Understanding the Variable Rate Commission in a Real Estate Transaction
Most everyone understands what the term commission means as it relates to a real estate transaction. The opposite is true as it relates to a variable rate commission. In this article, I hope to shed some light on what it is and what it means to buyers and sellers of real estate.
The Ethical Explanation
Section 3-4 of the REALTOR® Code of Ethics defines a variable rate commission arrangement as follows: A listing in which one amount of commission is payable if the listing broker’s firm is the procuring cause of sale and a different amount of commission is payable if the sale results from the efforts of the seller or a cooperating broker.
The Code of Ethics and the National Association of Realtors® (NAR’s) Handbook on Multiple Listing Policy require listing brokers to disclose a variable rate commission to potential cooperating brokers as soon as it is practical. In response to inquiries from potential cooperating brokers, REALTORS® are also required to disclose the difference between the two rates.
Once a cooperating broker has been made aware that a variable rate commission is in play, they must disclose this critical information to his or her client before the client makes an offer to purchase. The disclosure is necessary for the buyer to make an informed competitive offer. For example, a buyer who makes an offer that’s identical to an offer from a buyer who’s represented by the listing broker’s firm offering a variable rate commission is at a disadvantage since the commission relating to the other offer will be lower. The lower commission rate will net the seller more money so they are likely to accept their agent’s buyers offer even though the offering price of both buyers is the same.
Practical Application of Variable Rate Commission
When a real estate agent lists a home, they negotiate the sales commission and fee to be paid by the seller. For our example, we will use 6% of the sale price of the home as the agreed-upon fee. The agent and the seller then discuss the co-op fee that will be offered to other brokers if they bring a ready willing and able buyer to purchase the home. This fee is commonly known as the buyer agent, subagent, or transaction licensee fee.
While it may be common to offer 50% of the total commission to the buyer’s agent, it does not have to be the case. A listing agent may decide to charge 6% and co-op at 2.5%. This arrangement is fine as long as it is agreed to by the agent and the seller. For our example, the agent and seller agree to co-op at 3% of the home's sale price with a broker who brings a buyer. This figure is then placed in the Multi-list to notify all brokers what the seller’s broker is offering as compensation for bringing a ready, willing and able buyer.
If the seller’s agent offers a variable rate commission plan the discussion will focus on what commission the agent will charge the seller if the agent is the one who brings the buyer. As with all real estate commissions and fees, they are negotiable. For our example, the agent and seller agree on a fee of 5% if the agent brings the buyer. This type of arrangement is known as a dual or designated agency. With a dual or designated agency, the seller’s agent is now also representing the buyer and needs to be disclosed and agreed upon by the agent and seller when listing the home.
As stated previously, the seller’s agent must disclose that there is a variable-rate commission in play to all other brokers. In many cases, this is done directly in the multi-list system.
If you are a buyer working with a real estate agent and have interest in a property you may want them to find out if any other agreement proposals in play and, if so, is it from the same real estate office (designated agent) or a dual agency situation where the seller’s agent has the buyer. If so, it is important to check and see if there is a variable-rate commission in play, and if so, how much is the difference in commission. This takes a simple call, email, or text from your agent to the seller’s agent and the code of ethics demands that the seller’s agent divulges that information.
You, the buyer, could make a full price offer and be outbid by a buyer who is working with the seller’s agent or brokerage who makes the same offer because the variable-rate commission was in play. If the seller takes your offer, they would have to pay 6% commission (3% to the listing broker and 3% to the buyer’s agent/broker) instead of the 5% variable-rate commission agreed to between the seller and his agent and brokerage. Your net offer is 1% less than the competing offer because of the variable.
People sometimes lose homes they try and buy and never really know why. It may come down to asking the right questions. Make sure your agent is aware of the variable rate commission scenario and many other conditions that exist so your offer is the best it can be.
Knowledge is Power!
Jeffrey C. Hogue