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2Chapter Overview Parties can create agency is several ways and can create a variety of agency relationships. This chapter explores the creation and termination of agency and how brokers

earn commissions or success fees in transactions.

THE CREATION OF AGENCY

A principal and an agent can create agency either through a formal agreement or through the

actions of the parties. When parties create agency through a formal agreement, the agreement can be oral or it can be in writing. Agency through formal agreement is express agency. Parties can also create agency without a formal agreement through the actions of one or both of the parties. Parties create implied agency when they do not have a formal agency agreement but develop an agency relationship through the actions of one or both par-ties. Implied agency relationships are usually unin-tentional and arise through the accidental actions of a party that leads the other party to believe they have an agency relationship. A seller lists a property with a broker. The seller and the bro-ker have express agency through a formal, written agreement, which in this case, is the listing contract. A salesperson for the broker meets with a buyer who does not sign an agency agreement. The buyer is a customer and not a client of the broker. The customer and the broker do not have an agency

agreement. The buyer wants to write an offer and the listing broker’s salesperson drafts the offer. The salesperson also provides the buyer with current market information, explains that the property is overpriced, has been on the market for close to one year, and that the seller will probably be willing to negotiate on price. The salesperson helps the buyer develop a negotiation strategy that should help the buyer write a strong offer that benefits the buyer. The salesperson, through actions rather than an intentional agreement, created an agency relationship with the buyer. The agency relationship is implied because the salesperson and the buyer did not have a formal agreement to enter into an agency relationship. The salesperson treated the buyer as a client rather than a customer when the salesperson provided opinions, advice, and a negotiation strategy. Now the broker has a multiple representation relationship with the buyer and the seller without their consent or disclosure of the relationship.

In Wisconsin, parties must execute express, written real estate agency agreements. A court will not enforce a verbal real estate agency agreement.

Agency IssuesWis. Stats. 240.10, 452.19REEB 24.08, 24.10

Important Terminologybuyer agency agreementdamagesexclusive agency listing contractexclusive right to sell listing contractexpress agencyfee splitting general agencyimplied agencyin-house salelisting contract mirror image offermultiple listing servicenet listing contractone-party listing contractopen listing contractprocurementready, willing, and able buyerrescissionspecial agency

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An agency agreement is an employment agreement for personal services based on a fiduciary relationship of trust and confidence in the broker. A seller uses a listing contract to hire a bro-ker to market property and pay the broker a commission if a ready, willing, and able buyer is procured according to the contract terms. A ready, willing, and able buyer is not under duress, is financially qualified, and of legal age. A buyer uses a buyer agency agreement to hire a broker to negotiate an ownership interest in a property. A tenant uses a tenant representation agreement to hire a broker to negotiate a lease interest. Agency agreements are contracts between a client and a broker-employer, not the broker’s employees. A salesperson or broker-employee does not have the authority to terminate, short-en the term, or reduce the commission amount of an agency agreement without the supervising broker’s written permission. Agency agreements must contain all of the following elements to be valid.

1. Description of the real estate.A listing contract uses a street address to describe the property. If the property is not devel-oped or is a portion of a parcel, the street address may not be sufficient and a party might use additional information like a legal description or a tax number to identify the property. A buyer agency agreement usually includes a general description of the property rather than a street address. For example, a buyer might describe a property as “a residential property with a list price between $150,000 and $180,000.” 2. Statement of the price.A seller lists a specific price of property in the listing contract. Sellers can use range pricing as a marketing tool but should not use a range for the purchase price in the listing contract. A seller can address range pricing in the marketing plans of the listing contract. Stating “price to be determined” is inaccurate and not the correct way to fill out a listing contract. The price in the listing contract is the amount at which the seller wants the broker to list the property, not an estimation or statement about the eventual purchase price of a property. Unlike a seller, a buyer usually states the price as a range because, as with the description of the property, the buyer may not know exact price of the property the buyer will purchase. For example, a buyer may state the price as $200,000-$240,000.3. Statement of the commission. A listing contract may list the commission as a percentage of the purchase price but brokers use different commission structures, including flat fees. A broker’s commission structure is set by company policy and a broker’s employees usually do not have the authority to set com-mission structures. State law does not dictate a maximum or minimum commission.4. Statement of the term. This is the period for which the parties contract. Parties cannot extend an expired agency agreement. 5. In writing. Agency contracts must be in writing. 6. Signed by the person who will pay the commission. The party that signs an agency agreement is agreeing to pay the broker for successful com-pletion of the contract terms. Usually the person signing an agency agreement is the buyer or the seller but the law states that it must be signed by the person who will pay the commission, which may not always be the buyer or the seller. A professor takes a temporary assignment at a university in a different state. The assignment works out well and the university offers the professor a permanent position. The professor is busy planning courses for the upcom-ing semester and asks her sister to list her home so she can purchase a new home. The professor’s sister can sign the listing contract to list the professor’s house. The professor will have to sign any offer to purchase she wants to accept but the listing contract is valid even though the seller did not sign it.

