Do “discount” Commissions = More Failed Pendings?

Everyone has been asking why there are many more failed pending sales these days.

One of the answers is that historically, a portion of “high” commissions has often been spent to keep the sale together through closing.

Let’s use a $450,000 house as the example.

In today’s market conditions, the seller may have “wanted” $500,000 for his house, and is “forced” by market conditions to sell it for $450,000.

In today’s market conditions, the buyer is fearful of future loss of value, and may have agreed to paying $450,000…but the buyer really wanted to pay $400,000.

A sale #FAILs over small things when the contract is on the low side as far as the seller is concerned, and on the high side as far as the buyer is concerned. That describes almost every pending escrow these days., except for short sales and bank owned property.

SO…let’s say that the agent for the seller is going to charge 2% at a 1% discount…and the agent for the buyer is going to charge 2%…at a 1% discount. That frees up $8,000 to handle “stuff”. BUT if the commission is simply discounted from the getgo…well, it may be setting the transaction up to FAIL.

IF EACH AGENT held 1% (2% total) as a “reserve for negotiation disputes”

vs reducing the commission on day one…

less transactions would fail.

The seller and buyer would pay less to get SUCCESS

vs paying less to get FAILURE!

1) ALSO the seller is often OK with giving $3,000 for “this” but not for “that”…so holding a reserve removes the emotion from the equation.

2) ALSO sometimes the seller is OK with giving the buyer a credit for that repair…BUT the buyer’s lender will not allow the credit. So you need to do a bit of juggling, often involving commission dollars vs “seller credits”.

You have to be creative in a weak market…and often juggling commission dollars is what makes the difference between “sale FAIL” and “sale CLOSED”.

This post is in response to a request I got from an agent in my email:

Agent asked me this: “I am a relatively new Agent (less than 1 year) in (X) ย I was very interested in your input on Redfin regarding working with using a bit of the commission for payment of inspection repairs.ย  Any chance you have a moment to give me specifics on how this is accomplished? Uncertain on how, and when, this would be setup?ย  I still struggle a bit with stayingย exactly within the MLS formats.”

In response, in addition to the post, I will give a few recent examples.

1) I listed a home for $399,950. In this case I was going to charge a $10,000 flat fee for me and a 3% offering to the Agent for the Buyer. Instead I did a 6% contract, knowing I would not charge the seller more than $10,000.

Everything went fine…got an offer…went into escrow…we told the buyer 3 things that were broken. During inspection negotiations, oddly, the buyer asked for $1,300 for 5 things…but not for any of the things that were broken. The seller would want to argue the point of “for what??”.

By reserving $2,000 for inspection repairs there was NO dispute…The buyers got the $1,300 that they asked for and by agreeing to the buyer’s request…the seller got $700 change. Win-Win by using commission dollars vs letting the buyer and seller negotiate it to the point of “Sale Fail”.

2) I listed a much older house than the one above for $600,000. Same scenario. I was charging the seller a $10,000 flat fee…but stated that as 3% with $8,000 as a reserve from commission for repairs.

At time of inspection the buyer wanted the roots in the sewer drain fixed and $6,000+ for repairs, including the things we told the buyer were in need of repair. In a hot market…that repair was not needed or requested. In a WEAK market…there are more things “broken” to cause a #FAIL. Market conditions will change a “no problem” item into a $5,700 “fix”, as it did in this particular case.

The front porch of an old house leaning a bit in a hot market is a “no-nevermind” with multiple offers. In a WEAK market the buyer wants money to fix the slight tilt of the front porch. Same house…same problem…different markets = different inspection request.

Long story short…with no commission dollars to fix the problems…the sale would have failed. By reserving $8,000 toward repairs…the client was successful. IF I had listed it for a $10,000 flat fee…on day one…the sale would have failed.

So giving that discount up front would have caused the sale to fail.

3) The house I sold in about 20 days that was the subject of my “Why Agent’s Are Better than Lawyers” post. Sold at Full Price with Max Credits from seller to buyer. Lender would not allow any more seller credits. As I noted in the post, I charged $5,000 BUT what I don’t say in the post is I reserved the $2,500 in a 3% charge toward repairs.

