5.1 Broker Responsibilities, Brokerage Agreements, and Compensation
Key Takeaways
- Salespersons work under a broker; all commissions flow to the sponsoring broker first, never directly from a consumer.
- Fiduciary duties to a client = OLD CAR (Obedience, Loyalty, Disclosure, Confidentiality, Accounting, Reasonable care); confidentiality survives the relationship.
- Customers are owed only honesty, fair dealing, and disclosure of known material defects — not loyalty or confidentiality.
- Exclusive right to sell pays the listing broker regardless of who sells; commission is always negotiable and based on the sale price.
- Compute commission on the actual sale price, then apply brokerage and salesperson splits in sequence.
How Brokerage Actually Works
A real estate broker holds the license that authorizes a firm to provide brokerage services to the public. Salespersons (and most associate brokers) work under a broker's supervision and cannot operate independently. Every commission earned by a salesperson is legally paid to the sponsoring/employing broker first, who then pays the licensee per their written employment agreement. A salesperson can never collect a fee directly from a consumer.
The broker owes the public statutory duties and owes supervised licensees managerial duties: monitoring transactions, reviewing contracts, maintaining the trust (escrow) account, and ensuring advertising compliance. Exam writers love testing who is responsible: if a salesperson commingles client funds, the broker is typically disciplined for failure to supervise.
Agency Duties Owed to Clients (OLD CAR)
The fiduciary duties a broker (and the licensees acting for the broker) owe a client/principal are commonly memorized as OLD CAR:
| Letter | Duty | Plain-English Meaning |
|---|---|---|
| O | Obedience | Follow lawful instructions of the principal |
| L | Loyalty | Put the client's interests above your own |
| D | Disclosure | Reveal all material facts to the client |
| C | Confidentiality | Protect client info even after closing |
| A | Accounting | Account for all money and documents |
| R | Reasonable care | Act with skill and competence |
To customers (non-clients, like the other side in a transaction), the licensee owes only honesty, fair dealing, and disclosure of known material defects — not loyalty or confidentiality. A classic trap: confidentiality survives the end of the agency relationship; obedience and loyalty do not.
Types of Brokerage Agreements (Listings)
A listing agreement is the contract that creates agency between a seller and a broker. The three core types differ by who earns the commission:
| Listing Type | Who Can Sell | Who Gets Paid |
|---|---|---|
| Open listing | Any broker, or the owner | Only the broker who procures the buyer; owner-sale = no commission |
| Exclusive agency | Owner OR the listing broker | Broker paid unless the owner sells it themselves |
| Exclusive right to sell | Anyone | Listing broker paid regardless of who sells, including the owner |
The exclusive right to sell is the most protective for the broker and the most common. On the buyer side, a buyer-broker (buyer-agency) agreement creates the same fiduciary duties owed to a buyer-client. All require a definite expiration date — an automatic, open-ended renewal clause is prohibited in most jurisdictions and is a favorite wrong answer turned trap.
Commission Math (Worked Examples)
Commission is negotiable and never set by law or by an association. It is usually a percentage of the sale price (not the list price).
Example 1 — Total commission and the split. A home sells for $420,000 at a 6% commission. The listing and selling brokerages split the total 50/50, and the salesperson keeps 60% of their brokerage's share.
- Total commission: 420,000 × 0.06 = $25,200
- Selling brokerage share: 25,200 × 0.50 = $12,600
- Selling salesperson's cut: 12,600 × 0.60 = $7,560
Example 2 — Solve for price. A broker earns a $13,950 commission at a 4.5% rate. Sale price = 13,950 ÷ 0.045 = $310,000. Always divide the dollars by the decimal rate to back into price.
Procuring Cause and Compensation Disputes
When two brokers each claim a commission on the same sale, the question is who was the procuring cause — the broker whose efforts set in motion an unbroken chain of events leading to the sale. A broker who merely opened the door for a quick look, then dropped out, usually loses to the broker who negotiated and closed the deal. These disputes are resolved by arbitration, not by who showed the property first.
Three elements must exist before any commission is legally earned: the broker must be properly licensed, must have a written employment/listing agreement, and must be the procuring cause. Miss any one and the commission claim fails. A licensee whose license lapsed during the transaction generally cannot recover, even if they did all the work — a frequent and harsh exam trap.
Net Listings and Compensation Traps
A net listing sets a price the seller wants to net, with the broker keeping everything above it as commission. Because this invites the broker to overprice or conceal a high offer, net listings are illegal in many states and discouraged everywhere — they create a direct conflict with the loyalty duty.
Watch the difference between a ready, willing, and able buyer and an actual closing. Under a typical exclusive right to sell, the commission is technically earned when the broker produces a buyer who meets the listing terms, even if the seller then refuses to close. If the buyer defaults, the commission usually is not owed. Most modern listing forms tie payment to actual closing to avoid this dispute, but the common-law rule still appears on the national exam.
Independent-contractor status and the IRS three-part test
Most salespersons affiliate as independent contractors, not employees, under the federal statutory nonemployee rules. Three conditions must hold: the person is licensed, substantially all pay is tied to output (commissions, not hours), and a written contract states they will not be treated as an employee for tax purposes. Critically, the broker still supervises for license-law compliance — that supervision does not convert the agent into an employee. The exam tests this apparent contradiction: supervised for legal compliance, yet an independent contractor for tax and pay.
Worked tiered commission split
A property sells for $450,000 at 6%, with the listing and selling sides splitting 60/40 (listing 60%), and the selling brokerage paying its agent 70%.
- Total commission = $450,000 x 0.06 = $27,000.
- Selling side (40%) = $27,000 x 0.40 = $10,800.
- Selling agent (70% of $10,800) = $7,560; selling broker keeps $3,240.
- Listing side (60%) = $27,000 x 0.60 = $16,200, split again per that firm's plan.
The classic error is applying the agent's 70% to the full $27,000. Each percentage applies to a different base — total, then side, then agent's share. Mislayering the percentages is the most common math mistake on compensation questions.
Procuring cause and ready-willing-and-able buyers
A broker earns a commission by producing a ready, willing, and able buyer on the seller's terms — even if the seller then refuses to close, the commission may be owed under an exclusive-right-to-sell listing. Procuring cause decides who is paid when two agents touch a deal: the agent who set off the uninterrupted chain of events leading to the sale. Simply showing the property first does not guarantee the fee if the buyer later returns independently through another agent after a genuine break.
A house lists for $380,000 and sells for $360,000 at a 5% commission. The listing and selling sides split 50/50, and the listing salesperson keeps 70% of the listing brokerage's share. What does the listing salesperson earn?
A seller signs a listing under which the broker is paid the commission no matter who finds the buyer, including the seller's own efforts. Which listing type is this?