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TYPES OF AGENCY CONTRACTSThere are several types of agency contracts and each contract creates the legal obligations and rights of the parties to the contract. A special agency relationship gives an agent the authority to represent a principal in a single transaction. The principal does not authorize the agent to act in any other transaction. A listing agreement usually creates a special agency relationship. The seller gives the listing broker a right to represent the seller in one specific transaction. A listing broker lists a property for 12 months. The broker procures a buyer and the transaction closes five months into the listing. The listing broker’s special agency relationship with the seller terminates when the buyer bought the property.

An agency agreement can give a broker a broader authority to represent a client. A general agency relationship gives an agent the authority to represent a principal in a range of matters. A buyer can draft an agency agreement to establish a general or a special agency relationship with the buyer’s broker. Lines 195-196 of the WB-36 Buyer Agency/Tenant Representation Agreement state, the “Broker and Buyer agree that this Agreement shall/ shall not (strike one) end [if neither is struck, this Agreement shall end] when Buyer procures an interest in property.” If the parties strike shall, the sentence reads “shall not end when Buyer procures an interest in property,” then the agreement is a general agency relationship. If the parties strike shall not then the sentence reads “shall end when Buyer procures an interest in property,” then the agreement is a special agency relationship. A buyer agency agreement states that it shall not terminate when the buyer procures an interest in property and the term of the agreement is one year. Three months after entering into the agreement, the buyer purchases a property. The agreement does not terminate because the buyer created a general agency relationship with the broker. When the buyer wants to purchase another property six months later, the buyer’s broker has the right to represent the buyer in that transaction without having to draft another agreement.

Listing ContractsExclusive Right to Sell Listing ContractThe exclusive right to sell listing contract is the state-approved form that a licensee must use when listing a seller’s property. There are state-approved exclusive right to sell listing contracts for different properties including farm, vacant land, commercial, business, and time-share. This course covers the topics a licensee most likely encounters when practicing residential real estate and will focus on the WB-1 Residential Listing Contract - Exclusive Right to Sell and the WB-4 Residential Condominium Listing Contract - Exclusive Right to Sell. The state-approved listing contract is an exclusive right to sell. The seller hires one broker to represent the seller in the sale of a property. If anyone procures a buyer for the seller’s property, the broker earns a commission. If there is any change in ownership or control of a property listed with an exclusive right to sell listing contract, the listing broker earns a commission. This means that if the seller, the broker, or any other party finds a buyer for the seller’s property, the broker earns a commission. Sellers and licensees can modify the state-approved form to create other types of listing contracts.

A seller lists a house with a broker using an exclusive right to sell listing contract. The seller is out doing yard work on a weekend afternoon. A jogger passing by notices the seller’s house is for sale and stops to ask the seller some questions. The friendly seller shows the jogger around, answers questions, and provides the jogger with the listing broker’s information. On Monday, the jogger submits an offer to the listing broker, which the seller accepts. The seller procured the buyer but the broker still earns a commission.

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Exclusive Agency Listing ContractA seller hires a broker to represent the seller in the sale of a home. A listing broker earns a com-mission unless the seller procures the buyer. A seller lists a house with a broker and the seller and the broker modify the state-approved exclusive right to sell listing contract by including a provision that says “If the seller finds a buyer, the seller does not owe the broker’s commission.” This changes the contract from an exclusive right to sell to an exclusive agency listing contract. The seller tells a friend about the house and the friend refers a buyer directly to the seller. The buyer submits an offer that the seller accepts. The seller found the buyer and according to the terms of the listing contract, the seller does not owe the broker a commission.

