LawsonGroupMediation

In my 20 years of practicing law, I have seen a lot of lawsuits over some of the what sometimes seem to be the least likely situations.

I have written in the past on several cases some various situations in which real estate agents may be at risk from seller clients in short sale cases.

However, as I read the lawsuits, real estate agents are very often at liability risk from the other agent in the transaction, in situations in which your E&O insurance may not provide protection.

One such a situation involves short sales.  It happens often, about half the time right now, that the Secondary Market Investor (SMI) will reduce the real estate agent commissions as a condition to lienholder approval.

Sometimes the servicing lender will also attempt to reduce the short sale commission, however, unless that reduction is a published policy that is enforced across the board, it is discriminatory and illegal, so we are able to prevent that from happening.

If the SMI legally reduces the short sale commission, the cooperating agent may object to having their commission reduced.  Some listing agents solve this problem by only asking for a commission that it would likely be reduced to.  However, if you do not ask for a full commission in short sales, you will not get a full commission.  I often see our agents getting 7% commission, but they would never see it if they did not ask for it.  FHA loans require 6%, but a lot of loans are not owned by Fannie/Freddie and some will lower them to 5% and others will approve 7%.  But…YOU DO NOT GET FULL COMMISSION UNLESS YOU ASK FOR IT!

However, some cooperating agents have been suing listing agents over the reduced commissions.  Others have been filing grievances with the local board and submitting it to arbitration.

Here is what we recommend for those short sale listing agents who want to try to get full commission.  First, insert language in the agent-to-agent remarks that this is a possible short sale and for the agents to see the attached media.  The attached media is a disclaimer that tells them about the possibility of a reduced commission and to obtain from the listing agent the short sale instructions.  The short sale instructions is a Buyer Packet we provide to the agents who work with us.  That packet describes the possibility of reduced commission and instructs them to have a conversation with the listing agent as to how they will handle the reduction in commission, if any.

Then, we provide to the agents a Commission Modification Agreement with the two alternatives to splitting any required commission reduction:  equal or pro rata.   Those two alternatives provide a great way to determine the reduction depending upon whether the published commission is equal or not.

This approach meets the legal requirements for resolving this issue in advance.  The agent would be estopped from claiming that he did not know at the beginning that a commission reduction might happen.

The numbers of agents filing these suits or complaints with the local board is way too high and absurd.  Add to that the problem that there are some boards who are not protective of agents and the problem is magnified.  Then there is one arbitrator of a huge local board who made public statements that he would rule contrary to the law, which shows how biased and stupid some of these arbitrators can be.

I highly recommend that all agents should discuss the possibility of a reduction in the commission at the onset of the short sale and sign a Commission Modification Agreement along with submitting the purchase contract.

Or…… you could simply take the easy way out and only ask for the lowest commission in short sale cases.

Best Wishes,

Kenneth R. Lawson, JD