Understanding Broker Commissions When Business Models Conflict

The Division of Real Estate continues to receive questions and complaints related to real estate transactions involving brokers and brokerages with different, and sometimes conflicting, compensation structures and business models. Many brokers are used to paying and receiving commissions based on a percentage of the sales price. However, a growing number of brokerages are operating based on a reduced “flat fee” business model. As one might expect, confusion can arise when determining how to reconcile the two different commission structures in one transaction.

One such question is how to address the situation where a buyer’s agent has an agreement with their client to receive a percentage of the purchase price, but is instead offered a “flat fee” cooperating broker compensation? Additional questions arise when a seller offers a cooperating broker commission based on a percentage of the purchase price, but the buyer’s agent has agreed with their client to be paid a “flat fee” that is significantly less than the amount the buyer’s agent would receive if paid the offered cooperating broker percentage. The buyer and buyer’s agent want the difference between the commission offered by the seller and the lesser amount actually charged by the buyer’s agent to be additional revenue for the seller (making the buyer’s offer more attractive) as opposed to just additional commission for the listing agent. How can this best be accomplished? Finally, the Division has received multiple complaints related to a broker’s overall opposition to the “flat fee” model and how those concerns are expressed in their business practice.

The following hypothetical scenario addresses some of the issues outlined above, and discuss how the Real Estate Commission would view the described conduct:

SCENARIO

The seller engages a “flat fee” broker to sell his property. In the Exclusive Right to Sell Contract, the seller and the seller’s broker agree that the cooperating broker’s commission will also be a flat fee. The seller receives a purchase offer from a buyer, who is represented by a “commission percentage” broker. As the parties are negotiating the purchase terms, it becomes apparent that the seller ‘s agent’s agreement to pay a flat fee to the buyer’s broker is contrary to the agreement between the buyer and buyer’s broker regarding compensation; the buyer and the buyer’s broker agreed the buyer’s broker would receive a percentage of the sale’s price as the broker’s compensation.

The flat fee offered is significantly less than the amount negotiated between the buyer and the buyer’s broker. Furthermore, the buyer and the buyer’s broker agreed that while the buyer’s broker will seek compensation from the listing brokerage firm and the seller’ broker, ultimately the buyer is obligated to pay the broker’s commission. While the buyer has the money necessary to complete the purchase transaction, he did not really contemplate having to pay his broker’s commission out of pocket. He does not have sufficient funds to pay the remaining commission owed. Given his predicament, the buyer decides that payment of his broker’s commission will now become an additional term that he needs to negotiate with the seller.

The buyer instructs his broker to include in the “Additional Provisions” of the purchase offer that the seller must pay the buyer’s broker’s commission. The broker is hesitant to include such terms because the Real Estate Commission’s Rule F-3 prohibits a broker who is not a principle party to the contract to insert personal provisions, disclaimers or exculpatory language in favor of the broker in the “Additional Provisions” section of the Commission-approved forms.

Q: If the buyer’s broker includes a clause in the “Additional Provisions” that indicates that the seller will pay the buyer’s broker’s commission and this clause is added at the buyer’s direction, is the broker in violation of the Commission Rule?

If the Commission were to receive a complaint about this set of circumstances, staff would inquire as to who required the inclusion of the clause about the commission payment. If the provision was added at the direction of the buyer, and not by the broker, it would not be a violation of the license law. In the scenario to the left, the commission has become a point of negotiation for the buyer. If the buyer completes the transaction with the seller’s broker paying the buyer’s broker a flat fee, the buyer will be responsible for the outstanding commission amount he previously negotiated with his broker. Since he does not have the money to pay the commission, he is now in a position to potentially be sued by his broker.

 

For additional scenarios visit ~ Division of Real Estate Investigator’s Insights