Open Listing ContractA seller can list a property with several brokers and will only owe a commission to the broker who finds a buyer. If the seller finds a buyer, the seller does not owe a commission to any of the brokers. Open listing contracts are not very common. Two different brokers approached the owner of a desirable property and offer to list it for the owner. The seller executes listing contracts with each broker. The parties modify the state-approved exclusive right to sell listing contract by including a provision in each contract that says “The seller will pay the listing broker a commission only if the listing broker procures the buyer. If another broker or the seller procures the buyer, the seller does not owe a commission under this listing contract. “

One-Party Listing ContractA seller can change the state-approved exclusive right to sell to a one-party listing contract by restricting the broker’s ability to earn a commission only in the case that a specific buyer purchases the property.

A broker is working with Betsy Buyer as a customer and Betsy expresses interest in a property that is not currently listed. The broker contacts the property owners and asks if they are interested in selling. The prop-erty owners indicate that they might be interested. The broker and the property owners can modify the state-approved exclusive right to sell and make it a one-party listing by including a provision that says “the broker will earn a commission under this listing contract only of the property sells to Betsy Buyer.” If Betsy writes an offer and the property owners do not accept it, the one-party listing contract will expire and Betsy and the broker can look for other properties.

Net Listing ContractA net listing contract sets the broker’s commission at any dollar amount over a minimum sales price. Net listings are illegal in Wisconsin. The seller and listing broker agree that commission will be any dollar amount over $100,000. The property sells for $180,000. The listing broker’s commission is $80,000.

Buyer Agency AgreementsA buyer agency agreement is an agency agreement a buyer or a tenant uses to hire a broker. The state-approved buyer agency agreement is the WB-36 Buyer Agency/Tenant Representation Agreement. Both buyers and tenants can use it to hire a broker to look for properties to purchase or lease. A buyer hires a broker to act as the buyer’s agent with regard to properties that the buyer includes in the agreement. While uncommon, a buyer can modify a buyer agency agreement to limit or expand a broker’s authority under the agreement.

Exclusive Right to LocateIf a buyer needs a buyer’s agent to locate a property and the buyer or the buyer’s attorney will negotiate the purchase or lease terms, the parties may create an exclusive right to locate agreement by striking out language giving the broker authority to negotiate. This is a common practice in the commercial real estate industry.

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Exclusive Right to NegotiateIf a buyer needs a buyer’s agent to negotiate for property but the buyer wants to locate the property, the buyer could create an exclusive right to negotiate agency agreement. Licensees can draft state-approved forms but cannot practice law. If negotiating for a buyer will require a licensee to draft other contracts or documents, the licensee cannot do this. A buyer can draft contracts or other documents used in the negotiations or could hire an attorney to draft those documents.

Exclusive Right to Locate and NegotiateIf the licensee wants to offer an exclusive right to locate and negotiate business model to consumers, this means the buyer’s agent is the only person who can locate or negotiate an interest for the buyer. The buyer has restricted the buyer’s own ability to locate or negotiate for property and vested all authority to do so in the agent.

Modification of any of the state-approved listing contract in no way changes a licensee’s duties to customers and clients.

TERMINATION OF AGENCYAgency may be terminated in the following ways.

1. Death or Incapacity of a PartyIf a party to an agency agreement dies or becomes incapacitated, the agency relationship terminates. An agency agreement is between a broker and a client, not the broker’s agents so the death or incapacity of an agent does not affect the agency relationship.

2. Destruction or Condemnation of the Property by Eminent Domain A government uses eminent domain to take private land for public use. For example, the Department of Transportation can use eminent domain to condemn land to build a highway. If a government condemns a seller’s listed property, the condemnation terminates the contract.