At time of inspection, buyer wanted several things. Neither I NOR the seller could give a credit for them. The buyer’s lender would not allow the credit. At least one of the things was not needed at all…and pretty costly.

The sale would clearly have failed over that item without the reserve from commissions. No question about it.

By doing the repairs prior to closing and paying for the repairs from my commission at closing…the seller and buyer had a successful closing with all repairs DONE! Awesome result. Quick sale..everyone happy.

Moral of the Story?

Saving Money…and losing the “successful closing”

by discounting UP FRONT

vs when needed MOST…

may be a Lose-Lose for everyone.

32 thoughts on “Do “discount” Commissions = More Failed Pendings?

  1. Before I comment, I need to understand the proposal: What is the mechanism by which each agent creates this “reserve”? Is it noted in the listing agreement that 1/3rd of each commission is being held “in reserve”? And what happens to those funds if no reserve is needed?

  2. Craig,

    I can only answer as to how I do it. There are likely many other appropriate answers. We also have to be careful that it doesn’t turn into an undisclosed “variable rate commission”. One of those pesky mls rules. ๐Ÿ™‚

    All of my examples in this post are with regard to being the Listing Agent vs the Agent for the Buyer, so I’ll start there. I do a thorough personal inspection of the property…one of the reasons I stage my own listings. Gets me in and out of most places in the home, except for under it and in the attic.

    In the first example it was a newer home built in 2003, so it did not need any major things. Old School way is to “plug in” the anticipated cost of inspection requests into the Sellers’ Net sheet before the home is listed. That way the seller has somewhat pre-agreed to what is likely going to be required to close the sale of their home. They are at least made aware in advance that no one skates through a Home Inspection in a weak market, with no requests. It can still be done that way, but doesn’t work as well.

    WHAT it is controls the HOW to a large degree. After being at hundreds of home inspections over the years, I pretty much know what the inspector is going to “call”, and anticipate the total cost based on the items.

    1) Check the age of the hot water tank before the home is listed. If it is at least 10 years old or more, likely the buyer’s inspector is going to call for a new one. A credit will often cost more than replacing the tank, so I usually have the tank replaced prior to closing. In one case the buyer’s inspector did not ask for a new tank…though they should have. In that case I bought the buyer a home warranty to cover their inspector’s error. On occasion the tank is replaced before it goes on market…but usually better to give the inspector something “to call” unless the tank is in danger of blowing before you have an offer or before the sale closes.

    2) Check the age of the heater and the “tagging”. Most any inspector will call for an HVAC qualified 2nd inspection if there is not a service tag on there from within the last 12 months, especially for a heater that is 10 years old or older. Best to use the commission to have it serviced and tagged prior to it being listed, so you know if a new heater is going to be called. At minimum the servicing will produce a recent tag and repair any minor things that need to be done and also put in new clean filters that will make the Home Inspection result of that heater better. Nothing ticks a home inspector off like dirty filthy filters. ๐Ÿ™‚ You can have the owner pay for that and reimburse them at closing from the set aside, especially if repairs are part of that billing.

    3) Roof…use age as a quick rule of thumb. 30 year shingle put on 12 years ago…might need some minor maintenance issues. 25 year shingle put on 18 years ago…iffy. No I don ‘t order a pre-inspection in most cases. But if it is 16 years old plus, I usually get it cleaned and checked as a mossy roof is less likely to “pass” than one that was recently serviced as to cleaning (do not power wash a roof!) and flashings and gutters cleaned. On a newer house I let the inspector call those things. On an older house a $500 request can turn into a request for a new roof costing thousands. So you have to use your judgment there.

    You don’t want to leave nothing for the inspector to call, and you don’t want to do a “pre-inspection” in most cases. The more accurately you are able to put a number on what the buyer and inspector are likely going to want…the better this works.

    In a hot market…the discount up front worked better and created fewer “back on markets”. In a weak market, the chances of the buyer asking for nothing are slim to none, unless it is a hot property. Even then…in a buyer’s market…a buyer often feels foolish to ask for nothing at all. So preparing for that eventuality is a must.

