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When Is A Commission Earned?

Question: I have a problem, which may turn into a lawsuit. A month ago, I listed my home for sale with a real estate broker. He agreed to charge four percent of the selling price if he was the only broker involved, or six percent if he had to cooperate with another company or agent. A couple of weeks after the listing, the broker presented me with a full-price offer, but the buyer wanted $8,000 in "seller's costs." I counter-offered, and the final contract requires that I give a $5,000 credit to the purchaser. Settlement is scheduled for mid-May. The broker has advised me that all is going well, but reminded me that I will owe a real estate commission of four percent based on the full selling price.

I do not think this is fair, since I will not get the full selling price. I believe that the commission should be based on the selling price minus the $5,000 which I will be giving to the purchasers at settlement. Am I correct? Furthermore, what happens if the buyers do not go to settlement? Am I still liable for the commission?

Answer: The simple answers are "no, you are not correct" and "yes, you will probably still be liable to pay the commission."

Let's step back a bit and review some basics. When a homeowner decides to sell his/her house, there are several options. The most common approaches are to try to sell it by yourself, without using a real estate agent or a broker, or to engage the services of a real estate company.

If you opt for the latter approach, you should make sure that you are satisfied with the person who will be your specific agent. The fact that you may have selected a large brokerage firm does not mean that the entire company will be working for you. Inquire of that person as to his/her experience, and knowledge about the area where your house is located.

Once you have selected a real estate agent to help you sell your house, you must sign a "listing agreement" with that person or company. There are different kinds of listing contracts:

  • Open listing -- this means that you agree to pay a real estate commission only to the broker or agent who finds a buyer for you. If you personally sell your house by yourself -- or through some other agent -- the holder of the open listing is not entitled to any commission.

  • Exclusive listing -- this means that you have given the exclusive right to an agent or broker to sell your house. Regardless of who sells the property, the person holding the exclusive listing is entitled to a commission.

While brokers periodically do enter into open listings, the exclusive listing is most commonly used. Brokers and agents do not want to spend a lot of time -- and money -- marketing your house, only to learn that no commission will be earned because you or someone else has sold it.

A signed listing contract is a binding, legal document. You should read it carefully before it is signed. Most standard form listing agreements provide that the commission is earned when the broker presents a ready, willing and able purchaser to the seller and a real estate contract is entered into. Accordingly, whether or not the buyer actually goes to settlement, the real estate agent is entitled to his/her commission.

As a practical matter, it is my experience that many agents will waive their right to a commission should settlement not take place. However, this is not universal. Accordingly, it is recommended that you add the following language into the basic listing agreement:

The commission will not be earned until and unless settlement actually takes place.

Without this language, since the agent found you a person who signed a real estate contract with you, that agent could legally claim a commission, even though you have not sold your house.

Turning to your other question about the amount of the commission you will owe, the standard listing agreement obligates the seller to pay the commission on the full selling price. This is not mandatory, however. You have every right to negotiate different terms -- and different commission arrangements -- with the broker, but only if you do so before you sign the listing contract.

Make sure that all relevant terms are included in the listing agreement. These terms include such things as price, the amount of any points you agree to pay (if any), and any other seller concessions you are willing to make. If you are unwilling to pay a full commission on the entire selling price, this should be discussed in advance with the broker and made a part of the written listing agreement.

However, since you signed the listing agreement without making any changes, you are legally obligated to pay a commission on the full selling price -- regardless of the amount of seller concessions you have given your buyer.

While I appreciate your concerns, the amount in question is, after all, only $200 (4 percent of $5,000). Perhaps you should raise your concerns with the broker, who may be willing to reduce the commission by this amount – or at least split the difference with you. Good will is a very important element of any business, and they want your business -- or referrals from you -- in the future.

 
 

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