5.1 Broker Responsibilities, Brokerage Agreements, and Compensation

Broker responsibilities and the agency hierarchy

The national exam treats the broker as the legal anchor of every transaction. A salesperson or associate broker can negotiate and show property, but the employing broker holds the listing, signs the brokerage agreement on behalf of the firm, employs all affiliated licensees, and is responsible for their conduct. This is vicarious liability: the broker answers for the licensed acts of agents performed within the scope of employment.

Core supervisory duties

Brokers must reasonably supervise licensees, maintain required records (usually 3 years), and safeguard client money. Exam stems often ask who is permitted to do something. The answer is frequently 'the broker only.'

• Hold and disburse trust/escrow funds
• Sign listing and buyer-representation agreements for the firm
• Set and negotiate the firm's commission (it is always negotiable, never set by law or board)
• Supervise advertising so it names the brokerage
• Resolve commission disputes among affiliated licensees

Trust funds and commingling

Earnest money, security deposits, and rents belong to clients, not the broker. They go into a trust (escrow) account separate from operating funds. Putting client and broker money together is commingling; spending client money is conversion, a more serious offense. Most states require deposit within a short window (commonly 3 business days) and allow only a tiny broker reserve to keep the account open.

The four brokerage (listing) agreements

A listing is an employment contract between seller and broker. Exam favorites turn on who gets paid when.

Buyer-representation agreements mirror these (exclusive vs. non-exclusive). A net listing is conflict-prone because the seller does not share in the upside and the broker may exploit superior market-value information or obscure the resulting fee.

Procuring cause and commission earned

Under common law a broker earns commission when it produces a ready, willing, and able buyer who agrees to the seller's terms. Earning is separate from payment, which the agreement usually times to closing. If the seller wrongfully refuses to close, the commission may still be owed.

When two cooperating brokers fight over one commission, the winner is the one who is the procuring cause — the unbroken chain of events that started the buyer's interest and led to the sale. Merely opening a door, hosting an open house the buyer attended, or writing the first (rejected) offer does not by itself create procuring cause.

Commission and split math (worked)

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

• Commission = $420,000 x 0.06 = $25,200

Co-brokerage split. The listing broker and selling (buyer's) broker split 50/50. Each brokerage receives $25,200 / 2 = $12,600.

Agent split. The selling salesperson is on a 70/30 split favoring the agent. Agent receives $12,600 x 0.70 = $8,820; the brokerage keeps $3,780.

Net-to-seller (price needed) problem — a classic trap. A seller wants to net $200,000 after a 5% commission and $4,000 in closing costs. Do not simply add 5% of $200,000.

Set up: Price - 0.05(Price) - $4,000 = $200,000 -> 0.95(Price) = $204,000 -> Price = $204,000 / 0.95 = $214,736.84.

Check: 5% of $214,736.84 = $10,736.84; $214,736.84 - $10,736.84 - $4,000 = $200,000. The trap answer ($214,000 from adding 5% of the net) is wrong because commission is charged on the sale price, not the net.

When commission survives a failed closing

Because commission is earned on procuring a ready, willing, and able buyer, the listing broker may still be owed even if the deal collapses. If the seller defaults, changes their mind, has a hidden title defect they refuse to cure, or commits fraud, the broker generally keeps the right to commission. By contrast, if the buyer defaults and the seller did nothing wrong, no commission is typically owed because no enforceable sale occurred. The exam tests this by asking whose fault broke the deal.

Termination of a listing

A listing ends by performance (sale), expiration of its term, mutual agreement, or revocation (with possible liability for damages). A listing also dies on the death or incapacity of either the broker or the principal, or destruction of the property, because it is a personal-service agency contract. Most states prohibit automatic-renewal listing clauses, so a definite expiration date is required.

Salesperson Status: Independent Contractor vs. Employee

Most salespeople work as independent contractors under their broker, which affects taxes and supervision but never the broker's legal responsibility for the salesperson's licensed acts. The federal statutory non-employee test for real estate agents has three prongs: the person is licensed; substantially all pay is tied to sales output, not hours worked; and a written contract states the agent will be treated as an independent contractor for tax purposes. Meeting all three lets the brokerage avoid withholding income and payroll taxes.

The distinction is independent of supervision: even an independent-contractor salesperson must follow the broker's lawful policies, route all commissions through the broker, and deposit client funds in the broker's trust account. The broker remains vicariously liable for the salesperson's licensed conduct regardless of the tax classification, which is why supervision duties cannot be waived by labeling the agent a contractor.