    How you do it has a lot to do with the buyer’s lender and what they will and won’t allow. If the offer came in with max credits toward closing costs…that is a HUGE red flag that you will be very limited as to how you can make it through the home inspection with no more room for allowable credits. Takes a lot of skill to not fail on inspection in those instances.

    Agents who don’t understand financing ask for a big credit at inspection…when they have maxed out their credits in the original offer…well, that is a sale that is doomed to fail when the lender diapproves the inspection credit…sometimes the day before closing. One must be aware of what the buyer’s lender will allow…and often not by asking them. On my last one I figured between $5,500 and $6,000 would be allowed by the lender. The lender said 4% of the sale price ($10,000), quoting the max under the program…which is NOT the case. So don’t go by what the max of the program is…go by what the total closing costs will be, as most lenders will not allow a credit in excess of the total closing costs. If those are 2%…than that 4% allowance is meaningless.

    The goal is not to have any “excess” going back to a seller, as that can defeat the purpose. So accurately pinpointing the amount gets better with practice and experience and works really well. On a house that needs a lot of work, you may want to match the seller dollar for dollar.

    Checking your question again to be sure I answer it in full…

    Craig asks: “What is the mechanism by which each agent creates this โ€œreserve

  3. Sorry, I meant to ask: “What is the LEGAL mechanism by which an agent creates this “reserve”?

    Reading between the lines above, it seems to me that this “reserve” is really make-believe and relies completely on the good will of the agent. In other words, this “reserve” is not an identifiable sum that will be used for a specific purpose (repairs, or “contract negotiations”) and if not so used will be returned to an identified person. Rather, this is a made up sum that exists only in the mind of the agent. If the agent wants to spend this “reserve” on repairs, great. But the agent has no legal obligation to do so. Rather, the agent is legally entitled to the fee, and what that agent does with it is that agent’s business.

    By calling this a “reserve” you are really putting lipstick on a pig. In reality, this “reserve” is the fee paid to the agent in excess of what is a fair amount for the service. You, being so extraordinary, use it to make the deal work. But you have no legal obligation to do so.

    I’m pretty sure any economist would vomit upon hearing your argument that this is somehow a better system. It is a monstrously inefficient way to compensate professionals. Essentially everyone overpays. Some of the professionals then use this fee for the benefit of the parties. But of course others do not. It would be much, much more efficient if everyone simply paid a fair fee; when additional funds are needed, they can come from the parties — it is, after all, their transaction and their money, its reasonable that they pay necessary costs as they are incurred.

    Finally, you really tip your hand when you say that the “reserve” may be consumed in “contract negotiations.” WTF? I thought these cash funds were to be used for actual expenses necessary to make the deal work. By noting that the reserve may be consumed by “contract negotiations” — i.e. excessive effort by the agent to get to mutual acceptance — you concede that this is no “reserve” at all. Its the agent’s fee. Some agents may use that fee to make the deal work, others may not. But its an inefficient system.

    • And that my friends…is why you need an agent and not a lawyer. ๐Ÿ™‚

      You are a smart man, Craig. As I said…you can reconfigure it to suit the needs of all of your pieces of signed paper. Real Estate is MUCH MORE than a bunch of signed papers. Find the effective means that suits your business model. Go through any failed transactions after you are in business a year or two, and make corrections that would have caused those client failures to be client successes. It’s really as simple as that.

      The amount is absolutely known by my clients in advance…that you can’t picture a world without every tiny i dotted and t crossed on a signed piece of paper is not my problem…or the problem of my clients. Usually I just write it out on the contract. Pretty simple really. We have to be a little “loose” about it, as we don’t know what rough spots we are going to hit in advance. We know we will have them…but until the buyer picks a house or the seller gets an offer and an inspection request…you have to allow for a little flexibility.

      I know flexibility in a contract may be a little foreign to you…but it’s fairly easy to achieve. Not rocket science.

      My clients hire me to help them succeed at what they are trying to do. Your clients pay you whether they succeed or not. Perhaps that’s where the confusion lies. A failed purchase to you is the same money to you…I am talking about helping the client be succesful…you have no vested interest in their success, as you get paid when they fail…the same amount as you would be paid had they succeeded.

