What Is a Real Estate Commission Agreement?
A real estate commission agreement is a legally binding contract between a real estate agent and a client that outlines the terms and conditions under which the agent will be compensated for their services. This type of agreement generally includes the percentage or flat fee that the client will pay the agent for their services, the duration of the agreement, and any additional clauses or contingencies that may apply, such as termination rights or conditions under which the client may owe a fee if they terminate the relationship prior to finding a buyer or seller.
Real estate commission agreements play a crucial role in all real estate transactions, whether residential or commercial, and serve to protect both the client’s and the agent’s interests . For the client, the real estate commission agreement is a necessary step in the process of purchasing or selling a home and protects the client’s interests. For the agent, this agreement provides a commitment on the client’s part to pay a fee if a transaction is successful. The agreement also gives the agent a vested interest in seeing that the contract comes to fruition.
In addition to listing the amount of the commission, a real estate commission agreement may also specify what services will be provided by the agent, and what contingencies will have to occur for the commission to be timely paid. For example, if an offer on a property is accepted, the agreement may stipulate that the commission is not owed until the sale closes and is contingent upon the proposed sale actually being finalized.
Core Elements of a Commission Agreement
When using or being used by a real estate broker, it is important to adhere to the Florida Department of Business & Professional Regulation’s (DBPR) rule to use the "written and signed agreement" to establish the dominant party entitled to the commission. On the other hand, the deed of the written agreement on how the commission will be paid will need to be established by both the seller and the broker for the transaction to go thru.
It is common for real estate professionals to provide an agreement pertaining to the real estate commission rates. In addition to the rate, the commission agreements typically include payment terms, the duration and termination of the agreement, and the duties and obligations of both parties to the agreement.
Parties in a commission agreement need to consider:
● when the commission is earned, which is usually upon expiration of the term;
● how the payment of the commission will be made;
● remedies if the agreement is terminated prior to its completion;
● if and when the commission is payable if there are multiple parties involved in the transaction and their entitlement to the commission, and how the amount will be allocated to each broker;
● what happens if the contract to sale is "flipped," meaning there is a change in a party to the agreement;
● if the commission is still owed if the transaction does not go to closing;
● if there will be a right to dispute the payment within a certain time frame;
● the time frame for payment of the commission. A reasonable time frame would be upon completion of the terms of the contract, not indefinite;
● what will happen with the commission if the contract is somehow voided;
● what will happen to the brokerage fee if the sale price of the property is reduced;
● if there are different fees or rates for different types of sales.
Others considerations depending on the facts and circumstances for the parties:
● if other licensed professionals will need to be paid additionally to participate in the sale, including appraisals, escrows and inspections;
● how disputes will be resolved among brokers, if necessary and/or appropriate;
● if the sale of the property can be aided by ensuring that the property is occupied, vacant or furnished; and
● if there will be a disclosure of terms of contracts required to be entered into by the buyer or seller, such as a listing agreement.
Types of Commissions
The nature of a real estate commission can vary significantly from one type to another. The level of a commission is not usually dictated by law and a fee can be fixed, tied to the price of the property or based on a percentage of the price. A fixed commission charge is pretty simple to understand. The agent simply charges, say, $X, regardless of the value of the property. This is straightforward for everyone involved but there is not much incentive for an agent or broker to do anything other than the bare minimum with a fixed commission charge. This may be great for the seller getting the commission, but not for a home buyer, for example. In some cases, home buyers and sellers are charged a percentage of the price of the property. It is worth checking the rate being charged in comparison to the market rate to see if it is reasonable or not. A tiered commission structure involves charging a different percentage to different tiers of price. For example, an agent might charge 4% on the first $100K of the sale price and 2% on any remaining amount. This is a much fairer system, rewarding the sale of higher value properties by charging a lower rate on the excess. Some stipulations may put these systems at a disadvantage, so it is worth checking the fine print with an experienced attorney in the relevant jurisdiction. A negotiated commission is one where a rate is negotiated between the agent and their client. Some agents are happy to get something out of the deal even if they only get half of the standard fee. With some sale billers, this percentage can be as much as 60% less than usual, and most real estate commission amounts are effectively negotiable to some extent under most circumstances. If both sides are in agreement and the results have merit, then the case should be based around that, rather than an arbitrary rate summarily set due to the expectations of other real estate agents. However, in some cases it may prove impossible to negotiate a lower rate.
Legal Issues and Statutory Compliance
Understanding the legal implications of and compliance with real estate commission agreements is important for both buyers, sellers, and agents. Their rights and obligations under any applicable law and within any applicable contract are factors that cannot be overlooked.
For example, in the United States, there are a number of federal and state laws and regulations that govern the relationship between real estate professionals and consumers. The most noteworthy is the Real Estate Settlement Procedures Act (RESPA), which requires disclosure of and prohibits kickbacks for settlement services. Many states go on to prohibit certain acts, such as personal services agreements with respect to residential property without the supervision of a licensed broker. Unless otherwise specifically exempted, this also applies to commercial real estate.
The American Bar Association and American Institute of Certified Planners have also published a "Land Use Planning Law" book that allows real estate professionals and consumers to keep up-to-date on the ever-changing local, state, and federal land use laws that govern real estate planning and use. Many states also have multiple public interest laws that apply to interested consumers at home, land/real estate owners, and investors and real estate professionals.
