Is It Really a Short Sale?

Some properties are being advertised as a short sale when they really aren’t in an attempt to lure bargain-hunter buyers. A new book,Foreclosures, Short Sales, REOs, and Auctions: Tools for Success in Today’s Real Estate Market, published by Dearborn, provides guidelines for using the term correctly. Here’s an exclusive excerpt:

There are a number of licensees who are attempting to attract buyers by using the term short sale in marketing property. It is very similar to the furniture stores that are constantly advertising that they are going out of business to draw purchasers. The fact that a home has lost value or that the loan has increased in amount and is now more than the value of the property does not automatically make the transaction a short sale.

It’s important that a licensee conduct a thorough analysis, not only of the property value and loans but of the prospective seller’s financial condition as well. As was indicated, according to some licensees who are experts in the field, only a small percentage of short sales are approved by lenders.

What is to be gained by these licensees who advertise properties as short sales when they really aren’t? The answer is attracting more buyers, of course.

Some licensees are describing properties as preforeclosure listing or short sale and use the terms synonymously. Appropriately, a preforeclosure sale of property would involve one where the owner is in default. The property may or may not be worth less than the loan amount.

On the other hand there are owners who are not in default attempting to sell a property for less than the amount of the loan who appropriately call the transaction a short sale.

Is it a short sale if the lender has not approved a sale? How can a lender approve a transaction without having an offer from a buyer? What can be done about these situations? It may be as
simple as indicating a property is a possible short sale. Additionally, standards and rules can be developed to curb the abuses.

In May 2008 the NATIONAL ASSOCIATION OF REALTORS® approved new model rules that would allow a real estate practitioner to alert fellow licensees to potential short sales and notify them that it is possible the lender could require a reduction in the gross commission and that the cooperating broker would share in the reduction of the commission received. Each MLS may decide whether or not to require their participants to make a disclosure if it is reasonably likely there could be a short sale.

It is common in short sales for the lender who is considering discounting the loan amount to seek others who are willing to sacrifice as well, including the real estate broker who has the short sale listing.

The question becomes, when the listing broker chooses to reduce his or her commission, is he or she still obligated to pay a cooperating broker the commission published in the MLS? Too often, this issue is left unresolved and harsh feelings develop as a result.

While the model rules do not make it a requirement of submitting a listing to a multiple listing service, it would be considered good practice to place a conditional offer of compensation to cooperating brokers in the “Remarks” section of the property information sheet that clarifies what the agreement with the listing broker is going to be.

Such an agreement could be: “Both the sale of the property and the gross commission payable is subject to lender approval.”

What would put the cooperating broker on notice that his or her commission is truly subject to the lender’s discretion would be the additional agreement: “Any reduction in total compensation by the lender is to be split 50/50 between listing and selling agents.”

Of course the percentage amount of the split is totally at the discretion of the listing broker. The important thing is that the cooperating broker is put on notice up front and if the terms of the agreement are not satisfactory to them they may not show the property.

In the absence of such phraseology in the MLS a diligent agent will want to call the listing agent and clarify exactly what the agreement is before performing actions. No one is required to work for free. If a cooperating broker should choose to show a property whose commission is unclear at best, or is unhappy with any offered commission, he or she could insure the desired compensation by using a buyer’s broker agreement.

This textbook is currently used across the country in continuing education classes for real estate agents and mortgage bankers. Please note that this book can be purchased through RECampus for professional development purposes; however, it cannot be purchased through RECampus for continuing education credit. Visit the Dearborn Education site to purchase the book.

Melissa Tracey

Melissa Dittmann Tracey is a contributing editor for REALTOR® Magazine, writing about home & design trends, technology, and sales and marketing. She manages the magazine's award-winning Styled, Staged & Sold blog.

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    The decision the NAR has made to allow local MLSs to require disclosure of a potential short sale, in practical application puts all Realtor’s® commissions at risk.

    “Multiple listing service rules. In May 2008 the National Association of Realtors® approved new model rules that would allow a real estate practitioner to alert fellow licensees to potential short sales and notify them that it is possible the lender could require a reduction in the gross commission and that the cooperating broker would share in the reduction of the commission received. Each MLS may decide whether or not to require their participants to make a disclosure if it is reasonably likely there could be a short sale.”

    In practical application, when a short sale is in the final stages of the closing process, the Seller’s bank, only hours before closing, refuses to approve the already accepted terms of the sale. Many times this is done even after a preliminary approval has been given. The bank simply refuses to approve the short sale unless the commissions are reduced to some arbitrary dictated amount.

    When the Realtors® are confronted with this last minute change they are usually forced to accept the reduction as a way to facilitate the sale of the property and continue to work in the best interest of their clients as mandated by Article 1 of the Code of Ethics. The Realtors® are put in a position of accepting the new commission amount or trying at the last minute to force the difference back to their own clients. These clients often are unable or unwilling to make up the difference. Sellers rarely can make it up to the listing Realtors®, because they are generally strapped and therefore the short sale in lieu of foreclosure. The Buyers, even with the obligation of a Buyer Broker Agreement, often are stretching to make the deal. The end result is that the Realtors® are put into the position of either demanding proper commission to the point of losing the approval of the bank or taking the reduction in order to preserve the sale.

