Question: A listing agent called me recently to express her frustration about the lack of understanding among her fellow Realtors® regarding the ethical requirements for dual or variable rate commissions. She had listed a property in the Metropolitan Regional Information System (MRIS) and had affirmatively disclosed the existence of a dual or variable rate commission. After receiving multiple purchase offers from cooperating brokers she realized that none of the agents ever called to check the differential.
Answer: The dual or variable rate commission is one of the least understood compensation models used by Realtors®. In fact, too many agents don’t even know what the term means. However, because it deals with compensation, I am reluctant to discuss it for fear that it would create the appearance that NVAR is violating anti-trust laws by advocating or discouraging any specific compensation model. Therefore, without limitation, I want to start by emphasizing that NVAR does not set, control, recommend, or suggest any amount of compensation or the compensation models for any firm, agent or service.
A dual or variable rate commission is an agreement between a seller and the listing firm that specifies that the seller owes a different amount of compensation to the firm based on who is the procuring cause of the transaction. For example, the seller may agree to pay the listing firm $1 if another cooperating broker procures a buyer for the property but only owes the listing firm $.01 if the listing firm procures a buyer for the property. Please note that these numbers are strictly hypothetical and were only selected for the purpose of simplicity.
As we all know, real estate firms have an absolute right to establish their own fees and charges as they see fit, and that all compensation is negotiable between the parties. The listing firm and seller are free to negotiate any amount of compensation and can use percentages instead of flat dollar amounts. However, under Standard of Practice 3-4 of the Code of Ethics and Article 3, Section C of the MRIS Rules and Regulations Manual, a listing agent has an affirmative obligation to disclose the existence of a dual or variable rate commission arrangement to other agents seeking cooperation.
This is based on a very basic premise. The cooperating broker is entitled to know about the terms and conditions of any offer of compensation that is extended to the cooperating broker. Therefore, a listing agent must disclose the existence of a dual or variable rate commission when offering cooperation to other brokers because the conditions may impact the cooperating brokers. In the MRIS system, an agent enters the listing as Modified Exclusive in order to disclose the existence of the variable rate commission to other subscribers. MRIS provides a field for Variable Rate Commissions that needs to be checked by the listing agent when entering the listing into the system. If this data is properly entered into MRIS and displayed in the system then the listing has satisfied the agent’s initial disclosure obligations under the Code of Ethics.
Any MRIS subscriber who wishes to accept the offer of cooperation and participate in the transaction (i.e. cooperating brokers) would be responsible for verifying the listing’s compensation information to determine special terms and conditions related to compensation. These cooperating brokers would have the right to call the Listing Agent and ask for the differential. The differential is simply the difference in the amount that the seller is obligated to pay if the cooperating broker procures the buyer instead of the listing firm. In the example above the differential is $.99 ($1.00 - $.01 = $.99).
The differential is a critical piece of information that needs to be disclosed because it can affect the attractiveness or competitiveness of any purchase offers that are procured by a cooperating broker. For instance, let’s assume that both the listing firm and the cooperating broker write two separate offers with identical contract terms and conditions at the same sales price (i.e. for list price, no seller concessions, no contingencies, etc.). In this event, the seller would net more money from the listing firm’s offer because of the differential.
Therefore, to create a level playing field between competing buyers while ensuring that the seller will get the best possible offer, the differential needs to be disclosed so that cooperating brokers can be aware of that information and advise their clients accordingly.
A recent change to Standard of Practice 3-4 also requires that cooperating brokers acting as buyer or tenant representatives must disclose the information about the dual or variable rate commission before the client makes an offer to purchase or lease. This change was intended to close a loophole that some buyer agents used to withhold information about differentials from their clients until after the seller ratified a different, competing offer.
What a dual or variable rate commission does not mean is an offer of compensation that will be modified by a third party to the transaction. In this market, short sale listings in the MLS remarks often state something like: 50 percent of the commission approved by the bank. That is not a variable rate commission! As I have stated numerous times before, that is simply an informational remark. The selling agent is still entitled to whatever commission was offered in the cooperative compensation field of the listing.
Article published in the May 2009 issue of Update Magazine.
Sarah Louppe Petcher, NVAR General Counsel, has been employed with NVAR since September 2007. Her legal career spans the specialties of RICO, anti-trust, litigation, domestic/diplomatic relations and real estate. Honored as the 2007 Virginia State Bar Young Lawyer of the Year, she was also a member of the Virginia State Bar Board from 2007-2010. In her spare time, Sarah performs Pro Bono work for the National Center for Refugee and Immigrant Children, where she was the recipient of the Mutual of America Community Partnership Award in 2006. A native of France, Sarah is fluent in English and French, and is proud of her U.S. citizenship. You can read more articles written by Sarah here.