5.1 Broker Responsibilities, Brokerage Agreements, and Compensation

Broker Responsibilities and Brokerage Structure

A broker holds the firm's license; every salesperson (associate) works under that license and is legally an agent of the broker. This is the single most tested structural fact on the national exam. The salesperson owes fiduciary duties to the client but is supervised by and compensated by the broker.

The broker's core supervisory duties include reviewing contracts and advertising, maintaining the escrow/trust account, keeping transaction records (commonly 3 years), and ensuring affiliated licensees follow license law. The broker is vicariously liable for acts the salesperson performs within the scope of employment.

Who Pays Whom

Money flows in one direction the exam loves to test:

• The client (seller or buyer) pays the broker the negotiated fee.
• The broker pays the salesperson per their independent-contractor or employment agreement.
• A salesperson may never accept compensation directly from a client or from another broker.

Many salespersons are independent contractors for IRS purposes. The three statutory tests: (1) hold a real estate license, (2) substantially all pay tied to output (sales), not hours, and (3) a written contract stating they are not employees for tax purposes.

The Four Listing Agreements

A listing agreement is an employment contract between seller and broker creating special (limited) agency. Memorize who gets paid in each:

The exclusive-right-to-sell is the most common and most protective for the broker. An open listing can be given to many brokers, and only the procuring broker earns the fee.

Independent contractor vs. employee, and net-listing math

Whether a salesperson is an independent contractor or an employee changes the broker's control and tax duties. The IRS safe harbor treats a salesperson as an independent contractor when (1) they hold a real estate license, (2) substantially all compensation is tied to sales output, not hours, and (3) a written contract states they are not employees for tax purposes. Even so, license law still requires the broker to supervise the salesperson's real-estate activity — the independent-contractor label governs taxes, not the duty to supervise.

Why net listings are dangerous: In a net listing the seller names a net amount and the broker keeps everything above it. This creates a built-in conflict because the seller does not share in the upside and the broker may exploit superior market-value information or obscure the resulting fee.

Worked net-listing math: A seller wants to net $180,000 and the property sells for $215,000 with $5,000 in closing costs charged to the seller. The broker's "commission" is $215,000 − $5,000 − $180,000 = $30,000, roughly 14% of price — far above market, illustrating the abuse risk. Contrast a normal percentage listing: at a 6% rate the fee on $215,000 would be $12,900. On the exam, when a listing pays the broker "all proceeds above" a set figure, identify it as a net listing and flag it as the disfavored arrangement, then compute the spread as price minus seller costs minus the net amount.

Commission: Negotiable and Earned

The exam hammers two rules. First, commission rates are always negotiable between the parties — they are never fixed by law, the MLS, or a real estate board. Any agreement among brokers to set a standard rate is illegal price-fixing (covered in 5.3).

Second, commission is earned when the broker produces a buyer who is ready, willing, and able on the seller's terms — even if the seller then refuses to close. Paid, however, is usually conditioned on closing per the listing's wording. Distinguish earned (procured the buyer) from payable (settlement occurs).

Worked Commission Math

Example 1 — Basic. A home sells for $385,000 at a 6% total commission. Total fee = $385,000 x 0.06 = $23,100.

Example 2 — Co-op split. That $23,100 is split 50/50 between listing and selling brokerages: each side = $11,550. The listing salesperson is on a 60/40 split with her broker, keeping 60%: $11,550 x 0.60 = $6,930.

Example 3 — Solve for price. A seller wants $188,000 net after a 6% commission and $4,000 in costs. Price x (1 - 0.06) = $188,000 + $4,000. Price = $192,000 / 0.94 = $204,255 (rounded). The trap: never apply 6% to the desired net — apply it to the unknown selling price.

Procuring Cause and Splits

When two cooperating brokers are involved, the procuring cause doctrine decides who earns the selling-side share — the agent whose continuous, unbroken efforts led the buyer to purchase. A buyer who tours with Agent A but writes the offer with Agent B can spark a procuring-cause dispute, usually resolved by arbitration, not the courts.

Remember: a co-op split divides one negotiated commission; it never adds a second fee onto the seller. If the seller agreed to 6%, that 6% is the total pool, split between the two brokerages. The seller never pays both sides separately, and a buyer's agent is typically paid out of that same listing-side pool unless a separate buyer-broker fee is negotiated.