      My clients are grateful for this method…it removes their emotional attachment to a $250 issue. At the time they can’t remove the emotion for some other reason that causes their senses to be blurred momentarily. Often it is because they love their house…or it is ego and about BUT the seller “should” or the buyer “shouldn’t”. Those are the little things that cause transactions to fail…if you don’t prepare for that ahead of time.

      There is a reserve…the only time my client doesn’t know about it is when they want to pay me full price and I know a lesser one is more fair for one reason or another. Then I work it into the transaction the same way you make a gift to someone who thinks it is excessive or unwarranted.

      This is a personal business for people who roll up their sleeves and help people succeed at buying the right house or getting their house sold. It is not a bunch of “accurate” paper…and it is filled with 196 landmines called “mls rules”.

      You have to know how to dance…for your client to get to the finish line…in most cases. Not all…but most. Once a sale fails…it’s near impossible to pull it back out of the drink. You have to manage every step of the way…and all of that is not necessarily pinned down on day one, because it’s a two party transaction, and the 2nd party is an unknown at time of contract.

      Without flexibility…which you choose to call inefficient…more sales fail. More ARE failing. Time to work in a little Old School to fix that.

      • Craig,

        ALL Buyer Agent Commission arrangements…MOST ALL…are not a hiring by contract of the buyer agent. MOST are verbal arrangements, and have been for…oh…about 100 years.

        What an economist would hurl about or an attorney would lose sleep over, is common practice in the real estate business, day in and day out.

        If my client and I agree that the commission will be $12,000 with $6,000 to be used toward…whatever we agree it will be used toward, then that’s what it is. That IS real estate, Craig. I know you are new to all this, but having this industry fit your perception of it, after it being in existence for at least 100 years, well…I don’t know what to say about that.

        This is what David is saying when he says “you come into our industry…” and throw rocks at what you simply do not understand due to lack of experience in the real estate industry.

        This is every day stuff in real estate, Craig. I can give you a list of everyone of my clients who used this arrangement at their choosing and by mutual agreement. It works. It’s good.

        That it doesn’t fit into your “lawyer training” of how the world works, is your personal problem. Not an “inefficiency” of “our” industry. How can you possibly say that I am overpaid…but when Ray says that to you…you get very, VERY upset. My clients don’t think I am overpaid. Your clients don’t think you are overpaid. We each get paid for what we do, by mutual agreement with our clients.

        You choose to have that pinned down in writing so that you get paid whether your client is successful or not. I am more vested in my client having a successful outcome, and mostly use verbal agreements confirmed by email with buyer clients.

        You are a different model, Craig. Embrace that. You don’t have to think everyone else has been wrong for 100 years for you to have that model. Really. Lighten up. Some people choose to believe in God, even though they can’t see him. Some people are just fine with an email from Ardell confirming the commission arrangement we agreed on…most don’t even ask for that, but I insist to be sure I don’t forget what we said if it takes a year or more to find the right house.

        If you are going to shift into a real estate agent from an attorney…you may have to leave a few dotted i’s and crossed t’s back at the office.

  4. …but “happily ever after fails”
    and we’ve been poisoned by these fairytales

    the lawyers dwell on small details…

    this is the end of the innocence.

    Don Henley

  5. This is the second time you’ve replied three times to my one comment. It does a very good job of obscuring the issue presented.

    I think I’m going to take a page out of your book, Ardell, and start talking about me and my practice and how I do such great work for my clients. To date I’ve always tried to focus on larger issues — systemic issues — but the rebuttal always gets back to the absolutely incredibly wonderful job you do for less for each and everyone of your clients.

    I understand the goal of the transaction: Close it. Right up until my client decides to not close it, then of course the goal is to avoid any further contractual obligations without incurring liability. I bust my hump to achieve my client’s goals. Very, very few of our transactions fail without our client being on board with failure. And of course your “contingent fee” arrangement also cuts the other way: Most agents — certainly not you, I know — might be tempted to encourage the client to close even if the client does not want to do so, because absent closing there is no fee. My model avoids that conflict of interest.