    The fact that the other professionals in the process rarely sacrifice any of their compensation only adds to the insult and suffering of the Realtors®.

    The NAR should have simply enforced the long standing Code of Ethics, Article 3, which requires Listing Brokers to honor the terms they published in the MLS. This much simpler action would encourage listing Brokers to arrange a fixed compensation agreement with the bank prior to a potential short sale listing. No Broker would risk an offer of cooperative compensation without a previous agreement with the Seller or the Seller’s bank.

    If the bank was unwilling to make such an agreement in advance, the Broker would refuse to take the listing. Banks need local Realtors® to facilitate these sales. Every professional in the process should expect to know in advance the amount of their compensation.

    “No one is required (or should be expected) to work for free”.

  2. John, excellent post. The short sales are MLS pollution and I have stopped supporting NAR & CAR with any “lobbying” money.

    You are correct, we are not required to work for free. Shame on all of our associations which don’t support the basic fact: that we expect to be compensated.

  3. Perhaps buyers see value in our services, skill and experience. If this is the case, they should compensate us for our time, skill and work.

    We will all be better off as an industry when we start charging fair professional services fees to our own customers (both buyers and sellers). If this were the model today, what the “short sale” lender decided to pay the listing broker would be a moot point for a buyers agent.

    Additionally, if the deal does not close, the buyers agent did all that work and spent all that time (which could have been spent working another prospect or just relaxing with family/friends) working for free. Being a volunteer is very kind of us, but we are in this ‘business’ to earn a living.

    This shift in our industry is an excellent opportunity for us to adjust to be more viable in the future. Perhaps GM, Ford & Chrysler would be in better shape if they adjusted when their environment changed.

  4. Tom Alix

    In this day and age when it is hard enough to make a dollor why would our own make it harder to feed our families.Lets work together to get compensated fairly.

  5. I agree, NAR lost credibility points on this issue. NAR should support the MLS Rules and defend the Professionalism of the industry, including the right to be fairly compensated. Otherwise, Buyer Agents should be allowed to negociate compensation at the time of making an offer on all transactions.

    Short Sales are Inventory from “Fantasy Land”. I feel it’s an “unethical practice” to even allow Short Sales on our MLS without a Listing Agreement signed by both the Seller & all the Phantom Ghost Sellers (THE Banks)

    The Listing Contract should have a target range price, that all the Banks involved must mutually sign, along with the “Seller”, with fixed commissions and fixed splits between Banks, and any other required paperwork & conditions on the Seller or other parties involved.

    If foreclosure is eminent that date should be posted on the MLS that this offer will terminates on XX date. (Even if under contract.) If the Bank has a requirement of the new Purchaser, such as; Prequalifing or Financing, or other stipulations such as, “AS IS”, or Title Companies, (which I don’t understand why the Bank or Seller has a right to dictate or impose.) . Then all of these MATERIAL Facts are known up front.

    Short Sales are Inventory from “Fantasy Land”. They are currently “false advertising” Talk about Bait and Switch. They are products that have 90%-95% disappearing — failure rate. The current system we have in place on short sales, is almost like having “Stolen Goods” on the market. Some have gone to foreclosure while the Buyer is days from the close of escrow on a contract they thought was valid. Did you know that same buyer isn’t even interested when that house returns to the market 8 months later for a $100,000 less? The 4 months waiting & the indecisiveness on the Banks part, and the last minute, distortion sort of tainted that house.

    It’s Perception, Buyers really think all houses on the MLS are FOR SALE.

    The Buyers are disappointed, and some leave the buying arena completely. Others don’t have time because of volatile interest rates to wait 4 months to close a deal.

    Short Sale Properties overstate inventory, inflate days on market, inflate/deflate original List price versus actual Sales price Percentages. And they create cumbersome issues with data searches and skew data statistics with inflated expired, withdrawn and pendings.

    I agree Short Sales are totally MLS Pollution, False Advertising, and should be considered Contaminants.

    Shame on the Banking Industry for not making short sales streamlined and their 2nd Line of Defense after “Real Loan Modifications”. The emotional and financial devistation being created by Prioritizing Foreclosures as the Primary business models over loan modifications, and over short sales is criminal, and even more so if your a Bank being bailed out. Then dumping properties with no-utilities, dying yards, unstaged, unmaintained, empty, trashed and violated on the market to drag prices down further. And some I’ve seen listed with Agents 200 miles out of area.

    The Short Sale should be the Hero – it has the best chance of selling at a highest price. The seller is still living there, can actually provide reports, disclosures, staging, using a local Agent that actually takes photos, knows the inventory and area, and provides advertising, and should GET PAID a full Commission ! — Dena Heck Brentwood 94513, California (12-10-2008)