REO “Net” Commissions
Member Legal Services
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Oct. 16, 2008
REOs, REOs, REOs – unfortunately, these properties still dominate our landscape and will continue to do so for the near future. This informational piece will build on previous discussions pertaining to MLS compensation based on the “net selling price.”
From all accounts, it appears to be the norm for the lenders/sellers of REO properties to compensate their listing agents based on the “net selling price” rather than the “gross selling price.” Listing agents on these properties then face the dilemma of being paid by the lender based on the “net sales price” or of operating under listing contracts where the lender instructs them to compensate the cooperating broker as a percentage based on “net sales price” but are required by MLS Rules to compensate cooperating agents based on the “gross sales price.” The California Model MLS Rules require that the offer of compensation to MLS participants be stated “in one or a combination of the following forms: (1) a percentage of the gross selling price or (2) a definite dollar amount” (Rule 7.12 Unilateral Contractual Offer).
C.A.R. has previously provided guidance for practitioners about trying to anticipate their differential and base their commission offer accordingly (i.e. a lower percentage offer or the percentage offered minus some fixed dollar amount ex: 3% minus $300). This approach seems to be working for many members.
In addition, NAR has just adopted a new MLS policy option giving MLSs discretionary authority to revise their rules to alter how they allow the offer of compensation to be expressed.
It is important to note that while the REO crisis was the impetus for the optional rule change, the change itself is not limited to REO listings.
This new NAR option enables participants, in effect, to offer compensation through the MLS based on the net sales price in the following form: “a percentage of the gross sales price minus buyer upgrades (new construction) and seller concessions (as defined by the MLS unless defined by state law or regulation).” No definition of “seller concessions” was provided by NAR (and it is not defined by law or regulation in California), and, to reiterate, this new pay-on-the-net option would not be limited just to REO properties but would be in place across the board.
C.A.R. staff has heard from many grappling with how best to navigate these and related issues and offers the following strategies:
1. If it ain't broke don’t fix it. If your MLS and its participants have learned to make adjustments to the way they offer compensation and don’t wish to adopt new compensation rules, then there is no need to do anything. Even if not thrilled with the status quo, but you think the new NAR alternative is worse, then keep going as is.
2. Your MLS could adopt NAR’s new rule but would still have to define “seller concessions.” C.A.R. staff has drafted a tentative (albeit cumbersome) “working definition” that an MLS could use as a base or point of reference in developing its definition as follows:
“Seller concessions are non-real estate items of value given or paid by a seller, or by a third party for the seller, on behalf of the buyer. Examples of seller concessions include interest rate buy downs, below-market rate financing; loan discount points; loan origination fees; closing costs paid by the seller or a third party for the buyer; payment of condominium, PUD, or cooperative fees or assessment charges; refunds of (or credit for) the borrower’s expenses; cash credits, home warranties, repairs, absorption of monthly payments; assignment of rent payments; and the inclusion of non-real estate items in the transaction such as down payment assistance, monetary gifts, builder incentives, or personal property given by the seller or any other party involved in the transaction.”
3. Your MLS could adopt NAR’s new rule with a sunset. This is appropriate if there are misgivings about the law of unintended consequences and how such a provision would play out with non-REO properties or in a different market. NAR’s new option would be in place for all listings, and while intended to assist with REOs in the given market, it is unknown what the actual impact on practice would be. The new “minus seller concession” standard would govern compensation offered in all listings. One way to mitigate the impact of this risk would be to adopt the new rule on an interim basis for a fixed time period. Such a sunset clause wouldn’t limit the applicability only to REOs, but it could time the new rule out.
This legal article is just one of the many legal publications and services offered by C.A.R. to its members. For a complete listing of C.A.R.'s legal products and services, please visit car.org
Readers who require specific advice should consult an attorney. C.A.R. members requiring legal assistance may contact C.A.R.'s Member Legal Hotline at (213) 739-8282, Monday through Friday, 9 a.m. to 6 p.m. and Saturday, 10 a.m. to 2 p.m. C.A.R. members who are broker-owners, office managers, or Designated REALTORS® may contact the Member Legal Hotline at (213) 739-8350 to receive expedited service. Members may also submit online requests to speak with an attorney on the Member Legal Hotline by going to http://www.car.org/legal/legal-hotline-access/
. Written correspondence should be addressed to:
CALIFORNIA ASSOCIATION OF REALTORS®
Member Legal Services
525 South Virgil Avenue
Los Angeles, CA 90020
The information contained herein is believed accurate as of Oct. 16, 2008. It is intended to provide general answers to general questions and is not intended as a substitute for individual legal advice. Advice in specific situations may differ depending upon a wide variety of factors. Therefore, readers with specific legal questions should seek the advice of an attorney.
Copyright© 2008 CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.). Permission is granted to C.A.R. members to reprint this material in hardcopy or PDF format only for personal use or with individual clients. This material may not be used or reproduced for commercial purposes. Other reproduction or use is strictly prohibited without the express written permission of the C.A.R Legal Department. All rights reserved.