    Ironically, the biggest problem I have is dealing with lenders to apply my full rebate. Since the rebate oftentimes exceeds closing costs and prepaids, I need to work with the lender to get approval of some other credit in favor of my buyer client to exhaust the remainder of the rebate. Some banks – big ones like Wells Fargo, out-of-state small lenders – have a really, really hard time understanding that the law allows for this rebate. It can lead to a last minute thrash. But I spend the time to get the deal done.

    Seaking of which, Ardell: Are YOUR “reserve credits” to or on behalf of your client disclosed on the HUD-1? You’re a little too loosey-goosey with the facts to really nail you down, and it sounds like these “reserves” — which exist only in your head — can be applied a whole bunch of ways. I suspect that some of those “ways” fall within a required disclosure to the lender on the HUD-1. But on the other hand, your intent is pure, so who cares if you cut a few legal corners, break a few laws, to get the deal closed, right?

  6. Craig says: “Ironically, the biggest problem I have is dealing with lenders to apply my full rebate. Since the rebate oftentimes exceeds closing costs and prepaids.”

    Not ironic at all, Craig. It’s a fact of real estate transactions, and something every agent should know before they write an offer and before they negotiate a home inspection. In fact you shouldn’t be fighting tooth and nail on every deal to work a cash back. The lender has every right to insist the amount be applied to lower the purchase price vs cash in the hand of the buyer, and limit the transaction credits to price and closing costs.

    Not only do they have the right to do that…it’s pretty much a given that they DO do that and SHOULD do that. In fact I make a strong argument that they shouldn’t allow it toward prepaids either…and there may come a day in the near future when we go back to the loan not being able to include the first year annual premium for insurance. What does THAT have to do with “collateral”?

    At minimum these excess financed costs should be fully disclosed publicly, so that the sold price used for comparable sales does not include all of this “excess” over the property’s real sold price, without some disclosure of that fact. It’s very misleading to the next home buyer who is using that amount in the “comps”.

    Back to your dilemma, there’s a difference between “flexible” (so as to do so in a legal way) and “loosey goosey”.

    Most recent example.

    1) Listing Contract was for $250,000 with 3% to the agent for the buyer and 3% to me, including a reserve of $2,500 toward repairs or other transaction considerations. In this case it was $2,500 not “1/3”, as if the house sold for less than full asking price, the reserve would not change. Every case is a little different for it’s own reasons. Remember…my client is fully willing to pay me the full 3%, so the reserve is YES…somewhat within my control as to how and where to apply it toward a successful transaction for my clients. IF (not the case here) the buyer and seller were $1,000 apart at time of offer and acceptance, yes…it could be applied to that difference. Though that was not the case here, and I prefer it be reserved for other issues that have to do with the house, and not the initial price negotiations, when possible.

    I think it is more appropriate for those monies to go into the lender’s collateral than to bridge a gap in offer and acceptance price, for many good and valid reasons. But if someone gets into an ego battle over $500…I am free to bridge that small gap, as any and all agents have always been able to jump in and resolve that issue. Most any agents.. unless they are foolish…do.

    OR if they perceive there is a bigger reason why everyone is stalled at $500…as in the buyer doesn’t really want the house, then it should NOT be applied in that manner by the agent for the buyer, only by the agent for the seller. Again, agents should never forget whom they represent and never work against the interests of their client. That is why “loosey goosey” as you call it, and being flexible as I call it, is absolutely necessary.

    2) Contract, after offer and counter offer, was for full price with $6,000 toward closing costs.

    3) There was one minor dispute over the washer and dryer. The seller did not want to, and did not in the listing, include the washer and dryer. The buyer wanted the washer and dryer included. Buyer’s Agent said “$6,000 is in excess of what the buyer’s lender will allow. The seller can keep the difference (unknown number until day of closing) toward the washer and dryer.” The washer and dryer became included at time of final acceptance. This is important due to a later negotiation at time of inspection.

    4) Home Inspection request was for several items which could easily exceed the $2,500 reserve, plus $500 credit.

    5) Back to Craig’s dilemma of “what a lender will allow as credits”. Every agent MUST know about these limitations, whether it is due to trying to hand the buyer commission dollars, as in Craig’s case, OR as part of regular transaction negotiations. As noted in my post, an agent who does not know this is leading a client toward a failed sale if they allow their client to ask for or agree to something that can’t be done. Anyone representing a buyer or seller in a real estate transaction must understand financing and the limitations thereto. Not be surprised when it happens…know it in advance.

