5.1 Broker Responsibilities, Brokerage Agreements, and Compensation

Real estate practice rests on three pillars: the brokerage relationship that authorizes the licensee to act, the written agreement that defines that authority, and the compensation rules that decide who gets paid. The national exam expects you to distinguish the agreement types precisely and to know that compensation always flows through the broker.

The Broker's Core Responsibilities

A broker holds the license under which all affiliated salespersons operate. Because salespersons act in the broker's name, the broker carries supervisory liability for their conduct.

Typical broker duties include:

• Supervision of every affiliated licensee's transactions and advertising.
• Trust-fund custody: holding earnest money and other client funds in a separate escrow or trust account.
• Recordkeeping: retaining transaction files, agreements, and accounting records for the period set by state law (often three to five years).
• Preventing unauthorized practice: agents must not draft contract language from scratch or give legal or tax advice.

A central rule is the prohibition on commingling — mixing client trust funds with the broker's own operating money. Worse is conversion, using client funds for the broker's purposes, which is grounds for license revocation.

Listing Agreements

A listing is an employment contract between a seller and a broker. The four classic types differ in who is owed a commission and under what circumstances.

The exclusive right-to-sell is the most common and most protective of the broker. The net listing is disfavored or banned because the seller does not share in the upside, and the broker may exploit superior market-value information or obscure the resulting fee.

Listings must be in writing under the statute of frauds, must have a definite expiration date (no automatic renewals in most states), and may be terminated by mutual agreement, expiration, performance, or breach. The death or incapacity of either party generally terminates a listing because it is a personal-service contract.

Buyer Representation Agreements

Buyer agreements mirror listings but obligate the buyer:

• Exclusive buyer agency — buyer owes the broker even if the buyer finds the property alone.
• Exclusive agency buyer — buyer can buy directly without owing, but owes if any broker is involved.
• Open buyer agency — buyer may work with several brokers; only the procuring broker is paid.

Compensation and Procuring Cause

Commission is negotiable between broker and client; there is no legal standard rate. All commission is earned by and paid to the employing broker, who then compensates the salesperson under their independent-contractor or employment arrangement. A salesperson may not be paid directly by a buyer or seller.

Worked example: A home sells for $420,000 at a 6% total commission. The listing and selling sides split 50/50.

• Total commission: $420,000 x 0.06 = $25,200
• Listing side: $25,200 x 0.50 = $12,600
• If the listing salesperson keeps 70%, the salesperson receives $12,600 x 0.70 = $8,820, and the broker keeps $3,780.

Procuring cause resolves disputes when two cooperating brokers each claim the commission. It is awarded to the broker whose continuous, uninterrupted efforts caused the buyer to purchase — not simply the broker who opened the door or wrote the first offer. A common trap: a broker who shows a property once, then disappears for weeks while another broker negotiates and closes the deal, is usually not the procuring cause.

A commission is typically considered earned when the broker produces a ready, willing, and able buyer who agrees to the seller's terms — even if the seller then backs out — though most listings make payment contingent on closing.

Broker Supervision and Procuring Cause

The broker is legally responsible for supervising affiliated licensees and for the handling of client funds. Salespersons are agents of their broker, not of the client directly, and may accept compensation only through their own broker, never directly from a buyer or seller. The broker must maintain transaction records and ensure that earnest money is deposited promptly into a designated trust account rather than commingled with operating funds.

Compensation in a typical sale flows from a procuring cause analysis: the broker who started an uninterrupted chain of events leading to the sale earns the commission. A commission is earned when the broker produces a ready, willing, and able buyer who meets the seller's terms, even if the seller later refuses to close, though most disputes are resolved by the listing agreement's wording. Commissions are always negotiable and are never set by law or by association rule; any attempt to fix them across firms violates antitrust law.

Worked Example: Splitting a Commission

A $640,000 sale carries a 6% total commission of $38,400. The listing and cooperating brokerages split it 50/50, so each office receives $19,200. The selling agent's contract with the broker is a 70/30 split favoring the agent, so the agent earns $19,200 x 0.70 = $13,440 and the broker retains $5,760. Because every percentage here is negotiated between private parties, no law or board may set or suggest a standard rate; doing so is illegal price fixing, reinforcing that commission structure is always a private, firm-by-firm decision.