3. Expiration of the Term of the Contract4. Mutual Agreement Both the principal and the agent can agree to terminate the agency relationship.5. BreachA party violates a material term of the agency agreement. Whether a party has violated a material term of a contract resulting in a breach that would permit termination of the agency contract is not always clear and parties may need the assistance of a court or other dispute resolution methods to determine whether a breach will terminate a contract. A listing broker tells a buyer that the seller is eager to sell and will probably accept under list price. The buyer writes an offer for $10,000 below list price. The broker has violated the duty of loyalty, which is a material term of the contract. A seller should not assume that this automatically terminates the contract, however, and should seek legal counsel to determine the seller’s rights.

6. Operation of Law A court order or some other operation of law can terminate an agency agreement. For example, a judicial confirmation of the sale of a seller’s foreclosed property will terminate an agency relationship. 7. Completion The parties complete all of the terms of the agency agreement.

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REMEDIES FOR BREACH OF AN AGENCY AGREEMENTReal estate agency agreements are personal service contracts where a client hires a broker to provide a service. If a party breaches the terms of an agency agreement, the other party can-not ask a court to award specific performance as a remedy. Specific performance is a remedy a court can grant to a party where the court orders the breaching-party to perform according to the terms of the contract. Parties to an agency contract can cancel the contract at any time but they do not have the legal right to early termination of the contract. This means that either a broker or a client could choose to terminate the agency contract early, but the terminating party could be liable for dam-ages resulting from the early termination. Cancellation of an agency agreement must be in writing and the cancelling party must deliver it according to the terms of the agency agreement. A seller cancels a listing contract before the expiration date. A broker may be able to claim damages for the costs of advertising, reimbursement for expenses for listing and marketing the property, and the value of the broker’s services. To claim damages, a party must be able to prove the amounts.

If a party breaches an agency agreement, remedies include:1. Rescission. Rescission is a legal way of undoing a contract. The parties act as if the

contract did not exist and go back to their status before they executed the contract. This includes forfeiting a right to sue for any obligations or rights arising from the contract.

2. Forfeiture of Commission. If a broker breaches an agency agreement, the broker can lose a claim to any compensation due under the agreement.

3. Sue for Damages. The non-breaching party can sue the breaching party in court and request a judgement for the amount of actual damages resulting from the breach of contract.

COMMISSIONCommission is a seller’s closing cost unless the parties agree otherwise. A seller pays a broker’s commission in addition other closing costs out of the proceeds from the sale. Parties usually use the purchase price to determine the amount of a broker’s commission.

When more than one broker participates in a transaction, the brokers will often share the com-mission. The way brokers split commission depends on the commission sharing agreement between the brokers. Similarly, the way a broker shares commissions with salespeople or broker-employees depends on the broker’s company policy and varies from broker to broker. Parties can always negotiate commission amounts and structures and there is not a standard commission that brokers charge. Leading the public to believe that there is a standardized rate can constitute price fixing, which is a violation of the antitrust laws.

Antitrust LawsThe Sherman Antitrust Act of 1890 is a federal statute designed to maintain and preserve busi-ness competition. Wisconsin also has state antitrust laws. For an antitrust violation to occur, there must be proof of a conspiracy to restrain trade. A conspiracy exists when two competing companies act according to a joint agreement. A conspiracy does not occur if the action is taken independently by one broker as a result of an internal office decision. A restraint of trade occurs when the agreement between the companies has a limiting effect on competition within the real estate market in which the companies work. The limitation may affect other real estate compa-nies, sellers, sales agents, buyers, newspapers, and title companies.

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Licensees must understand antitrust laws and acts that violate them. Group boycotts exist when a group of brokers agree to refuse cooperation or offer to work with limited guidelines with anoth-er specific broker or a type of broker that offers a certain kind of business model. Price fixing is an agreement among competing companies to set a fixed commission or fee to charge or pay. There is no such thing as an innocent agreement among competing companies to fix commis-sions or fees they charge or pay. These agreements are “per se” violations, which means there is no justification, excuse, or defense for the violation.

1. Realty A and Realty B agree both will charge sellers a 7% or $3,000 minimum commission on all listings taken after the date of the agreement.

2. Realty A and Realty B agree both will pay 2% of the sales price to co-brokers on all listings published in a multiple listing service after the date of the agreement.

3. Realty A and Realty B agree both will pay listing agents 60% of the listing commission on all listings taken after the date of the agreement.