    6) I tried to explain to the Agent for the Buyer that based on what HE said before, not my opinion, the $6,000 credit in the initial agreement was already in excess of allowable credits. So why are we adding $500 to an amount that is already in excess? No luck…I put it in the “deal with it later” column and proceeded. ๐Ÿ™‚

    7) To answer Craig’s question about my “loosey goosey” methods…there are legally THREE choices here (maybe more if I think harder…but let’s deal with the primary three). That’s why there needs to be flexibility to choose from the available legal methods:

    a) You can work the reserve into a credit from seller to buyer for repairs, cleanest method, but not available in this case as buyer maxed out their credits at time of offer and acceptance. NOTE to Agents and Home Buyers! IF YOU MAX AT YOUR CREDITS as to what your lender will allow, at time of offer, you can’t be looking for MORE credits down the line from the seller or your agent. Makes perfect sense to want a repair credit…BUT…not doable if you already maxed out your credits. Forewarned is forearmed. How many sales fail because the buyer wants a credit for repairs? MANY! Not because the seller won’t give it…but because their lender will not allow it. Knowing that a lender RARELY allows a credit in excess of closing costs…no matter who that credit comes from…or what it is for, is a very important thing to know.

    b) Reduce the purchase price by the amount of the reserve and excess credit. This works better if the buyer has the money to do the repairs after closing from their own funds vs the lender’s funds. This is the cleanest way to do it from the lender’s standpoint. This way the Sold Price represents the full collateral at time of closing and the 80% LTV is a true representation not skewed by excessive credit issues.

    c) Do the repairs with the reserve and the excess credit…throw in a home warranty…build the credits into the collateral as repairs or into protections for future repair needs. Usually a combination of both.

    In the instant case we used c) above. We installed a fire door between the house and the garage. It was already a solid core door and satisfactory since 1966 for that home…but we put in a new one. We did about $600 of electrical improvements as request in a detailed list from the buyer’s home inspector. We installed a new hot water tank…again, like the fire door…maybe not necessary, but the buyer wanted peace of mind that it didn’t need to be replaced again for at least 5 years. Added smoke detectors in all of the bedrooms…went the extra mile and made the Carbon Monoxide and smoke detectors, even though not requested in that manner. Added a whole house warranty…premium package plus added optional coverage for the air conditioning system. No one asked for a warranty…but on a house built in 1966…you really need one. I had already told both seller and buyer, but since no one wanted to pay for it…I built it into the reserve. Sometimes you have to give people what they need, whether they “want” it or not.

    The original billing was to be $2,501.66 with tax. My initial guesstimate was $2,500. Pretty darned close. Craig wants to know who would pay that $1.66. I say who cares.

    The final billing the day of closing was $2,476.66. Craig wants to know who gets that difference of $23.34. I disclosed it to the clients…they wanted to take me to dinner…I said I’ll bring the $23,34 toward the dinner bill. ๐Ÿ™‚

    Loose goosey?? I guess one might call that “loosey goosey”. I call it a successful transaction for all involved. The lender wins as well, as the collateral for that loan was increased by the $2,500 worth of improvements to the collateral asset. The insurance provider wins as well, as the new hot water tank is less likely to blow than the 9 year old one in the next 3 to 5 years.

    Representing ONLY your client well…yes…but understanding ALL OF THE MOVING PARTS WELL and being flexible accordingly…even better.

    Sorry if you think that sounds like a commercial for me, Craig. It isn’t! It’s an effort to be transparent about the actual ways a transaction unfolds…for the benefit of all readers. Buyers, sellers, and agents alike. Do you really think I am the only one who knows this or you are the only one who does not?

    Blogging in detail vs tiny sound bites adds value for the buyer reading from most anywhere in the Country and the seller reading from most anywhere in the Country and the Agents reading from most anywhere in the Country.

