5.1 Broker Responsibilities, Brokerage Agreements, and Compensation

Who employs whom

Real estate brokerage runs on a strict chain of authority. A client (seller, buyer, landlord, or tenant) hires a broker. The broker may employ salespersons (and associate brokers) to perform licensed activity on the brokerage's behalf. The salesperson is the agent of the broker; the client is the broker's client. This is why a salesperson can never accept a fee directly from a customer or another brokerage — all compensation flows through the sponsoring broker, who then pays the salesperson per their internal agreement.

The broker carries the legal responsibility: supervision of licensees, custody of trust funds (earnest money), maintenance of records, and ensuring advertising and disclosures are lawful. A salesperson's misconduct can expose the broker to discipline.

Brokerage (listing) agreements

A listing agreement is an employment contract between a seller and a broker, creating agency. It must usually be in writing, name a definite termination date, and state the price and compensation. The four classic types differ in who is entitled to the commission:

Exclusive-right-to-sell gives the broker the strongest protection and is most common. A net listing is discouraged or banned because the seller does not share in the upside and may not appreciate the size of the resulting fee.

Buyer representation mirrors these: exclusive-buyer-agency (buyer owes the fee even if the buyer finds the home alone), exclusive-agency buyer agreement, and open buyer agreements.

When is commission earned?

Under common law, a broker earns the commission when they produce a buyer who is ready, willing, and able to purchase on the price and terms stated in the listing — or on terms the seller accepts. Importantly, commission can be earned at the moment of a meeting of the minds (a signed contract), not necessarily at closing, unless the listing says otherwise. To avoid disputes, most modern listings include a "no sale, no commission" clause tying payment to actual closing.

A seller who refuses a full-price, no-contingency offer, or who defaults, may still owe commission because the broker performed. But if the buyer is the one who defaults and no closing occurs, a "no sale, no commission" clause protects the seller.

Procuring cause

When two cooperating brokers both touch a deal, procuring cause decides who is paid: the broker whose continuous, unbroken efforts actually caused the buyer to purchase. A broker who merely opened the door once, then vanished while another broker negotiated the deal to closing, is usually not procuring cause. Procuring-cause disputes between MLS members are arbitrated, not litigated.

Independent contractor vs. employee, and the broker's supervisory file

Most salespersons work as independent contractors of the broker for tax purposes, yet the broker still supervises their licensed activity. Under IRS safe-harbor rules a real estate agent is treated as a statutory independent contractor when three tests are met: the agent is licensed, substantially all pay is tied to output (commission), not hours, and a written contract states the agent will not be treated as an employee for tax purposes. The exam trap is assuming "independent contractor" means "unsupervised" — the broker remains legally responsible for the agent's compliance regardless of tax status.

Antitrust limits on compensation

Because brokerages are competitors, commission rates must be set independently. Agreeing with another firm on a "standard" rate is illegal price-fixing under the Sherman Act; agreeing to boycott a discount broker is group boycotting; dividing neighborhoods is market allocation. These are per se violations — no business justification excuses them. Practically, never tell a seller "everyone charges 6%"; instead present your firm's rate as negotiable and your own. A salesperson who hears competitors discussing a uniform rate should disengage, because even passive participation can implicate the broker.

Commission and net math

Commission is a percentage of the sale price (not the list price unless they are equal). Master the three forms.

Total commission. A home sells for $420,000 at a 6% commission.

• Total commission = $420,000 x 0.06 = $25,200.

Splitting between brokerages and agents. Suppose the 6% is split 50/50 between the listing brokerage and the cooperating (buyer's) brokerage, and each brokerage then pays its salesperson 60%.

• Each brokerage receives $25,200 x 0.50 = $12,600.
• The listing salesperson receives $12,600 x 0.60 = $7,560; the brokerage keeps $5,040.

Net-to-seller (solving for price). A seller wants to net $300,000 after paying a 6% commission (ignore other costs). Do not simply add 6% to $300,000 — the commission is taken from the higher sale price, not the net.

• Sale price = Net / (1 - commission rate) = $300,000 / (1 - 0.06) = $300,000 / 0.94 = $319,148.94 (round to ~$319,149).
• Check: $319,149 x 0.06 = $19,148.94 commission; $319,149 - $19,149 = $300,000 net. Correct.

Trap: Adding 6% of $300,000 (= $318,000) understates the needed price because the commission is computed on the sale price, which is larger than the net. The divide-by-(1 - rate) method is the only correct approach.

Compensation rules and traps

• Commission rates are always negotiable; printed or "standard" rates are starting points, and agreeing with competitors to fix rates is illegal price-fixing.
• A salesperson may not be paid directly by a client or another brokerage — payment flows through the sponsoring broker.
• A referral fee may generally be paid only to another licensed broker.
• Listing the wrong base (list vs. sale price) is the most common math error on exam questions.