If you're going to hire a real estate broker to sell your real property, you need to understand how the broker gets paid. Generally, the broker receives a commission from the seller when the sale is completed. The amount of the commission is set by the listing broker and may be negotiable by the seller and the listing broker. The terms for payment of the sales commission need to be included in the real estate brokerage contract or listing agreement.
How are Commissions Set?
Although in the past real estate associations had mandatory commission rate schedules for their members, these rate schedules have been banned. Commissions are now set by the broker and may be negotiable by the seller and the listing broker. The seller and listing broker agree on the type of listing, the rate of the commission, and the conditions which have to be met for the commission to be paid. This information is then included in the brokerage or listing agreement.
For example, the seller and the listing broker may agree that the listing broker has an exclusive right to sell the property and that the broker will receive five percent of the sale price of the property when the property is sold to anyone or the broker presents to the seller any enforceable offer from a ready, able and willing buyer on terms authorized by the listing or accepted by the seller.
Earning a Commission
Once the property is listed with a real estate agency or with a multiple listing service, the listing broker tries to sell the property. Since the seller's contract is with the listing broker, it is the listing broker's responsibility to show the house to prospective buyers and to carry out all of the duties agreed upon in the listing agreement.
Sometimes, a broker other than the listing broker finds prospective buyers for the property. That broker is known as a selling broker. If the selling broker helps to make the sale, the selling broker will receive a portion of the listing broker's commission. The listing broker usually offers to split the commission with the selling broker.
It is the selling broker's responsibility to tell prospective buyers that she is working with the listing broker and that she will receive part of the listing broker's commission as payment for services. If the buyers have hired their own broker, the buyers have to pay their broker as agreed in their contract.
In order to recover a brokerage commission, the broker must:
- Have a contract of employment, called a brokerage or listing agreement
- Perform the duties of a real estate broker
- Meet the conditions of the brokerage agreement
- Be licensed as a real estate broker
- Be the procuring and the efficient cause of a sale, which means that the broker was the predominate force in bringing about the sale
- Procure agreement on all essential terms of the bargain
The real estate commission typically is split, with 10 to 30% to the listing broker, 40 to 60% to the selling broker or cooperating real estate firm, and the remainder to the listing broker's firm.
Many states require real estate brokers to obtain written brokerage contracts as a prerequisite to collecting a commission.
Disputes over Commissions
Disputes over commissions must be handled as agreed in the brokerage or listing agreement. This can include alternative dispute resolution methods such as arbitration or mediation, or having the dispute decided in a lawsuit in small claims court or civil court. If the brokerage or listing agreement does not provide a resolution method, the parties can agree to arbitration or mediation or the wronged party may file a lawsuit.
If you have any questions or concerns about paying a real estate broker's commission, you may want to consult a real estate attorney.
Questions for Your Attorney
- How are commissions for real estate brokers set? What are the factors in setting a commission? Can I make exceptions to the broker's right to a commission, for example, if I produce a buyer while my house is listed?
- Will provisions for the payment of a selling broker's commission be addressed in my brokerage agreement with the listing broker, or is that matter between the brokers? Is the selling broker paid directly or at closing, or do I rely on my listing broker to see that the selling broker is paid?
- What must a real estate broker do in order to obtain a commission, and at what point in the sales process has a broker earned the commission? What if the sale falls through?