4. Realty A and Realty B agree both will only pay $50 to 123 Title Company for real estate closings.Following these tips can help a broker avoid antitrust violations.

1. A broker should not discuss with other brokers the commission rates or structures the broker uses with clients or the ways in which the broker shares commissions with coop-erating brokers.

2. To prevent a claim of price fixing, a broker should make all commission and fee decisions as independent business decisions made solely within the broker’s office. Brokers may conduct market focus groups or other consumer research when revising commission rates or structures. When a broker changes a commission rate or structure, the broker should document the process used for making the decision.

3. Brokers should train agents and other staff to explain the broker’s fees and commissions as independent decisions driven by competitive market forces to avoid giving the appear-ance of a conspiracy among competing companies. In addition to commissions, agree-ments concerning other terms and conditions of listing contracts could serve as the basis for an illegal conspiracy in violation of the antitrust laws. A conspiracy is treated as a price fixing if it has an effect on price, even if it does not directly involve price. A conspiracy among real estate brokers to fix the term of a listing contract, the form of compensation, or even the type of listings accepted, may be illegal under antitrust laws as price fixing.

4. Real estate brokers and sales agents should never discuss their competitive business decisions with brokers or agents from other firms in the same market. These discussions can convert the implementation of lawful business strategies into illegal antitrust conspira-cies.

Other Commission IssuesOnly a person holding a real estate license can receive commissions. The payment of a real estate commission by a real estate licensee to a non-licensee is fee-splitting, which is illegal under Wisconsin law. Wisconsin law states that no licensed broker or corporation may pay a fee or a commission or any part thereof for performing any brokerage activity or for a referral or as a finder’s fee to any person who is not licensed or registered to practice real estate.

A broker places an advertisement in a local newspaper promising to pay $200 to anyone who refers a buyer or a seller to the broker. If the broker pays the $200 to a non-licensed individual for a referral, the payment is illegal fee-splitting.

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Wisconsin allows licensees to offer incentives to buyers and sellers. The incentives must be documented properly before to closing. Parties must have a clear, thorough, and advance understanding of all the terms and conditions of the incentives. A broker can offer incentives in any amount to induce buyers to buy and sellers to sell. Licensees must be aware that after-closing gifts given to a party that the licensee did not document ahead of time could be fee-splitting if the gift is of more nominal value. After-closing gifts are customary but should be of nominal value.

Wisconsin requires that compensation received by the employee of a broker be paid by the broker-employer. Compensation includes referral fees, commissions, and other things of value. A person who wants to compensate an employee of a broker must give compensation directly to the broker-employer, who will distribute it according to the broker’s company policy. A seller gives a licensee a $100.00 gift certificate. If the licensee keeps it, the licensee will violate license law. The licensee must give it to the employing broker who will distribute it according to the broker’s company policy.

Multiple Listing ServiceReal estate brokers have agreements with other real estate brokers that state how the firms will cooperate and share compensation if they work together on a transaction. The agreements may be compensation agreements or standing policy letters. Agreements may pertain to just one transaction or they may be standing policies between brokers. When two brokers who cooperate on a transaction are both members of the same multiple listing service (MLS), the MLS will often have standard compensation sharing polices for all members of that MLS. A Multiple Listing Service is a service among brokers that facilitates cooperation and compensa-tion between listing brokers, subagents, and buyer’s brokers. The members of the MLS agree to share listings with other members. If a member of the MLS shows a listing with the MLS, the agent knows the share of the commission the agent’s employing broker will receive for a successful transaction. MLS membership is voluntary and licensees do not have to join. Once a licensee joins the MLS, the licensee agrees to the terms and conditions of the MLS, including placing all the broker’s listings in the MLS, unless that would be contrary to the seller’s instructions. There is not one single MLS in Wisconsin. There are a variety throughout the state and nation, each with its own membership guidelines. MLS membership is voluntary and information about MLS membership and guidelines does not appear on the state licensing exam. For more information about MLS membership, a licensee can contact the licensee’s local MLS.