    Blogging is about educating on the process…and the best way to do it. Leaving the transaction “high and dry” after initial commission negotiations IS NOT and has never been the best way. Next time you see someone asking “why are there so many failed pending sales?” and I see it on Seattle Bubble and I see it in Redfin Forums…a LOT! Ask yourself…if maybe, just maybe…leaving the transaction “high and try” and leading it to failure as a result…may not be at least ONE of the many reasons why so many pending sales are failing.

    Clearly it can account for at least 1%? If you say no to that…well, you would just be fighting for your toehold and not answering the question honestly. But you can answer it any way you like. It’s a free Country.

    • Brevity certainly isn’t your strong suit, Ardell! ๐Ÿ˜‰

      You said, in reference to a lender’s hesitancy to allow a buyer to get the full benefit of the SOC rebate: “Not only do they have the right to do thatโ€ฆitโ€™s pretty much a given that they DO do that and SHOULD do that.”

      That’s interesting, because that’s not what Fannie/Freddie Guidelines have to say about it, nor is that consistent with the DOJ’s position that rebates are healthy for the marketplace. Is it possible, Ardell, that I know more about this issue than you? ๐Ÿ˜‰

      I understand that the parties might benefit from breaking the rules a little. But failing to disclose IPCs (check the Fannie link) is bank fraud, a federal felony punishable by 30 years in the clink and/or $1m fine. And I’m sick to death of lenders telling me to just cut a check outside of closing to buyers for the balance of my rebate, i.e. telling me to commit bank fraud. I’m sick of people deciding which law can be broken because “everybody wins”. I think it reflects poorly on our profession.

      [You’re right, by the way, lenders certainly don’t have any legal obligation to allow a credit in excess of closing costs and prepaids, except that their refusal is usually based on their own misunderstanding of the guidelines.]

      • We’ll agree to disagree on that one, Craig.

        I don’t think the lenders “misunderstand” nor do I think the DOJ is fighting for the right to build those “rebates” into non allowable credits.

        The DOJ is fighting for variance of commissions via rebate WHERE ALLOWED AND PRACTICAL and as used by other means, like against purchase price or against property improvements WHEN NOT ALLOWED BY LENDER AS ACTUAL CASH CREDITS.

        Do you really think that you understand, and every lender since there has been a mortgage in this Country is “misunderstanding”. Wow! Hey…whatever floats your boat.

        That you don’t understand it…does not mean the entire rest of the world, and the way it has been done ethically and legally for over 100 years…is because everyone else except Craig “misunderstands” it all.

        The lender is allowing the commission to be included in the financing. You want them to allow what COULD HAVE but IS NOT the commission…to be included in the financing. Someone is indeed “misunderstanding” that. But it is not “the lenders” in toto. But if you want to believe that…like I said…It’s a Free Country.

        • Wow — what is so appalling is that you clearly did not even take the time to analyze those links in any deail whatsoever. You don’t even pretend to learn from a discussion!

          We work with lenders who allow credits in excess of closing costs and prepaids all the time. They are enlightened. Others are not.

          Okay, hit me with your long-winded, misinformed last word…

          • Craig…you can not “learn me” that amounts in excess of the commission, can pretend to be commission when they are not, and financed as commission when they are not. It’s really as simple as that.

            The lender allows for the cost of the transaction, within limits, to be included as part of the sold price and financing. If the lender is financing 80% of the purchase price, they are also financing 80% of that commission. If the seller offers 3% of an $800,000 purchase as commission ($24,000) and you only charge $4,000 as commission, then “the $4,000 actual commission” should be included in the price and financing, and $20,000 should reduce the price of the home to $780,000. Or…used for a new roof needed or new siding on the home or something that has to do with the bank’s collateral, given they are financing 80% of that “cashback”.

            It’s that simple. Otherwise why wouldn’t everyone “pretend” the commission is the max allowable, which I believe is customarily 7% by lenders, and take the difference in cash and go to Hawaii with the “excess mortgage” and let all home sales include a trip to Hawaii? If you can pretend something is a true cost of purchase…when it is not, why couldn’t everyone do that…on every transaction…jack up the commission above what it truly IS, and to the max allowable, and “keep the change”?

