The increase in the number of short sales has resulted in many questions pertaining to the unique nature of these transactions. Many of these questions concern commission issues. The following Q&A will answer some of the most common questions.
For purposes of this article, assume the following facts:
The property is listed in the MLS as a short sale subject to lender approval. The buyer submits an offer through the buyer’s broker. The listing broker submits the offer and short sale package to the lender. The lender responds that it will approve the short sale if the total commission is reduced by 2%. Both buyer and seller demand that the brokers reduce their commission to allow the transaction to close escrow.
Must the listing broker agree to reduce their commission to allow the transaction to close? No. The listing broker has no fiduciary duty to the seller to reduce the commission to allow the transaction to close.
Must the buyer’s broker agree to reduce the commission to allow the transaction to close? No. The buyer’s broker has no fiduciary duty to the buyer to reduce the commission to allow the transaction to close.
If the listing broker agrees to reduce their commission, must the buyer’s broker agree to split the reduction? No. The buyer’s broker’s has no obligation to agree to split the reduction in commission. The buyer’s broker is entitled to the cooperative compensation offered in the MLS at the time the broker produced the offer. Standard of Practice 3-2, which requires the listing broker to communicate any changes in offers of compensation before an offer to purchase is produced, states:
REALTORS® shall, with respect to offers of compensation to another REALTOR®, timely communicate any change of compensation for cooperative services to the other REALTOR® prior to the time such REALTOR® produces an offer to purchase/lease the property. (Amended 1/94)
What if the listing broker and buyer’s broker get into a dispute over the lender’s refusal to approve the short sale unless the commission is reduced? A.A.C. R4-28-1101(D) states: “A licensee shall not allow a controversy with another licensee to jeopardize, delay, or interfere with the initiation, processing, or finalizing of a transaction on behalf of a client.” However, the Rule is clear that “[t]his prohibition does not obligate a licensee to agree to alter the terms of any employment or compensation agreement or to relinquish the right to maintain an action to resolve a controversy.” Therefore, this Rule does not apply to a dispute arising from a refusal to reduce the agreed upon commission; it applies primarily to procuring cause disputes. Thus, if the brokers can not reach an agreement, neither will reduce their commission by the full amount demanded by the lender, and the lender will not approve the short sale without the commission reduction, the transaction simply will not close.
If the listing broker agrees to reduce the listing commission and instructs the escrow company to reduce the buyer’s broker’s commission as well, can the buyer’s broker agree, allow the transaction to close, accept the lower commission and then pursue the listing broker for the reduction amount? No. If the buyer’s broker agrees to accept a reduced commission amount, the buyer’s broker is bound by that agreement.
Isn’t the buyer’s broker in the above situation accepting the lowered commission under duress? The buyer’s broker may be under duress in that the broker wants or needs to be paid, but that does not constitute the type of economic duress that would invalidate the agreement to accept the reduced commission amount. As an Arizona Court explained: “[a] charge of economic duress or business compulsion must be based on the acts or conduct of the opposite party and not merely on the necessities of the purported victim, or on his fear of what a third person might do, and the mere fact that a person entered into a contract with reluctance, or as a result of the pressure of business circumstances, financial embarrassment, or economic necessity does not, of itself, constitute business compulsion or economic duress invalidating the contract . . . Unless wrongful, unlawful or unconscionable pressure is applied there is no business compulsion amounting to duress . . .” USLife Title Co. v. Gutkin, 152 Ariz. 349, 732 P.2d 579 (1986).
Could the listing broker have avoided this issue by offering a split of the commission approved by the lender (for example, 50/50), instead of offering a specific percentage of compensation for buyers’ brokers when posting the listing in the MLS? No, offering a split would conflict with MLS Rules. The NAR Model MLS Policy requires that the compensation specified be a percentage of the gross selling price or a definite dollar amount. Therefore, the listing broker could not offer to split the commission 50/50.
In conclusion, brokers who are involved in a short sale transaction must be prepared to address the many issues these transactions present, including the potential of a demand for a reduction in commissions. These situations should be handled professionally in all cases and any agreement to alter the previously agreed upon commission structure should be reduced to writing to avoid any misunderstandings or disputes after close of escrow.