Who Pays the Commission on a Short Sale
A common question. I’ll do my best to answer it for you.
When a real estate transaction closes, there is a document created called a HUD-1 Settlement Statement. The HUD-1 is a spreadsheet of sorts that outlines the flow of money for the two parties involved in the transaction.
Who are the two parties? The buyer and the seller. On the HUD-1 there’s a buyer column and a seller column. The buyer comes to the table with money for the purchase. Costs are calculated for each party, and the bottom of the HUD-1 will show two important numbers: 1) Cash to/from buyer, and 2) Cash to/from seller.
You’ll notice we haven’t mentioned any aspect of the short sale yet. The reason for that is because the lender involved in the short sale, in other words, the investor who holds the note on your mortgage, is not a party to the real estate transaction.
They are a party to the settlement arrangement with their client, the SELLER. What? Yep, that’s right. The agreement between the seller and the seller’s lender is an independent settlement arrangement designed to make the agreement between the buyer and the seller work.
I know. It’s a bit confusing. When there’s a lender who is owed money on a home that a seller is selling, at closing, some of the money that the buyer is bringing to the table goes to pay off the loan against the house. If the value of the home is more than the amount owed (the home has equity), then the seller will most likely receive what’s left over after paying the lender and paying closing costs. However, if the value of the home is less than the amount the seller owes, then the seller won’t receive anything. Moreover, the seller’s lender probably won’t receive full payment on the balance of the remaining loan. The only two solutions to remedy this is for the seller to contribute cash to bridge the deficiency gap at closing, or ask the lender to take less than is owed.
In other words, a Short Sale.
If the lender isn’t getting fully paid, then who pays the closing costs? Bingo. That’s the original question, isn’t it? Who pays the commission on a short sale? On the HUD-1, the line that shows how much the lender is getting at closing is calculated after all associated costs are subtracted from the sales price.
If a home is closing at $100,000 and $150,000 is owed, there are closing costs. We negotiate with the bank to take $100,000 minus closing costs.
The basic answer to the question is: The Seller pays the commission, but because there’s no money left over after paying off the lender, the lender backs off enough to allow the buyer’s new funding to pass through to the seller, thereby satisfying all fees.
Who’s eating the cost? The investor is ultimately eating the closing costs.