In response to the rising tide of short-sale properties and foreclosures, a National Association of Realtors committee that meets next month is expected to consider new rules to better describe the status of properties in Realtor-affiliated multiple listing services.
Some local and regional multiple listing services have worked out definitions and disclosures about the status of properties and developed their own policies related to bank-owned foreclosure properties and short sales. Short sales are typically defined as transactions in which the lender agrees to accept less than the full amount due on a mortgage when a property is sold in order to avoid a costly foreclosure process.
There are some differences of opinion within the industry about how and when to characterize a property as a "short sale" property, and members of the National Association of Realtor trade group’s Multiple Listing Issues & Policies Committee are scheduled to review and discuss policy recommendations on the issue during the association’s annual conference in Washington, D.C., in May.
MetroList MLS, which has about 25,000 participants in the Greater Sacramento area, allows its participants to specify whether a property has a "short sale lender approval contingency," for example, among other categories.
The MLS, which serves several counties including national foreclosure hotspot San Joaquin County, requires participants to designate short-sale properties using a specific MLS data field, and to communicate to cooperating brokers whether the commission offered could potentially be reduced because of the required court or lender approval.
Most MLSs do have data fields that specify whether a sale is "subject to lender approval" or "subject to court confirmation" said Colleen Badagliacco, a Realtor in San Jose, Calif., who is serving as the chairwoman for NAR’s Multiple Listing Issues and Policies Committee.
And in cases where the property has been bought back by the bank through a foreclosure process and is for sale as a real estate-owned or REO property, MLS participants can describe this status and the possible impact on commission in private comments to other participants.
"The (issue) that we’ve really been trying to focus on and pin down for discussion at the May meeting is: How do you define a short sale? Because technically you don’t have a short sale until it comes to closing and there is not enough money to pay off the lender," Badagliacco said. "This can be a slippery slope."
For example, a house may be listed for sale at $500,000, and the outstanding loan amount may be $490,000. If the offer is above the loan amount then the property would not qualify as a short sale.
"What we’ve been grappling with is to come up with a consistent definition of a short sale," she said, and to determine when this short-sale possibility should be disclosed.
"It is a material fact that there is a potential here (for a short sale) and someone should be aware of it, but when should you disclose it?" she said.
Awaiting lender approval of offers on short-sale, foreclosure and REO properties can be a lengthy process because of the volume of distressed properties that banks and the asset management companies are working with these days, and agents may want to know up-front whether a property could be tied up in a court process or that they won’t hear back for several weeks on whether an offer is approved.
In California, the status of properties is complicated by two types of foreclosure processes: the judicial foreclosure process and trustee sales, and each process has its own set of rules.
Some properties that are bank-owned or could end up as short sales are not publicly marketed as such, and the banks may have specific directives about how to advertise — and not to advertise — the status of properties to consumers. If a property is prematurely labeled as a short sale, that could potentially attract low offers, and Badagliacco noted that listing agents have a fiduciary duty to represent the sellers’ interests.
On the flip side, prospective buyers want to know about the status of the properties that they could potentially purchase.
"We’re trying to balance the disclosure to both parties," she said.
A working definition of a short sale, which could be considered at the upcoming meeting, provides that a short sale is a sale in which "the title transfers, the price is insufficient to pay the total of all the liens and costs of the sale, and the seller does not bring sufficient liquid assets to the closing."
Under that definition, Badagliacco explained, a sale could not be a short sale until the point of closing.
Trying to describe a "potential short sale" can also be dicey, she said. "Are you potentially pregnant?"
Many real estate professionals have taken crash courses in real estate short sales and foreclosures to better understand the process and to play a role in this growing real estate market segment, though there is a steep learning curve as many real estate professionals have joined the business in the past few years and have never experienced a down-cycle in the market, Badagliacco said.
"There has probably been some slightly inaccurate use of terms" relating to distressed properties in some cases, she said.
The definition of an REO property is fairly clear and straightforward, she said. "It’s the short sale that is problematic because it’s a fluid situation. The trick is how are you fair to all sides: to a seller, to a potential buyer, and on the compensation side alerting the agent."
Though there will not be formal policy recommendations considered next month for MLS-listed properties that are scheduled for sale at auction, Badagliacco said that is another area of discussion for MLSs. Some MLSs do not have specific fields to designate auction properties and do not allow public remarks about auction sales, while other MLSs have specific data fields that describe a property as an auction process and allow agents to set a price or price range related to the auction.
This is not the first time that NAR has tossed around discussions about formal MLS rules for foreclosure properties.
"The last time it came up was in the early ’90s," though the market turned around before formal policies materialized, Badagliacco said. "This has been a fairly protracted (market) contraction and so my guess is we will have at least a better handle on it."
James Harrison, president and CEO of MLSListings, a large regional MLS in the Greater San Francisco Bay Area, said MLSListings has about 4,000 listings listed as short sales in its database, and the MLS "made some changes so that we could accommodate them" in the description fields.
Short sales now represent about 20 percent of the actively listed properties in the MLS, he said. "This market has a lot of short sales and foreclosures."
MLS participants can specify for other members whether a property is a short sale and whether compensation is subject to change, and the MLS also allows participants to make public remarks about the short-sale status of a property.
MLSListings also has policies that require disclosure about properties scheduled for auction, and is also considering whether to add a field for foreclosure properties. The MLS treats REO properties much the same as standard property listings.
Robert Bustamonte, compliance officer for MLSListings, said the MLS requires price information and auction type and terms to be disclosed for MLS-listed properties scheduled for auction. The intent of the auction policy, he said, is "disclosure, disclosure, disclosure."
Sylvia Barry, a Realtor for Frank Howard Allen Realtors in Marin County, Calif., said her MLS, Bay Area Real Estate Information Services Inc., has added several new fields to describe property status, including "REO," "short sale," "in foreclosure," "offer as is," and "notice of default," among others.
She said she would like to see the MLS add a "contingent pending lender approval" field in addition to these descriptions to better explain the transaction. "Until the lender approves it we don’t quite know," she said.
Barry said she describes a property’s short-sale status in the private remarks section. The MLS does not allow participants to include public comments about possible short-sale properties.
Also, she said, "Some agents do not put short sale properties that have rectified contracts as contingent although our MLS rules require it."
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