Dividing CommissionsA listing contract entitles a listing broker to a commission in a successful real estate transaction. Because other participants may be necessary for the transaction to be successful, the listing broker may end up sharing the commission with other brokers. A listing broker will divide a com-mission according to which broker played what role in a transaction. Usually, a seller pays the listing broker the commission at closing and commission is a seller’s closing cost. The listing broker then divides the commission with other parties that participated in the transaction. There is not a standard formula that all brokers use to determine how the broker shares a commis-sion and the division will depend on agreements between brokers and the individual details of a transaction.

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Commission in a Co-Brokerage SaleWhen a transaction involves a cooperating broker, the transaction has a listing side and a sell-ing side. The listing broker will share a portion of the commission with the selling broker. A seller pays the whole commission amount to the listing broker, who then pays a share to the selling broker, who is subagent of the listing broker. Brokers then pay the individual agents according to company policy. Commissions are first paid to a broker who then pays the salespeople. When a cooperating broker is part of the transaction, there may be four different parties who take a part of the total commission.

In this diagram, the listing broker agrees to share 50% of the total commission with any cooperating broker. Both the listing broker and the cooperating broker have office policies to share 50% of their commissions with their salespeople.

Commission in an In-House SaleWhen the same broker lists the property and finds the buyer, the sale is in-house because there is no outside broker in the transaction. A broker may have different ways for divid-ing commissions on in-house sales. In this diagram, the same agent who took the listing on behalf of the broker also found the buyer.

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An in-house sale might include the employing broker and two of the broker’s agents. There may be the listing agent and the selling agent who writes the offer for the buyer. The parties may divide the commission three ways.

A seller lists a property with the listing broker. Jane is the salesperson who executes the listing. Jane is the listing agent. Alan works for the same broker as Jane. When a buyer contacts the broker to write an offer, Alan drafts the offer for the buyer. Alan is the selling agent. When the property closes, the seller pays the commis-sion, which is $12,000, to the listing broker. The listing broker allocates one-half of the $12,000 commission to the listing side of the transaction ($6,000) and one-half to the selling side of the transaction ($6,000). From the listing portion of the commission ($6,000), the broker keeps 30% ($1,800) and gives 70% ($4,200) to the list-ing agent. From the selling portion of the commission ($6,000), the broker keeps 40% ($2,400) and gives 60% ($3,600) to the selling agent.

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CALCULATING COMMISSIONS1. To calculate a broker’s commission, look at the terms of the listing contract. 2. The commission is often a percentage of the purchase price. To find the percentage, look

to the listing contract. To find the purchase price, look to the offer to purchase. 3. A seller pays a broker’s commission at closing because it is a closing cost. A seller usu-

ally pays other closing costs in addition to the broker’s commission but a commission is a closing cost.

4. The seller pays the entire commission amount to the listing broker. The listing broker then pays a cooperating broker according to the terms of any agreement between the brokers. The brokers then pay their employees according to company policy.

When calculating commissions, first read the problem. What is the known information? Does the problem include the list price or the purchase price? Does it provide the broker’s total com-mission amount or the rate of the broker’s commission? Does it specify how much a co-broker receives or does it say the rate at which the listing broker shares commissions with co-brokers? When you are solving the commission problems on the following pages, use the information provided to solve for the information that is missing. Method 1: The algebraic formula:

partial number = whole number x rate commission = sales price x %

ORMethod 2: The “cover-up” formula: partial number = P whole number x rate W x %

commission = C sales price x % S x %

Note to student: Both methods do the same thing. They allow you to plug in the information that you know to solve for the missing information. To use Method 1, plug in the numbers that you know, use a variable to rep-resent the unknown, and then perform the necessary operations to isolate the variable and solve the equation. To use Method 2, plug in the numbers that you know and then cover up the element that is missing. If you have a number above the line and a number below the line, divide the number above the line by the number below the line to find the missing number. If you have both numbers below the line, multiply the numbers to find the number that is missing.

A seller pays a broker $12,000 at closing. The seller agreed to pay the listing broker 6% of the sale price at closing. What was the purchase price of the property?

Method 1 Method 2

commission = sales price x percent Commission$12,000 = sales price x 6% sales price x % $12,000/6% = (sales price x 6%)/6% $12,000$200,000 = sales price sales price x 6% Cover up the unknown, you have one number above the line and one below, so you divide the number above, $12,000, by the one below, 6%, to arrive at the sale price of $200,000.

