BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Dual or Variable Commission Arrangements
Q: I am a listing agent and my seller wants me to agree that if I sell the property myself that seller will owe me and my brokerage 2% less than the full amount in the listing agreement. I am willing to do this but are there rules about disclosing this arrangement?
A: Yes. This is what is known as a “dual or variable commission arrangement” and the rules are governed by both MLS rules and the NAR Code of Ethics.
In a fast market with multiple offers, questions frequently arise regarding how to handle dual/variable commissions; that is, where a listing agent will agree with the seller to take a lesser commission if the listing agent (or sometimes his/her office) also represents the buyer.
1. MLS RULES: The applicable CAR Model MLS Rule, which has been adopted by most MLS’s, reads as follows:
7.22 Dual or Variable Rate Commission Arrangements. The existence of a dual or variable commission arrangement shall be disclosed by the listing broker by a key, code or symbol as required by the MLS. A dual or variable rate commission arrangement is one in which the seller or owner agrees to pay a specified commission if the property is sold by the listing broker without assistance and a different commission if the sale results through the efforts of a cooperating broker, or one in which the seller or owner agrees to pay a specified commission if the property is sold by the listing broker either with or without the assistance of a cooperating broker and a different commission if the sale results through the efforts of a seller or owner. The listing broker shall, in response to inquiries from potential cooperating brokers, disclose the differential that would result in either a cooperative transaction or, alternatively, in a sale that results through the efforts of the seller or owner. If the cooperating broker is representing a buyer or tenant, the cooperating broker must then disclose such information to his or her client before the client makes an offer to purchase or lease.
Not all MLS’s have adopted the CAR Model MLS Rules without changes, so check your local MLS rules to confirm their rules governing dual/variable commission arrangements. But virtually every MLS has a box, code or other means for the listing agent to indicate the existence of a dual/variable commission arrangement.
2. CODE OF ETHICS: The NAR Code of Ethics, Standard of Practice 3-4, basically mirrors the language in the MLS Model Rules but adds that:
“The listing broker shall, as soon as practical, disclose the existence of such arrangements to potential cooperating brokers…”
So the Code of Ethics applies these rules even to properties not in the MLS and adds that the obligation of the listing agent to disclose the existence of a dual/variable commission arrangement “as soon as practical.”
3. CONSEQUENCES OF A FAILURE TO DISCLOSE: If a listing agent offers the seller a dual/variable commission and that arrangement has not been published in the MLS, or otherwise timely disclosed to other buyer agents in a multiple offer situation, that listing agent can:
1. Be charged with a violation of the MLS rules;
2. Be charged with an Ethics violation; and
3. Potentially be the subject of arbitration by an unsuccessful co-op broker who offered on the property and who did not receive a commission because, arguably, of the reduced commission charged to the seller by the listing agent.
PRACTICE TIPS:
LISTING AGENT:
1. If you, as a listing agent, agree to take a dual/variable commission if you also represent the buyer, you must disclose that in the MLS.
2. If a buyer agent asks what the dual or variable commission arrangement is, you must truthfully disclose that arrangement.
3. If you had not agreed with the seller beforehand to a dual/variable commission but, when you are representing a buyer in a multiple offer situation and either you or the seller suggest that you receive less if your offer is accepted over the others, this then creates a dual/variable commission arrangement which must be promptly disclosed to the other buyer agents. Then, prior to the acceptance of your offer or the issuance of counter-offers, you must (a) advise the other buyer agents of the arrangement and the amount of the reduction you are willing to take, and (b) give those buyer agents the opportunity to convey this information to their buyers and have the opportunity to re-submit their offers.
4. You must be careful in the above situation to keep in mind your fiduciary duty to the seller to get the best price and terms for seller; and not be focused solely on getting your buyer’s offer accepted. For example, instead of offering to reduce your commission in order to incent the seller to take your buyer’s offer, it may be in the seller’s best interest to issue a counter-offer or a multiple counter-offer to try to get a higher price and/or better terms from competing buyers. You must always put the seller’s interests ahead of your interests.
5. To avoid problems associated with the above scenario, see Weekly Practice Tip entitled “Dual Agency in Multiple Offer Situations.”
BUYER AGENTS:
6. If a dual/variable commission is indicated in the MLS, it is up to you to ASK the listing agent what the AMOUNT OF THE DIFFERENCE is between an outside (co-op) broker commission and the dual/variable commission that the seller will pay if the listing agent/office ratifies the sale.
7. When you receive the dual/variable information from the listing agent, you are obligated to disclose that information to your buyer before the buyer makes the offer to purchase.
8. If you suspect that a listing agent is engaging in a dual/variable commission arrangement that was not properly disclosed, check with your broker or manager. Initially this situation can be brought to the attention of the listing agent’s broker or manager.
9. If there has been an undisclosed dual/variable commission by the listing agent, consider filing an Ethics complaint and an MLS violation complaint at the local AOR Professional Standards Panel.
DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
© Copyright Broker Risk Management 2014 04/11/14