            Why can’t they buy a new boat…stick it in the living room, and call it part of the purchase price and finance it with the house? You may think that is ludicrous, but what you are doing is having the seller stick $20,000 cash on the coffee table and then having the bank finance 80% of that as part of the cost of the house.

            ACTUAL commissions can be financed as part of the sale price. $20,000 sitting on the coffee table in excess of the actual cost of commissions charged cannot…should not…you can browbeat them into saying yes…but really? Why should $20,000 put on the coffee table by the seller be financed 80% or more by the home financing?

            On second thought we better have the seller wallpaper his bathroom with that $20,000 “pretending to be commission” because the coffee table isn’t part of the sale and financing…nor should the cash be part of the sale and financing unless you permanently affix it to the property.

  7. More on ACTUAL price and the costs that “can” be financed.

    Say the house appraises for $850,000 but the purchase price is $800,000, can you get 80% of the $850,000 from the bank as part of the mortgage…pay the seller $800,000…and keep the difference?

    NO! Why? Because they finance 80% of the appraised value OR 80% of the cost of the house…WHICHEVER IS LESS!

    Now…apply the same logic to the commission. If the commission COULD have been $30,000 and financed, but it is REALLY only $4,000…should you be able to get 80% of the not charged commission of $26,000 from the bank as part of the mortgage and go on a trip to Hawaii with it?

    NO! Why? Because they finance 80% of the max allowable % commission OR the ACTUAL charge for commission…whichever is LESS!

    If the true cost of professional services to sell is 4%…they allow that in the financing and provide 80% of it on a 20% down transaction.

    If the true cost of professional services to sell is 5%…they allow that in the financing and provide 80% of it on a 20% down transaction.

    If the true cost of professional services to sell is 6%…they allow that in the financing and provide 80% of it on a 20% down transaction.

    NO ONE should include commissions in excess of the true charge for services up to the max allowed, that are not the true and actual charges for those services, any more than they should include the full appraised value of the home if the actual price of the home is less than full appraised value.

    The max that “could have been” is not the basis to finance it 80%. It is the lesser of the max it could have been…OR THE ACTUAL…whichever is less.

    Again…a kid can throw a massive hissy fit at the candy aisle and sometimes get a big bag of candy and eat it in the car on the way home. That someone can figure out a way to do it…is not the benchmark for “should” vs “can”.

  8. Honestly, I have no idea what you are talking about. All I know is as follows:

    An SOC rebate is an “Interested Party Contribution” (IPC) per Fannie guidelines (see link above, and then use the TOC to link to “Interested Party Contributions” B3-4.1). IPCs can take two forms: Financing Concessions, and Sales Concessions. Financing Concessions are applied to allowable closing costs and prepaids; Sales Concessions are IPCs in excess of those costs. Sales Concessions are allowed if the sale price is reduced by the amount of the Concession to determine an adjusted LTV for loan purposes. All lenders are OK with Financing Concessions; only enlightened lenders are OK with Sales Concessions.

    If you believe I am mistaken, I’d appreciate a response based on existing legal authority, not on your theoretical musings…..

  9. Craig says: “Sales Concessions are allowed if the sale price is reduced by the amount of the Concession to determine an adjusted LTV for loan purposes.”

    No argument there, Craig. In fact that is what I said. Whether you changed what you said to what I said…or we were agreeing all along…well, it’s Monday. A new week. Who cares? LOL!

    The point of the post is to be open to USING the “Sales Concessions”, or a portion thereof, to what will make your client most successful in their overall goals, before jumping to credit OR price reduction. If your client wants lowest price that is below Fair Market Value, and a ton of repairs or even upgrades to the home like refinished hardwood floors, and the seller to pay closing costs, and to KEEP all of the forfeited SOC for themselves, well…that might just land them at the wrong house that is willing to bend over that far.

    Laying the ground work from day one, that the forfeited SOC “rebate” might be best used for something other than just “WooHoo! Free money!” is often the better way, and one that will bridge the gap between getting the right house…or conversely getting it “all” at the wrong house.

    Leaving the transaction “High and Dry” when your client needs it most…by pulling the forfeited SOC out of the price, vs spending it on things that may matter more, is often…not always…but often, not the better way.

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