Commissions, Compensation and the Code of Ethics: Are You Complying?

 Tracy Rucka  |    December 08, 2016

The REALTOR¬ģ Code of Ethics includes many provisions regarding commissions and compensation and how REALTORS¬ģ should communicate with customers and clients and each other to meet the standards imposed by the Code. Whether you are acting as a listing broker, cooperating broker or buyer‚Äôs agent in a transaction, the Code has provisions that pertain to you.

Listing broker commission conversation 

When entering into a listing, Standard of Practice 1-12 provides in part that the listing broker must advise the seller or landlord of the company policies regarding cooperation and the amount(s) of any compensation that will be offered to subagents or buyer‚Äôs agents working with potential buyers or tenants. The broker will explain both how the broker offers compensation and how much compensation will be offered. For example, for REALTORS¬ģ in the MLS, the firm offers cooperation and compensation by way of the MLS. The seller will understand that the firm ‚ÄĒ not the seller ‚ÄĒ makes the MLS offer of compensation as agreed with the seller and instructions of the seller. The amount of cooperative commission offered is determined by negotiation between the seller and the listing firm, and the firm completes the listing according to the terms negotiated with the seller. To meet the obligation of the Code, the standard Wisconsin WB listing contracts contain the following provision: ‚ÄúBroker offers the following commission to cooperating brokers: _________________________________ (Exceptions if any): ________________________.‚Ä̬†

Protected buyers

The Code Standard of Practice 16-14 provides that REALTORS¬ģ are free to enter into contractual relationships or to negotiate with sellers, buyers or others who are not subject to an exclusive agreement but shall not knowingly obligate them to pay more than one commission except with their informed consent. Whether providing services for sale or rentals, when presenting the listing, the licensee should determine if there may be protected buyers or tenants from previous listings. If these buyers or tenants are not excluded from the new listing, include an affirmative statement indicating that the seller understands that he or she may be subject to more than one commission to comply with the Code. Likewise, buyer‚Äôs agents should address protected properties if a buyer had previous buyer agency agreements.

Cooperation and/or compensation

When acting as a cooperating broker, either as a subagent or buyer‚Äôs agent, Standard of Practice 3-1 provides the cooperating broker ascertain the terms of compensation, if any, before beginning efforts to accept an offer of compensation. A cooperating broker does not assume compensation from the listing firm. Article 3 of the Code of Ethics provides REALTORS¬ģ shall cooperate with other brokers, unless it is not in the client‚Äôs best interest. Article 3 goes on to provide the obligation to cooperate does not include the obligation to compensate. For REALTORS¬ģ who participate in the MLS, once the listing firm has made the MLS offer of cooperation and compensation, the cooperating broker may earn the MLS offer of compensation by becoming the procuring cause of the sale.¬†

Variable rate commission 

In the event the seller and listing firm negotiate a commission structure where the seller agrees to pay a specific commission if the property is sold by the listing firm and a different amount of commission if the sale results with the efforts of a broker from a cooperating firm, this is a variable rate commission. Per the Code, the listing broker is required to disclose the existence of the variable rate commission to cooperating brokers per Standard of Practice 3-4. The listing broker, if asked, is required to inform a cooperating broker of the differential between a cooperative transaction and a transaction occurring within the listing firm. 

Buyer agency commission conversation 

Buyer‚Äôs agents, just like listing agents, are obligated to discuss commission and compensation with the potential client prior to entering into an agency agreement. Standard of Practice 1-13 requires a conversation with the potential buyer clients about the REALTOR¬ģ‚Äôs company policies regarding cooperation, the amount of compensation to be paid by the client, and the potential for additional or offsetting compensation from other brokers, from the seller or landlord, or from other parties. To comply with the Code, the buyer‚Äôs agent should review and discuss the compensation provisions of the WB-36 Buyer Agency/Tenant Representation Agreement, explaining to the buyer about his or her obligation to pay the broker‚Äôs compensation unless it is offset by any amounts received from the owner or the owner‚Äôs agent.¬†

When entering into a buyer agency agreement, this is the time for the potential buyer‚Äôs agent to discuss procuring cause with the buyer if the REALTOR¬ģ participates in the MLS. If the buyer has been communicating with other firms or saw property with other brokers, the potential buyer‚Äôs agent should discuss that he or she may not be the procuring case of the sale for those properties. The buyer clearly understanding that buyer agency does not automatically equate with procuring cause is critical. This conversation about the potential for the buyer owing a buyer agency fee would meet both the Code of Ethics and the broker‚Äôs obligation to disclose material facts per Wis. Stat. 452.133(2)(b).¬†

Procuring cause

So how do REALTORS¬ģ explain procuring cause? The broker will start by putting cooperative commission in the MLS context. Where the REALTORS¬ģ are in the same or MLS linked by WIREX, entitlement to compensation is determined by the cooperating broker‚Äôs performance as the procuring cause of the sale. Procuring cause is how a cooperating MLS firm earns an MLS offer of compensation made by another MLS participant. To be the procuring cause of the sale, the cooperating agent must show involvement in the uninterrupted series of events that result in the sale of the property to the buyer or lease of the property to the tenant. There are no predetermination rules of entitlement to the MLS offer of compensation, so a determination must be made on a case-by-case basis. For example, a buyer‚Äôs agent it not procuring cause just by the fact of the buyer agency, nor is a broker procuring cause by the mere fact he or she showed the property first or wrote the offer for the buyer.¬†

Commission in the offer? 

