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CAM Emerging Trend 3Understanding 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 scenarios address some of the issues outlined above, and discuss how the Real Estate Commission would view the described conduct:
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.
The seller has engaged a “percentage” broker to represent him in the sale of his home. The seller receives and accepts a purchase offer from a buyer who is represented by a “flat fee” broker. The seller and the seller’s broker have agreed that the cooperating broker will be offered a percentage of the sales price as a commission. However the buyer’s broker is requesting to be paid a flat fee, which is less than the cooperating commission amount agreed upon by the seller and the seller’s broker. The buyer’s broker memorializes the commission amount sought in a document to the seller’s broker. The seller’s broker places the document in the transaction file without any disclosure or discussion with the seller. At closing, the buyer’s broker paid the flat fee requested. The seller’s broker collects his fee including the amount that would have been paid to the buyer’s broker if he had sought a percentage based commission instead of a flat fee.
Q: Is there a problem with how the seller’s broker handled the commission to the cooperating broker?
Yes. The seller’s broker, regardless of whether he is a single agent or a transaction broker, is required to exercise reasonable skill and care for the seller, including advising the seller regarding the transaction. The seller’s broker should have disclosed to the seller that, while the buyer’s broker was offered the agreed upon percentage-based commission, the buyer’s broker elected to accept a flat fee. Depending on the agreement between the seller and his broker, the seller’s broker may be entitled to keep the outstanding amount not sought by the buyer’s broker.
The buyer contacts her buyer’s agent and requests to see 1234 Main St., Fruita, Colorado. The buyer’s agent pulls the listing information from the local multiple listing service and discovers that the cooperating commission is a flat fee less than the percentage amount desired by the buyer’s agent. As a result, the buyer’s agent refuses to show the property to the buyer because she is unwilling to accept the minimal flat fee offered by the seller’s broker.
Q: Is the buyer’s agent’s refusal to show properties a violation of the license law?
Yes. All brokers, transaction brokers and single agents, are required to exercise reasonable skill and care for the party (or parties) that they represent in the transaction. Additionally, a buyer’s agent has the duty and obligation to promote the interests of the buyer with the utmost good faith, loyalty, and fidelity. Refusing to show properties based on the cooperating commission is not consistent with the expectations of a broker under the Brokerage Relationship Act. If a property matches the criteria sought by the buyer, the buyer’s agent should discuss the disparity regarding the broker’s commission. Depending on what the buyer and buyer’s broker agreed upon in the Exclusive Right to Buy Listing Contract, the buyer may still be responsible for paying the difference in the commission amounts. It is important for the buyer to be aware of these issues so that she can make the best decision for her particular situation.
A broker is concerned with the emergence of discounted “flat fee” compensation structures and is opposed to the business model. They choose to voice their concerns by broadcasting their advocacy for percentage-based commission structures over “flat fee” based business models within the MLS listings for each of their properties. Additionally, they offer one cooperating broker split for brokers who operate based on a percentage based commission structure and a lower punitive cooperating broker split for “flat fee” based brokers.
Q: Is the listing agent’s use of the MLS to promote their industry views and offer differing cooperating broker commissions based on company or business model a violation?
Whether the listing broker is acting as a transaction broker with the obligation to exercise reasonable skill and care, or as a buyer’s agent with the obligation to promote their client’s interests with the utmost good faith, fidelity and loyalty, the multiple listing service should be used by a listing broker as a tool in advertising their listings for the benefit of the seller. The Real Estate Commission has consistently disciplined listing agents who have used the MLS as a vehicle to further their agenda against “flat fee” brokerages to the potential detriment of their client’s interests. Brokers are reminded that the advertising terms identified in the MLS should be aligned with the marketing terms agreed to in the Exclusive Right to Sell Listing Contract. If the terms identified in the MLS or other advertising conflict with the terms outlined in the agency agreement, the Commission could determine that to be a violation. Additionally, a broker should discuss with sellers the impact (positive or negative) that language in their advertising could have on the consumer's ability to sell their property.