Reprinted from REALTOR® Magazine March, 2001 by permission of the NATIONAL ASSOCIATION OF REALTORS® Copyright 2001. All rights reserved.
Structure bonuses clearly and in writing to avoid confusion.
Alex’s listing wasn’t selling. To encourage activity, Alex and his broker decided to offer a bonus to the cooperating salesperson. Alex cleared the concept and the amount that he would offer with the seller, with whom he had an agency relationship.
Showings started to improve, and the property sold quickly. The buyer’s agent, Sarah, told Alex that she expected the bonus payment at the closing. The settlement sheet indicated that Sarah’s broker was paid the advertised co-op fee. At the closing, Alex gave Sarah a check for the bonus amount. Alex also got her Social Security number, so that he could send her a 1099; he wanted to deduct the bonus as an expense. Sarah was happy. Alex was happy. The sellers were happy.
The buyers, however, watched what was happening and asked, “What’s that all about?” Sarah told them about the bonus and said, “This is just between salespeople.”
When Sarah returned to the office, she discovered that the buyers had called her broker, clearly perturbed about what looked like an undisclosed payment. Later, the broker heard from the state real estate commission asking about the transaction and the method of payment to the salesperson.
What could have been done to prevent the buyers’ anger and ensure the bonus payment was handled properly? These tips will help licensees clarify their roles with clients and reduce liability-and, at the same time, make sure bonus money goes to the right person.
FOR LISTING AGENTS
Offer the bonus to the cooperating broker, not to the salesperson. In most states all payments must go to the broker, who then pays the salesperson. The correct method of payment would have been for Alex’s broker to pay the bonus to the cooperating broker, who then would pay Sarah according to the terms of their independent contractor agreement. (NAR MLS policy also requires that all compensation be paid to the broker for listings placed in the MLS.)
Incidentally, a broker must be the one to offer the bonus, too.
Before offering a bonus, make sure you know who will pay it. Alex assumed-without discussing it with his broker-that the bonus would be his own expense. Think about having the bonus deducted by the broker from the gross listing side of the commission prior to a split with the salesperson. Or maybe the seller would be willing to pay it; you’ll never know if you don’t ask.
FOR BUYER’S AGENTS.
Make sure bonus payments are addressed in your independent contractor agreement with your broker. Are bonuses split with the broker or does the entire amount go to the salesperson? What if the bonus isn’t money but instead is two tickets to Mexico, and the broker wants to go instead of you? Remember, even though you state may permit “designated” or “split” agency, the money still flows through the broker.
Have a written agreement with the buyer. Just as listing agreements are written, so can buyer-agency agreements be detailed in writing. (Article 9 of the Code of Ethics states, “REALTORS® for the protection of all parties, shall assure whenever possible that agreements shall be in writing.”) If you have an agency relationship with a buyer, with or without a written agreement, then you owe a fiduciary duty to your buyer.
To avoid confusion, specify the conditions in writing. Indicated that the broker’s fee shall be whichever is greater, the negotiated percentage of the purchase price or the amount actually paid by the listing broker. Specify also that any bonuses are the exclusive property of the cooperating broker and the buyer’s agent. Don’t say the “broker will accept the MLS co-op fee as his full fee.” If the property the buyer purchases is a FSBO and therefore not in the MLS, under this language, technically there would be no fee, much less a bonus.
Make sure to have at least some form of written acknowledgment that the bonus is your money. Otherwise, a case can be made that the bonus is actually due to the buyer. Remember, the bonus is extra compensation not anticipated in the original agency relationship.
Tell buyers the amount of compensation you’d receive, including any bonuses, on each house they show an interest in. Just the act of receiving a bonus puts into question Sarah’s motivation to show and sell the property advertising the bonus. Buyers might wonder whether they were shown the property because of the bonus or because it was truly in their interest. It’s best to be up front from the start.