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The first step to solve any math problem is to read the problem. What information is the problem asking you to find? What information is given to you? Use the information given to you, substitute it in the formula, and solve for the missing information.

1. Toni Yang sold her property for $175,000. She paid the listing broker 7% commission. The listing broker paid 40% of the total commission to the selling broker. How much commission did Toni Yang pay to the listing broker? What did the listing broker pay the selling broker?

2. If Toni Yang’s listing broker and the selling broker each pay 50% of their commission share to their salespeople, how much did the listing agent and the selling agent earn?

3. The seller of a property nets $85,500 from the sale after paying the listing broker’s 5% com-mission. What was the selling price of the home? How much commission did the listing broker earn?

4. A listing broker earns $14,000 in commission. The seller agreed in the listing contract to pay the listing broker 8% commission. What was the selling price of the home?

5. The Millers received $130,000 from the sale of their house after paying their listing broker 7% commission and an additional $4,850 in closing costs. What was the selling price of the home and the commission paid to the broker?

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Commissions Answer Key1. Known information:

Sale price = $175,000Commission = 7% of the sale price Selling broker commission = 40% of the total commission$175,000 x .07 = $12,250 commission paid to the listing brokerThe listing broker pays the selling broker 40% of the total commission.$12,250 x .40 = $4,900 commission paid to the selling broker

2. Known information:Listing broker & agent = 50% each of the listing broker’s portion of the total commission Selling broker & agent = 50% each of the selling broker’s portion of the total commissionListing broker commission = 60% of the total commissionIn problem #1, the listing broker paid the selling broker 40% of the total commission. The listing broker is left with 60% of the total commission to share with the listing agent. 100% - 40% = 60%$12,250 x .60 = $7,350 listing broker’s commission$7,350 x .50 = $3,675 listing agent’s commission, or divide the listing broker’s share by 2$4,900 x .50 = $2,450 selling agent’s commission, or divide the selling broker’s share by 2

3. Known information:Seller nets = $85,500Commission = 5% $85,500 is not the sale price but is what the seller keeps after paying the broker’s 5% commission, which means $85,000 is equal to 95% of the sale price. 100% of sale price - 5% commission = 95%, or the seller’s net of $85,500$85,500 / .95 = $90,000 sales price$90,000 - 85,500 = $4,500 commission paid OR$90,000 x .05 = $4,500

4. Known information:Listing broker’s commission = $14,000Commission = 8%$14,000 / .08 = $175,000 sale price

5. Known information:Seller nets = $130,000 Commission = 7%Additional closing costs = $4,850 First, add the additional closing costs back to the seller’s net. $130,000 + $4,850 = $134,850$134,850 is the sale price minus the broker’s 7% commission, or 93% of the sales price. $134,850 / .93 = $145,000 sale price$145,000 x .07 = $10,150 commission paid

Note to studentWhen solving for the selling price on question three, remember that the seller was left with $85,500 after paying the listing broker a 5% commission. The sales price is 100% of value and the seller paid 5%, which means that $85,500 is 95% of the selling price.

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PAYMENT OF A LISTING BROKERThe listing broker earns commission at the procurement of a buyer. The seller pays the bro-ker’s commission at closing or the date set for closing in the offer to purchase. Lines 215-218 of the WB-1 Residential Listing Contract state, “A buyer is procured when, during the term of the Listing, an enforceable contract of sale is entered into between the Seller and the buyer or when a ready, willing and able buyer submits to the Seller or the Listing Broker a written offer at the price and on substantially the terms specified in this Listing. A buyer is ready, willing and able when the buyer submitting the written offer has the ability to complete the buyer’s obliga-tions under the written offer.” In other words, a listing broker earns commission when a buyer’s offer has no more contingencies to be met or a buyer writes a mirror image offer. A mirror image offer is a full price, contingency-free, cash offer. Even if the seller rejects a mirror image offer, the listing broker may be able to successfully make a claim for compensation. A seller may also owe a commission to the listing broker even if the property does not close. This may occur if the buyer backs out of the transaction because of the actions of a seller.