A limited number of states require disclosure of commissions and/or brokerage fees on property; however, a number of these disclosures go beyond the requirements of Federal law (including RESPA).
Real estate commission agreements should require that they cannot be verbally modified without a written document that has been signed by all parties.
Navigating a Commission Agreement
Before settling on a commission amount, an agent should take time to compare the commission percentages in the area with the proposed fees. Thorough research will provide both the agent and client with a sound argument to use when discussing commission. An agent should consider informing the client of the common range of commission in the area, so that they will be less offended by a suggestion of a lesser amount. Further, it will boost the agent’s credibility if he or she can explain why a particular percentage is appropriate in the situation. A good approach to compensation should incorporate the following: 1) the agent should attempt to separate the discussion of the listing agreement from the negotiation of the commission. This helps each party save face while allowing the parties more time to reflect on the discussion, if necessary; and 2) if there is a request for a lower amount , the agent should counter with additional services or time. This demonstrates the good faith of the agent by indicating that they want to work for the commission even though it may be at a lower rate. A client should take the time to consider his or her options before agreeing to a commission arrangement with an agent. The client should be sure to review the services provided by the agent to understand whether the services are worth the proposed percentage of commission. It is reasonable for a client to ask the agent about their credentials, such as how long they have been an agent, how many sales they are involved in each year, and what their current involvement in the local community is. In the case of a disagreement, the parties can contact a third party to mediate the conflict. Using an arbitrator is also a possibility, although the type of service provided by an arbitrator is more invasive than mediation. A good starting point is a conversation about the situation involving the clients, buyers, agents, and attorneys.
Disputes: How Are They Resolved?
Disputes over real estate commission commonly arise in one of three circumstances – the contractual answer; the unilateral definition; or the ambiguous definition. In the contractual answer, a party usually claims that it did the "real work" of getting the deal through to closing and should be awarded the full commission. In the unilateral definition scenario, a broker claims that although it is not a party to the contract, it performed the work to get the deal through to closing and should be entitled to the full commission. Finally, the ambiguous/unclear definition case is one where the contract governing the transaction defines the commission in broad strokes (i.e. 3% commission, etc.) or otherwise makes no reference to the specific commission to be paid to any particular broker, but rather focuses on the total amount of compensation to be divided amongst two or more brokers.
In each of these circumstances, the party seeking payment of the commission will most typically bring some form of legal action, whether it be a demand letter, mediation, arbitration or even court, from the point of view that they have performed the work necessary to get the deal from point A to point Z and as such should be entitled to the entire commission themselves. The party who is on the receiving end of the commission dispute typically views it quite differently, and argues that the parties agreed with two or more brokers that it would split the commission and as such only half should go to any one broker. Each of these types of disputes is unique and can have multiple fact patterns and ultimately the resolution will depend on the facts of the case. Having said that, the predominant theme that runs through all commission disputes in some form or another is that a dealer will most likely be held responsible for the entire commission owed to a single broker regardless of any agreement to split it where the dealer has not made certain arrangements for the closing of the transaction. Many purchases and sales agreements will provide that the dealer is responsible for paying the commission, but that it may pursue that amount from the seller as an adjustment at the time of closing. However, to effectuate this process, the dealer must actually close the transaction. For example, if a dealer is repeatedly in default of its obligations under a lease or purchase and sale agreement and ultimately reaches a point of calling off the closing, the dealer may not be able to recover from the seller, the amount of the commission that it has previously agreed to pay. In the event that the dealer wants to close the transaction, it can ask the seller to hold back a portion of the sales price that would represent the commission due and/or set it up such that the seller receives less proceeds at closing.
Guidelines for Agents and Consumers
For both real estate sales agents and their clients, it is important to clearly establish a commission agreement from the outset. Both parties should understand the terms of the agreement and what is expected of them. One of the biggest challenges facing real estate agents is getting an agreement signed in advance. Forces outside of an agent’s control, such as prospective clients, not returning calls and last-minute decisions, can make it difficult to have an agreement in place at the start of a relationship. However, there are options for acceptance after the fact, including ratifying prospect’s consent to be a client or allowing the agent to continue representation under an implied authority standard once the agent begins working on their behalf.
Having things in writing is important for both sides because it ensures that expectations are clear. This is especially critical for all incoming referrals, which agents should receive in writing in order to avoid any disputes over the source of incoming business.
Communicating and setting expectations is essential to creating positive working relationships with clients. Here again, having everything in writing is important. Verbal agreements can easily turn into misunderstandings, and liability insurance will likely not cover a verbal representation . Clients should also be made aware of any fees or commissions that may arise, in addition to full disclosure of all parties receiving the commission. Full disclosure is paramount to maintaining a good relationship, as it builds trust with the client.
A written agreement is a critical tool when it comes to negotiating commissions with cooperating brokers. For sharing commissions, brokers can offer to pay all, half or a percentage of the sales commission of the property to the selling broker who brings an unrepresented buyer to the sale. Offering payments to the selling broker in these situations incentivizes brokers. Without the promise of a commission rate, they’ll be hesitant to show a property to their client, which is not in the best interest of the home seller. Real estate agents can also enter into buyer-broker agreements with their clients. These agreements are enforceable according to contract law and typically set the rate based on how much the purchaser has agreed to spend or based on the house’s price. A written agreement will allow the buyer to receive assistance from the agent in negotiating a deal with sellers.
Having a commission agreement in place helps to protect both the client and the agent in a professional relationship.