Most everyone understands what the term commission means as it relates to a real estate transaction. The opposite is true as it relates to a variable rate commission. In this article, I hope to shed some light on what it is and how it relates to buyers and sellers of real estate.
Section 3-4 of the REALTOR® Code of Ethics defines a variable rate commission arrangement as follows: A listing in which one amount of commission is payable if the listing broker’s firm is the procuring cause of sale and a different amount of commission is payable if the sale results from the efforts of the seller or a cooperating broker.
The Code of Ethics and the National Association of Realtors® (NAR’s) Handbook on Multiple Listing Policy require listing brokers to disclose a variable rate commission to potential cooperating brokers as soon as is practical. In response to inquiries from potential cooperating brokers, REALTORS® are also required to disclose the difference between the two rates.
Also, once a cooperating broker knows that a variable rate commission has been offered, the cooperating broker must disclose this information to his or her client before the client makes an offer to purchase. In this situation, a buyer who makes an offer that’s identical to an offer from a buyer who’s represented by the listing broker’s firm is at a disadvantage, since the commission on the other offer will be lower.
Now let me attempt to put all that into practical terms.
When a real estate agent lists a home, they negotiate the sales commission and fee to be paid by the seller. For our example, we will use 6% of the sale price of the home as the agreed upon fee. The agent and the seller then discuss the co-op fee that will be offered to other brokers if they bring a ready willing and able buyer to purchase the home. This fee is commonly known as the co-op commission.
While it may be common to offer 50% of the total commission to the buyer’s agent, it does not have to be the case. A listing agent may decide to charge 6% and co-op at 2.5%. This arrangement is fine as long as it is agreed to by the agent and the seller. For our example, the agent and seller agree to co-op at 3% of the home's sale price with a broker who brings a buyer. This figure is then placed in the Multi-list to notify all brokers what the seller’s broker is offering as compensation for bringing a ready, willing and able buyer.
The next discussion may be in regards to what commission the agent will charge the seller if the agent is the one who brings the buyer. This is where the dual or variable rate commission comes into play. As with all real estate commissions and fees, they are negotiable. For our example, the agent and seller agree on a fee of 5% if the agent brings the buyer. This type od arrangement is known as a dual or designated agency and also needs to be disclosed and agreed upon by the agent and seller when listing the home.
The seller’s agent must disclose that there is a variable-rate commission in play to all other brokers. In many cases, this is done directly in the multi-list using a simple “Y” or “N.”
If you are a buyer working with a real estate agent and have interest in a property you may want them to find out if any other agreement proposals in play and, if so, is it from the same real estate office (designated agent) or a dual agency situation where the seller’s agent has the buyer. If so, it is important to check and see if there is a variable-rate commission in play, and if so, how much is the difference in commission. This takes a simple call or email from your agent to the seller’s agent, and it is part of the code.
You, the buyer, could make a full price offer and be outbid by a buyer who is working with the seller’s agent or brokerage who makes the same offer because the variable-rate commission was in play. If the seller takes your offer, they would have to pay 6% commission (3% to the listing broker and 3% to the buyer’s agent/broker) instead of the 5% variable-rate commission agreed to between the seller and his agent and brokerage. Your net offer is 1% less than the competing offer because of the variable.
People sometimes lose homes they try and buy and never really know why. It may come down to asking the right questions.
Knowledge is Power!