5.1 Broker Responsibilities, Brokerage Agreements, and Compensation

The brokerage structure

Real estate is practiced through a brokerage firm headed by a responsible (managing) broker who holds the firm's license and is legally accountable for every licensed act performed under it. Salespersons (and most associate brokers) must affiliate with one broker and may accept compensation only from their employing broker, never directly from a buyer or seller. A salesperson who collects a fee straight from a client commits a serious license-law violation.

The broker owes the firm's clients the full set of fiduciary duties, often memorized as OLD CAR: Obedience, Loyalty, Disclosure, Confidentiality, Accounting, and Reasonable care. The broker must also supervise affiliated licensees and is responsible for their conduct within the scope of the agency.

Brokerage (employment) agreements

A brokerage agreement is the employment contract that creates the agency relationship. The two families are listing agreements (seller side) and buyer-representation agreements (buyer side). To be enforceable for a commission, these agreements should be in writing, identify the parties and property, state the compensation, and contain a definite termination date. A listing with no end date is improper; an automatic-renewal clause is prohibited in most states.

The three listing types

The exclusive-right-to-sell listing is the most common and most protective for the broker because the commission is owed even if the owner finds the buyer. A net listing (broker keeps everything above a set seller net) is regulated differently by jurisdiction and is conflict-prone because the seller does not share in the upside or may not appreciate the resulting fee.

A multiple listing service (MLS) is a cooperative database where listing brokers offer compensation to cooperating (buyer's) brokers. It is not a listing type itself.

When is commission earned?

Under the common-law rule, a broker has earned the commission when the broker produces a buyer who is ready, willing, and able to purchase on the seller's stated terms (or terms the seller accepts). Commission is technically earned at that moment, even though it is customarily paid at closing. This is why a seller who backs out after accepting a full-price offer may still owe the commission.

Procuring cause

When two cooperating brokers both claim a commission, the dispute is resolved by procuring cause: the broker who started an uninterrupted chain of events that led the buyer to purchase earns the fee. Merely opening a door or sending one email is usually not procuring cause; abandonment or a genuine break in the chain can shift it. These disputes are commonly arbitrated, not litigated.

Commission math you must master

Commission is a percentage of the sale price, then split among brokers and licensees.

Worked example 1 - splitting a commission. A home sells for $420,000 at a 6% total commission. The listing and selling sides split 50/50, and each side's broker keeps 40% while the salesperson keeps 60%.

• Total commission: 420,000 x 0.06 = $25,200
• Each side (50/50): 25,200 x 0.50 = $12,600
• Selling salesperson (60% of side): 12,600 x 0.60 = $7,560
• Selling broker (40% of side): 12,600 x 0.40 = $5,040

Worked example 2 - working backward from a net. A seller wants to net $200,000 after paying a 5% commission and $3,000 in closing costs. What sale price is required?

• Seller must net 200,000 + 3,000 = $203,000 before commission
• That $203,000 is 95% of the price (100% - 5%)
• Price = 203,000 / 0.95 = $213,684.21

Trap: Never compute the price by adding 5% to $203,000. The commission is a percent of the sale price, not of the net, so you must divide by 0.95, not multiply by 1.05.

Procuring Cause and Commission Disputes

When two brokers each claim a commission, the deciding question is procuring cause — which broker set in motion the unbroken chain of events that led to the sale. Showing a property once, then disappearing for months while another agent does all the work, usually does not make the first agent the procuring cause. Most disputes between cooperating REALTORS® are resolved through arbitration at the local board rather than in court. A clear written agreement and a documented trail of communication are the best protection.

Independent Contractor vs. Employee, and the Antitrust Line

Most salespeople work as independent contractors under a written agreement, controlling their own hours and methods, while the broker remains legally responsible for supervising their licensed activity. This dual reality — independent for tax purposes, supervised for license law — is a frequent exam point.

Commission rates are always negotiable. It is a federal antitrust violation (price fixing) for competing brokers to agree on a standard commission, and market allocation (dividing territories or clients) and group boycotts are equally illegal. A broker may set its own rate but may never coordinate it with competitors.