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I Challenge You to a Dual (or Variable Rate Commission)!

By: Hank Lerner, Esq. on in  | 

The NAR Code of Ethics (Standard of Practice 3-4) and local MLS rules (Section 5.3 of the NAR model MLS rules) generally require that the listing broker disclose the existence of “dual or variable rate commission arrangements” to buyer agents “as soon as practical.” And if asked, the listing broker must also disclose the amount of the difference.

The words of Standard of Practice 3-4 define dual or variable rate commission as “listings where one amount of commission is payable if the listing broker’s firm is the procuring cause of the sale/lease and a different amount of commission is payable if the sale/lease results through the efforts of the seller/landlord or a cooperating broker.” The model MLS rules use similar language.

But what does that mean in real life? And why does this rule exist, anyway?

The key to understanding this concept is that it applies when the fee paid by a seller to a listing broker will vary based on whether or not an agent with the listing broker procures the buyer. The textbook example would be a listing where the fee is something like (numbers for example purposes only…) $5,000 if the buyer is procured by a cooperating broker, but $4,000 if the buyer is procured by an agent who works for the listing broker.

It can also come into play in an exclusive right-to-sell listing, where the seller might agree to pay a listing fee of $1,000 if the seller procures the buyer on her own, but $2,000 if the listing broker or any cooperating broker procures the buyer.

In either of these scenarios, it is clear that a buyer represented by a cooperating broker could be at a disadvantage from the jump because the terms of the listing contract mean the seller would net less from their offer. And that’s the basis for the rule. It’s OK to have a contract with this sort of differential, but the Code of Ethics requires listing brokers to at least let the cooperating brokers know it isn’t a level playing field so they can advise their clients about ways to potentially make their offers more appealing to sellers.

[Side note. Don’t even think of trying to post any comments disparaging brokers who utilize these tactics. They are a legal and ethical business practice so long as the brokers explain any positives and negatives to the seller and the seller agrees – and of course the appropriate disclosures are made to buyer brokers.]

Now let’s talk about some of the hotline questions we get with scenarios that are not dual/variable rate commissions:

  • The listing broker’s offer of compensation in the MLS is $3,000, but the listing broker sends a separate letter to a specific brokerage telling them that if any of their agents bring a buyer they’re only going to be paid $1,000. [Yes, that’s a permissible practice, but the details are beyond the scope of this article.] This is not a dual/variable rate commission because: (1) there’s nothing suggesting that the seller will pay less in that circumstance and (2) even if the seller does pay a lower listing fee, the differential is based on the identity of the specific buyer broker, not the mere fact that there is a cooperating broker (and of course this specific broker has already been notified of the differential through the letter anyway).
  • The listing broker’s offer of compensation in the MLS is $3,000, but buyer broker X voluntarily negotiates an agreement to accept only $2,000 (properly using PAR’s Cooperating Broker Compensation Agreement – Form CBC – of course). Even though other buyer brokers might now be at a disadvantage compared to buyer broker X, this isn’t a dual/variable rate commission because, again, it’s based on this specific broker and not a difference based on the mere presence of a buyer broker.
  • In an exclusive right-to-sell listing, the listing broker’s fee is $600 regardless of who procures the buyer, with an offer of cooperating compensation in the MLS for $100. Represented buyers could be at a financial disadvantage compared to sellers procured directly by the seller if they ask the seller to contribute to the buyer brokerage fee (perhaps using the PAR Compensation Addendum to the Agreement of Sale – Form CAS) or if buyers would have to pay their own broker fee out-of-pocket based on the terms of their buyer agency agreement. But this is not a dual/variable rate commission because the listing fee is the same no matter who procures the buyer – any differential here is based solely on whether/how the buyer addresses the buyer broker’s fee.

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Comments (6)

Comments

  • Bob Moncavage   April 30, 2021 at 9:24 am

    I’m pretty sure I know the answer to this but would like your opinion. Total commission in the transaction remains the same but the brokerage offers its agents a higher commission split on an inhouse sale, Variable rate or not?

    Reply to Bob Moncavage
    • Hank Lerner, Esq.   April 30, 2021 at 9:30 am

      Not. If the total amount paid by the seller is the same, then it’s not covered by this rule. The underlying concept is to ensure that the buyer broker is aware if buyer is at a financial disadvantage, and they’re not. Good question, though.

      Reply to Hank Lerner, Esq.
      • Kathy Opperman   April 30, 2021 at 11:50 am

        Hi Hank! On the question above, we had been taught when Buyer Agency came to PA, that a Broker should not offer a higher commission payout to an agent within their own company because that could be considered a conflict of interest where an agent could be seen as putting their interest first by trying to sell in-house properties. Your thoughts on the practice of higher commission on inhouse sales?

        Reply to Kathy Opperman
        • Hank Lerner, Esq.   April 30, 2021 at 12:52 pm

          I have no thoughts, except to say that if this sort of practice by the broker creates a conflict of interest (and it probably does) then it would need to be disclosed to a broker’s clients just like any other conflict would need to be disclosed. Or to put it another way, the law doesn’t say you can’t have a conflict of interest – it says that the conflicts must be disclosed (and the client has to agree to them as part of their deal). Whether the broker chooses to utilize this practice is ultimately up to the broker after an appropriate discussion with brokerage counsel.

          Reply to Hank Lerner, Esq.
  • Lisa Linn   April 30, 2021 at 11:13 am

    When doing a “dual rate” commission with a seller must ALL the agents in the selling broker agency be subject to what you have negotiated as a “dual rate” with the seller. Or is it possible to have the dual rate only subject to the agent that is listing the property, but if splitting with another agent in your agency (just as with another brokerage) the commission is what would be offered to other brokerages as well. For example, I agree that if I, myself, procure the buyer and represent that buyer for the sale, I would charge the seller a total of $4,000 BUT if another agent (even from my own agency) procures the buyer, the total commission is $5,000 so that I can offer the same split as I would with another brokerage? Of course, disclosing that in the MLS as a dual rate commission. I believe it has to be the entire the agency as that is how I normally do it (because really the commission belongs to the brokerage) but not clear it if is possible to do it as a single agent as long as it is disclosed. The theory being that if a commission amount does not have to be split, the agent can offer to do it for less as not only an advantage to the seller, but also to their buyer.

    Reply to Lisa Linn
    • Hank Lerner, Esq.   April 30, 2021 at 12:48 pm

      That’s really two questions. First question is whether it would be permissible to have different commission arrangements based on WHICH in-house agent brings a buyer to the table. Legally, yes. But it would ultimately be up to the broker as to whether that is something they would be willing to authorize.

      Then the second question is whether that is still a dual or variable rate commission. I’d say the answer there is yes as well. Since the NAR rules talk about disclosing where the identity of the broker creates a differential, the rule should apply whether the differential applies to all brokerage agents or just a select number of agents. But again, it can only be that specific if the broker allows it.

      Reply to Hank Lerner, Esq.

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