The offer to purchase represents the agreement between the parties: the buyer and seller. The offer should not be used to modify the listing broker‚Äôs offer of compensation. A cooperating broker using the offer to purchase to change a listing broker‚Äôs offer of compensation is a violation of the REALTOR¬ģ Code of Ethics and Standard of Practice 16-16. Standard of Practice 16-16 provides, ‚ÄúREALTORS¬ģ, acting as subagents or buyer/tenant representatives or brokers, shall not use the terms of an offer to purchase/lease to attempt to modify the listing broker‚Äôs offer of compensation to subagents or buyer/tenant representatives or brokers nor make the submission of an executed offer to purchase/lease contingent on the listing broker‚Äôs agreement to modify the offer of compensation. (Amended 1/04).‚ÄĚ

If the listing and cooperating brokers agree to modify a previously offered commission, such an agreement is independent of the offer to purchase. Although it may be discussed between agents, the modification of the MLS offer of compensation should be confirmed by the firms. It is prudent for the firms to reduce the newly negotiated commission agreements to writing. The written document would then be evidence of the modified commission. 

In the event the cooperating agent is a buyer‚Äôs agent, a buyer‚Äôs broker may ethically suggest or recommend that the buyer ask the seller to pay some or all of the buyer‚Äôs broker‚Äôs fee pursuant to Article 16 of the Code of Ethics and NAR Case Interpretation #16-17. The buyer may condition the offer upon the seller paying the buyer‚Äôs broker‚Äôs fee on behalf of the buyer, as a seller‚Äôs expense at closing. The buyer‚Äôs firm must be authorized by the buyer and seller to collect the fee from the seller per ¬ß REEB 24.05(1) and Article 7 of the Code, which provides, ‚ÄúIn a transaction, REALTORS¬ģ shall not accept compensation from more than one party, even if permitted by law, without disclosure to all parties and the informed consent of the REALTOR¬ģ‚Äôs client or clients.‚ÄĚ

If the seller is selling FSBO, REALTORS¬ģ acting as buyer‚Äôs agents must notify the seller of the buyer agency relationship upon first contact per Standard of Practice 16-11. According to the Code and Wisconsin law, ¬ß REEB 24.07(8)(c), the representation as a buyer‚Äôs agent must also be confirmed in writing in the offer to purchase.¬†

When working as a buyer‚Äôs agent, the standard WB buyer agency agreement provides the buyer will pay the buyer agency commission, unless it is reduced by any amounts received from the owner or the owner‚Äôs agent. The buyer may ask the FSBO seller to pay all or a portion of the buyer agency fee in the offer. The seller may counter the offer to remove or modify the request, or increase the purchase price to cover the requested payment of a buyer‚Äôs agency fee. If the buyer has authorized the broker to accept compensation from the FSBO seller, by way of the offer, Standard of Practice 16-11 provides the REALTOR¬ģ make any request for anticipated compensation also on first contact. ‚ÄúRealtors¬ģ shall make any request for anticipated compensation from the seller/landlord at first contact. (Amended 1/98).‚ÄĚ

Are you represented? 

Any licensee in a position to write an offer for a buyer customer must first ask the buyer if the buyer is a party to a buyer agency agreement. For example, if a REALTOR¬ģ is the agent manning an open house, and any other buyer customer shows an interest in having the REALTOR¬ģ write an offer, the REALTOR¬ģ may not write an offer for that buyer customer without first asking the prospect whether he or she is a party to a buyer agency agreement. If the prospect is a party to a buyer agency agreement does not necessarily mean the REALTOR¬ģ cannot write the offer for the prospect. NAR has indicated that it is permissible for the REALTOR¬ģ, having asked about a buyer agency relationship, to ask the prospect if he or she would like the REALTOR¬ģ to write an offer to purchase. Standard of Practice 16-13 allows another agent to provide brokerage services to a buyer under a buyer agency agreement, provided the proper protocol is followed and the buyer consents. Wisconsin brokers approaching buyers under buyer agency agreements arguably should caution the buyers to check the provisions of their buyer agency agreement to determine whether they may work with other agents and whether the buyer will still be obligated to pay the buyer‚Äôs agent‚Äôs fees. Causing a buyer who is a party to a WB-36 to work with another broker without cautioning the buyer about the possibility of extra costs may be calling into question the Wis. Stat. ¬ß 452.133(1) duties of fair and honest treatment.

Tracy Rucka is Director of Professional Standards and Practices for the WRA. 

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