Understanding the Real Estate Listing Contract Part 2 ~ Broker Compensation
In part 2 of this 5 part series, I will explore the issue of Broker Compensation otherwise known as the Commission.
When you list your home it is not the price you get that matters most; it is the “Walk Away” dollars. Before signing a listing contract, it is required of all real estate agents that they supply a closing cost estimate to the property owner. One of these costs will be the Broker Compensation or commission.
The Broker Compensation will be in paragraph 5 of the listing contract as a percentage of the sale price of the home. There is also a space that allows for a flat fee, noted by the term “OR,” followed by the term “Whichever is Greater.” There are many reasons for the flat fee, but I will give you my take.
Take a home listed for $50,000 at 6% commission. The cost will be $3,000 if it sells for that amount. If the home ultimately sells for $40,000 the commission would be $2,400. The brokerage may have a minimum commission they charge, say $3,000 for this example. This amount would be listed in the flat fee space. This way if the home does sell for less than $50,000 the minimum Broker Fee would be enforced as the “Greater”.
Following the percentage and flat fee “Whichever is Greater” portion comes the “AND”. This space is reserved for any additional fee or fees as the Broker and Seller agree. In many cases, this is where the service, consultation or transaction fee, if any, is placed. It may also be agreed that part of the commission or a fee may be paid up front and, in BOLD letters stated (non-refundable).
The remainder of paragraph 5 details when and how the Broker earns the commission and fees. This part of the listing contract may be the most misunderstood of all. Because I am limited to the length of this article, I will attempt to be brief and to the point. The commission is earned when any ownership interest in the property is sold or exchanged during the term of the listing contract. This normally means the Broker produced a ready willing and able buyer for the property. According to the listing contract, it does not matter who produced the buyer. What matters is the property was sold or exchanged during the contract term, and even that can be vague.
If the contract term ends and negotiations are pending, a commission to the broker is still due if the deal gets done. The question is what constitutes a negotiation and whether or not those negotiations can be verbal or must be in writing. You may consider modifying the listing contract to remove the ambiguity of this issue.
Broker Compensation may be due if the Seller signs an agreement of sale then refuses to sell the Property, or if a Seller is unable to Sell the Property because of failing to do all the things required of the Seller in the agreement of sale. I have never charged a seller unless the transaction was completed but I do not behoove agents who have. A seller has the right to change their mind, but it does not mean an agreed to service was not performed.
If the property is taken by eminent domain, a commission is due the Broker.
If a sale of the property occurs within an agreed to amount of days after the listing contract ends, a commission is due the Broker if, the buyer was shown the property and it leads to a sale. This is not the case if the Seller lists the home with another brokerage. This is another misunderstood and somewhat ambiguous part of a listing contract that should be thoroughly discussed before signing.
Finally, the Broker may be due a fee if the sale falls through and the Buyer releases an earnest money deposit to the Seller. This is normally agreed to between the Broker and Seller up front as a percentage of the deposit.
Visit my website at JeffreyHogueRealtor.com to read part one of this series and stay tuned for the third installment in the next article!
Remember, ALL commissions and fees are negotiable!!!
Knowledge is Power!
Jeffrey C. Hogue