There has always been confusion surrounding commissions in the decade that I’ve been involved in the real estate industry. Who pays them, how they can be changed, when are they owed, and many other questions have come up. The system is pretty well designed but has a lot of moving parts, which adds to the confusion. I’m going to offer an approach at clearing up a few things.
Who pays the commission? Let’s answer this question first. The answer: It depends.
Both the Buyer and the Seller should have an agency agreement with their respective agents. If the brokerages are using the UAR agency agreements, then they both contain a section that deals with commissions. Let’s break them down:
In the Listing Agreement, the Seller agrees to pay the Listing Brokerage a commission; we sometimes call this the “Total Commission”. The Listing Broker and the Seller decide on the amount. However, what about the MLS? Hold that thought.
In the Buyer-Broker Agreement, the Buyer agrees to pay the Buyer’s Brokerage a commission. The Buyer and Buyer’s Brokerage decide on the amount. But what about the MLS?
How does the MLS factor into this system? The MLS offers a platform where a Listing Brokerage can offer a Buyer’s Brokerage a commission for bringing a Buyer to the Seller. We sometimes call this the BAC. Let’s be clear, this is a finder’s fee of sorts offered by the Listing Broker to the Buyer’s Broker. This fee is not paid by the Seller, it is paid by the Listing Brokerage. This is where things get a little complicated. How does the MLS system work with the individual agency agreements?
Listing Agreement: How is the commission agreed to in the Listing Agreement affected by the MLS? It isn’t. We mentioned earlier that the Seller agrees to pay the Listing Broker a commission in the Listing Agreement. Does the MLS system change that? No. Regardless of what is offered in the MLS, or whether or not a Buyer’s Agent is used by the Buyer, the Seller still agrees to pay the commission stated in the Listing Agreement to the Listing Broker.
Buyer Broker Agreement: How is the commission agreed to in the Buyer Broker Agreement affected by the MLS? In the standard UAR Buyer Broker Agreement there is language that says that if the property the Buyer buys is listed through the MLS, then any commission offered to the Buyer’s Brokerage from the Listing Brokerage (the BAC) will offset what is owed by the Buyer to the Buyer’s Brokerage in the Buyer Broker Agreement. Confusing? Let’s look at an example:
Buyer Brown has a Buyer Broker Agreement with Angie Agent. In that agreement Buyer Brown has agreed to pay Angie Agent’s Brokerage a commission of 10% minus any commission offered by a Listing Brokerage (standard UAR Buyer Broker Agreement language). Buyer Brown finds a home listed on the MLS. The commission offered to the Buyer’s Brokerage by the Listing Brokerage in the MLS is 10%. How much does Buyer Brown owe to Angie Agent? Nothing, because it was offset by the commission offered in the MLS (the BAC).
What if Buyer Brown found a home listed on the MLS that offered an 8% commission to the Buyer’s Brokerage? Then Buyer Brown would owe 2% to Angie Agent’s brokerage because that is the difference between the BAC of 8% and the commission agreed to in the Buyer Broker Agreement of 10%. Of course a Buyer’s Brokerage decides if they want to ask their Buyer to make up the difference.
There is one complication however; the promise to pay a commission in the MLS is conditional. What does that mean? It means that the Buyer’s Brokerage must qualify to earn the commission. The Buyer’s Brokerage must be the Procuring Cause in order to earn the commission offered in the MLS.
Procuring Cause: To be the procuring cause the agent or brokerage must begin the unbroken chain of events which leads to a successful transaction.
Simply put, this means that the Buyer’s Agent must be the one who gets the Buyer to the table to buy the property and then gets the Buyer through the transaction without any breaks in the chain of events.
The Listing Broker’s promise to pay a commission to the Buyer’s Brokerage is conditioned on the Buyer’s Brokerage being seen as the procuring cause. If the Buyer’s Brokerage is not the procuring cause, then there is no promise from the Listing Brokerage to pay.
Most of the times it’s a no-brainer, the Buyer’s Agent introduces the Buyer to the property, shows the property, negotiates the offer and sees the Buyer through to closing.
But sometimes it is more complicated. Maybe a Buyer’s Agent wasn’t involved in the beginning of the transaction, or the Buyer entered into the transaction without a Buyer’s Agent but gets one halfway through the transaction, or there was a break in the chain of events and the Buyer’s Broker’s involvement. In these cases, it is up to the Listing Brokerage to determine if the Buyer’s Brokerage was the procuring cause.
If the Listing Brokerage concludes that the Buyer’s Brokerage was not the procuring cause and doesn’t pay a commission, the Buyer’s Brokerage can challenge this decision through arbitration. A Buyer’s Brokerage can file for arbitration with the Utah Association of REALTORS® making a claim that it was the procuring cause and earned the BAC offered through the MLS. If the panel finds that the Buyer’s Brokerage was the procuring cause they will issue a decision ordering the Listing Brokerage to pay the commission.
I know that this is a lot to digest but hopefully this clears up some of the confusion surrounding commissions. Remember, good communication helps solve a lot of problems before they begin.