When Should A Real Estate Broker Be Paid?

Millions of homes are sold each year and the overwhelming majority are marketed through professional real estate brokers. It might seem as though real estate brokers are paid when they list and sell homes but technically that’s not quite the case, something which has created a stir in California and a controversy which is likely to spread nationwide.

A broker obtains the right to sell a home through what is called a “listing” agreement. Depending on the jurisdiction, that agreement can spell out various issues including the sale price of the property, how the broker will be compensated and the length of the contract.

However, the broker’s compensation is not actually tied to the sale of the property in most cases. Instead an agreement might say that a fee is earned, due and payable when “a buyer is procured who is ready, willing and able to buy the property at the price and on the terms stated herein, or on any other price and terms agreeable to sellers.”

For decades such language has been defined within the real estate community to mean that a commission is earned once a ready, willing, and able purchaser has been found who will offer to pay the listing price or lower price if that is acceptable to the property owner.

Real Estate Broker Protection

In other words, it is possible for a broker to be entitled to commission upon the receipt of a full-price offer — even if the home is not actually sold. The logic is that if a broker has found a buyer who is willing to make an offer for property at the price set by an owner than the broker has done his or her job.

While it is understandable that brokers would want to be protected for the work that they do, the ready, willing and able concept raises some questions. For example, in the ethics classes that I teach I have had real estate licensees who have argued that they have no obligation to the owner once an offer has been accepted, meaning their job is done and they do not have to help get the property to closing. Others disagree.

Now, in California, this dispute has gone to an appeals court and the seller has won. The result, according to Bob Hunt at Realty Times, is that the California Association of Realtors has revised its standardized contract to say that a commission can only be earned when a home sale has actually closed.

In RealPro, Inc. v. Smith Residual Company, a court ruled that getting an offer at the full listing price is not enough to earn a commission because of the “or” in the listing agreement, the part about other terms and conditions that a seller might required.

“Notably absent from the listing agreement is language that allows for payment of any commissions simply upon the receipt of a full price offer,” said the court. It also raised four other points:

First, “a seller would not have the option to accept a higher offer on acceptable terms without still owing a commission to a broker who presented a concurrent unacceptable offer.”

Second, “a seller would be responsible to pay multiple commissions on all submitted full price offers, irrespective of the offers’ terms.”

Third, “a seller would be responsible to pay a broker’s commission if the purchaser breached before the sale was consummated simply because the broker had procured a buyer willing to purchase the property for the listing price.”

Fourth, “prospective buyer’s brokers would have no incentive to obtain purchase prices below the listing price because it would jeopardize the broker’s right to a commission.”

The California decision is likely to reverberate around the country. The idea of relating brokerage commissions to the actual sale of the property is certainly the intent of sellers and the new California language aligns the goals of brokers and sellers more closely, an idea which is likely to spread to other states.

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