Real Estate Broker Commissions Are Flexible But Selling A Property In Foreclosure Requires Speed Above All Else

     Sometimes a property owner in foreclosure will decide to sell the property rather than lose it to foreclosure or file bankruptcy.  For some, it’s a difficult emotional choice.  But that old mantra comes back again – time is not on your side in foreclosureland.  Having made the decision to leave, there are a few questions to deal with.  How to find a buyer?  How to market the property?  What should I ask for?  Should I use a broker?  What do brokers charge?  As a licensed attorney and real estate broker, I encounter these questions often.  The answer often lies with first figuring out what a broker will charge.  

     The broker’s commission is usually paid by the seller out of the sale proceeds.  So there has to be enough equity to attract a good broker.  If there is little or no equity, there will not be enough left over to pay the broker at the closing after paying off the mortgage.  So, in foreclosure, most brokers start by comparing the mortgage payoff amount and the property value to determine whether a sale is realistic and what to charge. 

     Today, with the real estate market having softened from its peak in 2005, selling a property in foreclosure has become a bit more difficult.  Many owners have less equity because prices have leveled off or declined.  While I have not seen a dramatic drop in values, I have seen the old trend of rising values totally come to a halt.  Maybe we’ve reached a plateau.  It’s an important issue because some owners no longer have enough equity to even make selling worthwhile.  If they cannot sell for a price sufficient to pay the mortgage and a broker, they may not be able to hire an effective broker.

     In the past, the broker’s commission was typically set at 6% of the sales price.  In today’s market, many brokers have become more flexible.  Smartmoney.com is reporting today that as a result of the real estate boom, there are now too many real estate agents (in NY, agents work under brokers) and, as a result, many are reducing their commissions down to 4.5%.   In other words, the high prices of 2005 created more competition and that has made hiring a broker more affordable.  This is true.  But the owner in foreclosure should be very careful.  There is more than just the broker’s commission to worry about.

     With conventional sales, you might put out a “For Sale” sign, advertise or list with the multiple listing, have open houses, and then wait.  And wait.  And wait some more.  Foreclosures are not a kind place to be.  And waiting does not always make sense. 

     Sometimes trying to save a point (i.e., 1%) on a broker’s commission also makes no sense if it means that you are dealing with a broker that will take months to sell.  For each month that passes in foreclosure, you are that much deeper in the hole.  Your mortage arrears accumulate.  Your payoff grows.  The bank’s legal fees (which get tacked on to your balance!) grow.  Whatever savings you may have thought you were getting from a lower broker’s commission will be wiped out by all these charges if you choose the wrong broker or method of marketing the property.  In foreclosure, more so than anywhere else, time is truly money.  Selling fast is often more important than trying to sell high.  Many owners play the waiting game but never quite get the high buyer they sought, only to find themselves facing an approaching auction date.  In the end, some desperate owners sell for far less than they wanted and the money they saved on the broker’s commission is no consolation.

     Some brokers who specialize in foreclosures have developed a real estate network made up of investors, real estate agents and brokers, mortage brokers, lenders, title and abstract companies, developers and contractors and online real estate groups.  If a broker can market your property quickly through a real estate network and obtain a buyer right away, sometimes it makes more sense  to sell fast, even if it means that you have to take a bit less on the sale price or pay the broker 5% or 6%.  In the end, no one has a crystal ball to know what might have happened if they waited it out, negotiated the broker down to 4%, and tried to sell through conventional means at a higher price.  But I have seen more often than not, that in foreclosure this strategy results in disaster for the owner who thought they were going to save 1% on a commission. 

     It is true that commissions have become more flexible and brokers are willing to accept lower commissions or take whatever makes sense for the deal, but in foreclosure, above all else,  speed matters most.