In the listing contract, the broker does not promise that the transaction will close, just as the seller does not promise to accept an offer. Rather, the broker promises to procure a buyer and the seller promises to pay a commission. If the transaction does not close and the broker obtains a binding contract that the seller can enforce against the buyer in court, the broker earned a commission.

Each listing contract has preprinted terms specifically stating the various ways a listing broker earns a commission. The parties may agree to strike certain preprinted terms or modify the terms to limit the ways a listing broker can earn a commission. Chapter 3 covers the WB-1 Residential and WB-4 Condominium listing contracts.

PAYMENT OF A BUYER’S BROKERA buyer pays a buyer’s broker according to the terms of the WB-36 Buyer Agency/Tenant Representation Agreement. The WB-36 states that a buyer’s broker earns a success fee “if, during the term of the Agreement (or any extension of it), Buyer or any person acting on behalf of Buyer acquires an interest in property or enters into an enforceable written contract between owner and Buyer to acquire an interest in property, at any terms and price acceptable to owner and Buyer.” The WB-36 identifies a buyer’s broker’s compensation as a “success fee” rather than a commission but licensees commonly use “commission” to describe the compensation a buyer pays to a buyer’s broker. Depending on the terms of the WB-36, a buyer’s broker may earn a commission if a selling broker, buyer’s broker, or the seller introduces the buyer to the property. If the buyer procures an interest in a property described in the buyer agency agreement, the buyer’s broker earns a success fee. The broker does not need to locate or negotiate for the property on behalf of the buyer. Parties can modify the buyer agency agreement to limit the way a buyer’s broker earns a commission. For example, a buyer could include a provision that limits the buyer’s obliga-tion to pay the broker’s success fee only if the broker finds or negotiates for the property and that the buyer does not owe the broker’s success fee if the buyer or someone other than the broker locate or negotiate for the property. Chapter 3 covers the WB-36 Buyer Agency/ Tenant Representation Agreement.

Agency Issues - 2

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A buyer’s broker’s commission can be: 1. Percent of sale price; 2. Flat fee;3. Retainer fee; or4. Hourly rate.The most common method for paying a buyer’s broker is to use a percent of the sale price but when a buyer is seeking several properties, the buyer may hire the buyer’s broker using a retainer fee, hourly rate, or a flat fee for every property the broker finds that fits the buyer’s need. No matter what structure the parties use to determine compensation, the buyer may not be the party that pays it. In residential practice, it is common for the listing broker to pay the buyer’s broker as a cooperating broker in the transaction. A buyer can also include a provision in an offer to purchase requiring a seller to pay the buyer’s broker’s success fee. A licensee cannot receive compensation from someone other than the licensee’s client, the principal broker, or the broker-employer without the client’s consent. The buyer must provide consent for the listing broker or the seller to pay the buyer’s broker’s success fee. A buyer can give consent in a buyer agency agreement.

PROCURING CAUSE ISSUESA buyer sees a property with Jenny. Sometime later, the same buyer sees the property with selling broker Sandy. Sandy writes a successful offer for the buyer and the transaction closes. The seller pays the listing broker a commission. Should the listing broker share the commission with Jenny or Sandy? Jenny introduced the buyer to the property but Sandy wrote the offer that lead to the sale.

There is not one correct answer. The brokers may be able to negotiate a solution but if they cannot, a broker can use available dispute resolution methods to resolve the dispute about who should receive the commission. If the brokers are REALTOR® members, they must submit their dispute to the an arbitration board of their local REALTOR® association. If they are not REALTOR® members and are unable to reach an agreement, they will need to seek out mediation, arbitration, or file a suit for the compensation.

Whenever multiple brokers are involved in a real estate transaction, there is the possibility of a commission dispute. A listing broker will share a commission with another broker that procures cause in the transaction. Procurement is the uninterrupted chain of events that led to a sale. The broker that starts this chain of events is the broker who procured cause. There is typically not a single act that determines procuring cause. Procuring cause is an MLS performance standard and can only be answered by the full and knowledgeable con sideration of all the facts of a situation. The discussion of determining procuring cause is outside the scope of this course and is often dictated by rules of the REALTOR® organi-zation. It is, however, a very important concept that real estate licensees will explore further in their real estate practices.

REAL ESTATE SALES

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