acting in the seller's best interest. What does Article 12 of the Realtor Code say? Perhaps advertising short sales and preforeclosures can be addressed there. What about Article 1?
In terms of what exactly constitutes a short sale, oh please, give us all a break.
Realtors/real estate agents tell us that their expertise resides their knowledge, experience, and negotiation skills.
IF this is true, then Realtors/agents will be able to accurately determine whether or not the payoff balance of the liens is more or less than the list price.
If the home doesn't sell and the price is lowered and THEN it becomes a short sale, then all disclosure rules would then apply.
Short Sales are clearly a case study in how ethical conduct can inform state law and MLS rules.
Letting it be the other way around (law informing the NAR Code) would make your members question the value of the code.
Go NAR! YES! Address this issue.
:)
Submitted by Jose Lopez on April 24, 2008 - 9:09am.
A property should be considered a short sale, anytime an agent knows that the sale proceeds will not meet all mortgage and other obligations and the bank will be asked to forgive part of the mortgage.
When should it be advertised as such? I believe immediate upon knowing this. It is to the benefit of the homeowner to label the property as a short sale, this will at least draw interest and hopefully offers to the property. They might be low, but at least it is an offer. If the property was worth more and priced aggresively, then it would sell for more.
We are doing a disservice to our seller clients by not soliciting offers as a short sale early on. Because as we all know, it takes months for the initial review done by the bank on the first offer, even if it is rejected. In the meantime the homeowner is swimming in $*#*@# all the way up to his neck.
Full disclosure is the right way to go. Disclose it early in general remarks, and get offers to get the process started. This will also set expectations on the lender side as to what the real value of the property is.
I am dissapointed in the level of knowledge that most agents have about short sales. It's clear that this is a subject that everyone needs further education on and the local board is the best place to start.
Submitted by coji burned on April 24, 2008 - 1:05pm.
MLSlistings.com is a scam! on their website, they do not disclose to the public the true status of a property. check it out and see for your self!
Submitted by Tim Kuptz on April 24, 2008 - 3:36pm.
Compensation rules in the MLS are rather antiquated. NAR broke away from their compensation rules in Section 5 of the Rules and Regulations for shortsales. It is time to look at this more in all sales. Our local MLS is now strictly enforcing the "gross selling price" in terms of coop commission. This is after being quiet about it for years. Many banks are selling their propeties and adjusting commissions paid to reflect the "real" sales price (price less buyer closing costs concessions). Our MLS says pay gross price or risk losing the opportunity to remain a member. On a 6% seller contribution on a Nehemiah program at $200,000 that could mean $1200 in additional commission paid for no real value received. Is this fair to a seller no matter who that seller is? Our Preamble to our Code of Ethics stipulates we protect the comsumer and their dollar. I find this to be a direct contradiction to Section 5 of the MLS Rules and Regs and in need of immediate change. The market and the way we do business is evolving far more quickly than our "rules"
Tim Kuptz
RE/MAX Advantage
Las Vegas & Henderson, NV
Submitted by David Montgomery on April 24, 2008 - 6:10pm.
Our MLS provides for a required selection of 1 of 3 options under the prompt
"Short Sale Status"
Approved by Lender
Not Applicable
Subject to Approval
So far (over a year)... it is working well.
Dave Montgomery, MLS Chairman
Pocono Mountains Association of REALTORS®
Submitted by Jeri Creson on April 28, 2008 - 9:24am.
A serious problem we have been discussing increasingly at gatherings has been the ridiculously low short sale price tags, and the effect that these unrealistic prices are having on the perception of both the consumer and the appraiser as they look at the actives and pendings before they close escrow and the true story is eventually told. Why wouldn't a buyer sit on the fence if they "perceive" that others are getting deals - when in fact, they aren't. Unfortunately, the unscrupulous tactics of a few always end up hurting us all in the long run.
We need to save ourselves here, and fast. It seems a little extreme at first, but consider this - since the sales price will be subject to the lender's approval, why couldn't there be a requirement that the sales price for a short sale property be set by certified appraisal? We all know that appraisals can be "for sale" also - but at least there is another layer of protection there, where a license is on the line. Just an idea.
Submitted by Ron Taylor on April 29, 2008 - 4:12am.
There are many of us who are licensed real estate brokers or agents who are also licensed professional auctioneers.
As an auctioneer, we need a separate listing category of "AUCTION" to list these properties in order to notify the public and other agents of the pending auction.
Many of the properties that are trying to go through the "short sale" process will become REO property because many lenders and banks are still not willing to face reality, viz., that the home is worth what they think it is.
The whole "short sale" cycle can take 3 to 6 months to go full term. How many buyer's are willing to wait that long?
In addition, the lender requires almost the same finacial information to "get out of the loan" by way of the "short sale" as it does to qualify someone for a loan. Some homeowners are relunctant to provide this information.
Part of the problem is the BPO agent who pull comps that are no longer viable in the market we are in, viz., decreasing values.
Many of the major lenders are turning to the auction industry to move these properties for them. As a broker/auctioneer we can sell more houses with the help of our local MLS.
For more information on how the auction method can sell houses fast in a slow market, visit my website at www.canSellnow.com .
Ron Taylor
President/Broker/Auctioneer
The Restorer, Inc.
D/B/A Ron Taylor and Sons Real Estate and Auctioneers
POB 1083 Louisburg, North Carolina 27549
O-252-257-4822 Fax 252-257-1302
www.canSellnow.com
Submitted by Candy Wall on May 29, 2008 - 1:07pm.
What if my client has the funds to meet the shortage between an accepted price and the loans of record and for personal reasons would rather bring a check to escrow and not want it to record as a short sale what should it list as in MLS. I have received some flack for not labeling the listing as a short sale.(the house has recently been withdrawn from MLS no offers were offered during the list period)The Debt load is still being paid by property owner.
Submitted by Truett Neathery on May 29, 2008 - 3:07pm.
I like the idea of the appraisal - generally, BPOs are done as fast and as cheaply as possible, and so many times they do not reflect the value closely enough for an agent's ability to sell the property. By the time the property is listed, it has dropped in value so much that the BPO is worthless.
At times, I have seen the lienholder drag its feet so long that the property goes into default before it can be listed, ruining the owner's credit and costing the stockholders money in unecessary fees. Most of the REO administrators are saleried clerical help with no company stock.
Submitted by florinte mair on June 7, 2008 - 8:04pm.
Last week, I signed a contract for buying a short sale for about 4.5% less than the asking price. This was an "AS IS Contract for Sale and Purchase" and the second party (The Seller) also signed it. The contract has the clause "This property is subject to a short sale and third party approval... This offer is subject to the bank accepting this offer on or before ..."
Then, my realtor who is also the seller's realtor submitted this contract to another agent who handles her short sales for a portion of the commision. That agent submitted this contract to the bank.
Then, another offer came in and it was also signed by the buyer and seller. Is it legal for the seller to sign multiple contracts after he already accepted and signed one contract? Initially my realtor said that both contracts were submitted to the bank, but a few hours later she called me saying that only my contract was submitted.
Is it legal for all the contracts to be submitted to the bank? Is it possible to find out how may contracts were submitted to the bank and what exactly was submitted for my contract?