BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Uneven Commission Split Between Listing and Selling Brokers
Q: I am a buyer’s agent on a short sale. In the MLS, the listing broker offered 2 ½% to cooperating brokers, and in the confidential remarks noted: “Short sale commissions subject to seller’s lender approval; any reduction to be split 50-50% LO and SO.” The seller’s lender reduced the commission by 1%; and now I find out that, because of the 50-50 split on the reduction of 1%, my brokerage will be getting only 2%, but the listing broker gets to keep 3% because they took a 6% to start with – and did not disclose that to me.
That doesn’t seem fair. Can they do that? Isn’t this a Code of Ethics or MLS Rules violation? Isn’t that a “Dual/Variable” commission that must be disclosed in the MLS? It seems that they had a duty to disclose that they were getting more. What can I do?
A: In a word: Nothing. This is neither illegal, unethical nor a violation of the MLS rules. The custom of splitting commissions between listing and selling brokers at 50-50% is just that – a custom, and there is no legal basis or requirement for that split.
(NOTE: Reference to MLS Rules here is to the CAR Model MLS Rules, which have been adopted by most MLS’s throughout California, occasionally with changes. You must consult your own MLS rules to determine the exact wording of the MLS rules affecting your listings.)
We start with the proposition that Article 3 of the Code of Ethics requires cooperation, but does not require sharing commissions with, or to pay compensation to, the other broker.
MLS rules provide that the listing broker “must specify some compensation to be paid to either a buyer's agent or a subagent and the offer of compensation must be stated in one, or a combination of, the following forms: (1) a percentage of the gross selling price; or (2) a definite dollar amount.”
But, note that there is no requirement that the amount offered must be 50% of the full commission paid to the listing broker, nor any other percentage or amount whatsoever.
DUAL OR VARIABLE COMMISSION: A “Dual or Variable” commission is when the listing agent agrees to one commission if the buyer is represented by another agent, but will take less if the listing agent also represents the buyer. This situation described above is not a Dual or Variable commission.
SHORT SALE COMMISSIONS: In short sales most MLS’s have adopted the Model Rule that prohibits the listing agent from offering compensation to the selling broker that first nets out the Short Sale Negotiator’s fee (e.g., “Short sale commissions subject to seller’s lender approval; any reduction to be split 50-50% LO and SO after deduction of 1% for payment of Short Sale Negotiator’s fee.”)
In that regard, Model MLS Rule 7.15.2 states:
“Compensation offered through the MLS to cooperating brokers on listings which require lender approval (commonly referred to as “short sale” listings) is for the amount published therein unless the listing broker indicates on the MLS the following: (a) the fact that the sale and gross commission are subject to lender approval; and (b) the amount or method by which the compensation offered through the MLS will be reduced if the lender reduces the gross commission. This section does not allow an additional reduction from the commission offered for items such as a short sale negotiator fee or other administrative costs of the transaction. Any reductions from the commission offered for such items should be factored in as a reduced amount the listing broker initially offers to a cooperating broker and may not be made a condition of the offer.” (Emphasis added)
So, there is no prohibition on a listing broker taking a listing at, as in your example, 6% and then offering 2½% to the coop broker, with any reduction by lender to be split evenly, and then either keeping the full extra percent on the listing side, or paying a portion out to a Short Sale Negotiator hired by that listing agent. In fact, the above MLS rule contemplates such a practice.
And such practice is not a violation of any other law, rule or Code of Ethics either.
Finally, there is no obligation on the part of the listing broker to disclose this practice anywhere. Because of the structure of the various rules surrounding the MLS and listings, the listing broker has no obligation to disclose to the buyer’s agent that they will be receiving the same, or more, or less than, the buyer’s agent will receive.
PRACTICE TIPS:
1. It is a violation of the Code of Ethics to try to change an offer of compensation to the coop broker in the purchase agreement. It can also be alleged that such a practice is a violation of the fiduciary duty to the buyer to put the buyer’s agent’s commission in the way of the transaction.
2. If a buyer’s agent is dissatisfied with the offer of compensation, that agent can ask the listing agent to agree to a higher amount or percentage BEFORE THE OFFER IS PRESENTED – not in the purchase agreement.
FORM: Use CAR form “Cooperating Broker Compensation Agreement” for this purpose (ZipForms Form CBC”)
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 2012 01/06/12