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Short Sale Commissions, Home Inspection Contingency Addendum Explained

By Sarah Louppe Petcher, NVAR General Counsel

Q.  Must a lender pay agreed-upon commission on a short sale transaction?
A.  This is an interesting question. For short sale listing agents and brokers who have struggled with banks to receive the full amount of the commission outlined in the listing agreement, a court in Iowa has offered some hope. The broker in that case not only got his commission, but the court awarded it to him despite the fact that the deal did not go to settlement!
Here is what happened in that case. The owner of a warehouse was in financial distress and was working with the bank to wind down his business activities and sell the warehouse. The warehouse was rented to a tenant who had a right of first refusal to purchase the property.
The listing broker listed the warehouse for sale and received an offer to purchase the property. The bank authorized the broker to counter the offer and the parties reached an agreement. The broker then drafted a document estimating the distribution of funds at closing, which reflected that the bank would net $110,000.
At this time, the tenant exercised his right of first refusal. The tenant gave his earnest money to the broker, and the broker informed the parties involved, including the bank. The bank responded by stating that it would not accept less than $130,000. The tenant refused the new terms and the deal died.
The broker filed suit asking for his commission stating that he had satisfied all the terms of the listing agreement by bringing a qualified buyer at terms the bank had agreed to. The Court found in favor of the broker, holding that the bank was not entitled to mislead the parties into thinking that they had agreed upon a price when the bank knew the price would not actually satisfy its requirements and that it would seek a higher amount through various concessions.
This case is illustrative only of the law in Iowa, but can give brokers and their attorneys useful information about how to handle lenders in short sale transactions. For the full text of the opinion, go to: http://tinyurl.com/yl8q939 Stewart v. All States Quality Foods, 2009 Iowa App. LEXIS 427, 2009 WL 1499539 (2009)

Q.  How does the Home Inspection addendum work?
A . Many brokers and agents have posed this question recently, so this example offers an illustration:
The selling agent completes the Home Inspection Contingency form correctly and selects Friday as the Home Inspection Deadline. On Friday, one of three things can happen:
(1) The Buyer provides to the Seller a Home Inspection Report and an Addendum requesting replacement or repairs (paragraph i); or
(2) The Buyer provides a Home Inspection Report along with a Notice to void the Contract (paragraph ii). At this time the Contract is void; or
(3) The Buyer remains silent. The contingency expires and the Contract continues as if there never had been a Home Inspection Contingency (bolded language below paragraph ii). This means that the Buyer takes the property “As-Is.”
In the event the Buyer provides a Home Inspection Report and an Addendum requesting replacement or repairs
(option (1) above), the Seller then has a number of days to respond. If the Seller does not respond or makes a counter offer, the Buyer has some time to consider the Seller’s response or lack of response and can still choose from any of the three options above (submit a revised Addendum, void the Contract or take the property “As Is”).
A word of caution! In this very common fact pattern the Buyer may lose the deal over a very small amount of money.
To illustrate, Buyer selects option (1), and provides the Seller with a list of items he wants replaced or repaired. The Addendum requests that the Seller change the carpet in the living room, fix a hole in the basement wall, fix a leak in the bathroom and make the necessary repairs to the ceiling below that bathroom.
The Seller counters, agreeing only to some of the changes. She agrees to repair the leak in the bathroom and the ceiling below. However, she does not agree to change the carpet in the living room or the hole in the basement wall.
If the Buyer counters, once again, he essentially re-opens the deal for negotiations. By countering, the Buyer may risk losing the deal or any concessions he may have won with the Seller’s initial response.
Agents should explain to their clients that attempting to save just a few hundred dollars could result in a lost transaction.