Do lenders allow their short sale borrowers to list with Flat Fee brokers?

Asked by Iggy, Florida Wed Feb 3, 2010

I recently spoke to a seller who submitted a signed offer to the lender for his short sale property. The lender refused to accept the offer. The lender further informed the seller that their decision to refuse the offer was because the property was listed with a broker who does not collect a commission, therefore the property was not marketed appropriately. Has anybody heard of this situation?

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Erich Whitem…, Agent, FL,
Thu Feb 4, 2010
Having worked with Sellers of Short Sales, I've had their lenders want to see it marketed for 2 or 3 months before doing a Short Sale. They wanted to ensure that the home was in the MLS and being marketed ina similar fashion to non-short sale homes.

Once we had gone through that period, First American Loss Mitigation, working with Suntrust, moved quickly to order the BPO and approve the short sale. First American Loss Mitigation was great to work with.
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Susan J Penn,…, Agent, Weston, FL
Mon Feb 22, 2010
A short sale is a highly techical sale requiring professionalism, many hours of time, paperwork and negotiation. Take for instance one of my last short sales where the seller stopped paying on the pool maintenance and the maintenance on the grass and the city placed a lien on the property. The short sale was approved. Another short sale involved a federal tax lien. This short sale was approved.
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Erich Whitem…, Agent, FL,
Mon Feb 15, 2010

From the bank's perspective, they likely know that a flat fee broker that only lists the property in the MLS but leaves everything else to the seller is going to get even less attention than listing it with a full service broker, since the broker is at least looking at earning a commission on the short sale price and quite possibly, finding the seller another home, be it rental or sale.

There are many reasons why a lender would prefer a full service broker to a flat fee broker.
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Iggy, , Florida
Mon Feb 15, 2010
Hello Barry,

There is a method to the madness. First a lender must “allow” a property to sell for less than what is owed by qualifying the seller (hardship, etc.). Second, for a lender to “allow” the property to be sold for less than what is owed, lenders want to see that the property has been listed on the MLS for a period of time and has been “marketed in a similar fashion to non-short sale homes”. Again, this is prior to the lender telling the seller that they can short sell their property.

Once the seller is “allowed” to sell the property for less that what is owed, it can be marketed at the “Short Sale” price and a purchase agreement must negotiated and be submitted to the lender for “acceptance”.

Now let’s think about that for a moment: Lenders require the property to be listed on MLS and be “marketed in a similar fashion to non-short sale homes”. Obviously, since the lender has not yet “allowed” the marketing of the property as a “Short Sale”, the property must be priced accordingly to pay off the note and the commissions that the listing broker is charging (in the listing agreement). The seller is taking on the responsibility of paying the commissions before the lender “allows” short sale marketing. Therefore, prior to the lender “allowing” the property to be marketed as a short sale and be properly priced for the market, the property MUST be placed on the MLS in an overpriced position in case there is a buyer out there that is willing to overpay for the property. Personally, I have not seen many of these buyers in this market!

Now think about it from a listing agent perspective; would an agent put as much effort and marketing expense into a listing that they know is overpriced and headed for “Short Sale”? Not usually.
So what is the point of utilizing the “best agent in town” if they are not going to give their best effort to sell your overpriced property?

It seems to be in the best interest (monetarily) of the seller to utilize a flat fee listing broker before the lender allows marketing as "Short Sale" since they are responsible for the payment of commissions.

Once the lender allows short sale marketing, it is in the best interest of the lender to set a list price (based upon BPO or appraisal) and require the seller to utilize a flat fee broker to keep as much of the sale proceeds as possible that will go towards the loan payoff.
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Barry Dunn, Agent, Fort Lauderdale, FL
Sun Feb 14, 2010
On a short sale, the seller gets no money, but doesn't have to pay a commission either, since the lender lowers the amount they are accepting in order to pay off the loan. Why a seller would want to hire an inferior Flat Fee service when they could have gotten the best agent in town without spending any of their own personal money doesn't make any sense. There must be more to the story than is being told.
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Erich Whitem…, Agent, FL,
Thu Feb 4, 2010
They asked for records showing Open Houses, pricing reductions, ads, etc. They seemed most concerned with how long it was listed in the MLS.
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Iggy, , Florida
Thu Feb 4, 2010
Thank you all for your answers.

Elena: I agree. It seems odd that a lender would require the use of a commissioned listing broker rather than a flat fee listing broker since the issue really does come down to how much the lender is going to lose on the original note. With flat fee brokering and hence the elimination or significant reduction of the listing broker commission, the lender will keep more money on the short sale and recover a higher percentage of their original investment.

Erich: “marketed in a similar fashion to non-short sale homes”.
How did the lender evaluate “marketed in a similar fashion”? Were they looking to see if the typical marketing activities were completed; print ads, open house dates, virtual tours, etc?
Do most brokers/agents with both short sale and non-short sale listings put the same amount of money into the marketing of each?

Keith: I understand your logic from the lenders prospective and respect your statistics. In my experience, most of the reasoning for the longer time on market and failing to sell is due to poor seller pricing and emotional errors in negotiating, not the actual marketing activities of the flat fee/limited service broker.

Looking at it from a lender’s prospective, in which emotion does not play a part in negotiations or pricing, a BPO or appraisal should guarantee a well priced listing. Eliminating the listing broker commission should more than cover the 2.7% average price deficit (if there is one – which there should not be since the lender will be stating the acceptable price.).

and...Yes, extremely related to I do agree and can attest that the portion of the listings held by flat fee/limited service brokers in your market is extremely small. The previous performed poorly in the manner of attracting sellers to utilize the listing service in the entire state of CA. Iggys House would have used MRMLS in your area.

I would be interested in havng a discussion about the rules the treasury has put forth for lenders in the HAFA document released 11/30/2009 if anyone is interested.
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Mark LeMenag…, Agent, Lake Nona Orlando, FL
Thu Feb 4, 2010
Surprising the lender didn't get an independent BPO to determine if the offer was reasonable. But then we are talking about the people who did the most to create the current mess, aren't we. No nice way to put this, sounds like a pretty stupid loan officer.
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Keith Sorem, Agent, Glendale, CA
Thu Feb 4, 2010
(any relation to Iggy's house?)
You may be unaware, the performance of limited service brokers, or MLS Entry Only brokers, statistically not as effective as full service brokers.

I track the actual performance and here are the results in my MLS:
Listings taken by MLS Entry Only or Limited Service Brokers represent a very small portion of total listings.
When they take a listing it fails to sell more than twice as often.
When it does sell it sells on average for 2.7% LESS than the average of full service brokers
When it does sell it takes longer to sell.

So lenders are aware and simply want to maximize the profit from the sale and are willing to pay the normal market closing costs to efficiently and profitably sell a property in a short sale.
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Thu Feb 4, 2010
I do not see why the lender would be opposed to a flat fee broker. I've never had a case where they'd specify that the broker has to be commissioned.

Elena Ollick
Amerivest Realty
Faith Home Loans
skype: napleshomes
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James Gordon…, Agent, Hamilton, OH
Thu Feb 4, 2010
Iggy if the owner was talking directly to the lender they may want to talk to a Realtor®. This should not be hard as most flat fee brokers have an increasing scale of fees. Have the Realtor® get involved and it may go a little smoother.
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Vassi Saviano, Agent, Elk Grove Village, IL
Wed Feb 3, 2010
It is hard to say what exactly happened here without having all the details. Perhaps the lender felt that not enough supporting information was submitted with the offer. Was the lender presented with information on market activity in the area?
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