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FAQs: Compensation, Commission & Fees: Rebates
Published by OAR’s Legal Services Group
Summary: FAQ: Rebating part of a commission to a buyer or seller.
FAQs: Compensation, Commission & Fees: Commissions
Published by OAR’s Legal Services Group
Summary: FAQs: Answers questions on how brokers pay commissions in non-traditional circumstances.
FAQS: Compensation, Commission & Fees: Referral Fees
Published by OAR’s Legal Services Group
Summary: FAQs: Learn how to legally pay a finder’s fee or referral fee.
FAQS: Compensation, Commissions & Fees: Paying Commissions to a Corporation
Published by OAR’s Legal Services Group
Summary: Ohio law permits agents to have their commissions paid to a corporation or other legal entity. This allows REALTORS to take advantage of any tax benefits that may exist for them by incorporating. Inside are answers to some of the questions asked about this law.
Compensation, Commission & Fees: Rebates
Q 1: Can I rebate part of my commission to the buyer or seller, or is that splitting a fee with an unlicensed person?
A: Although Ohio license law does prohibit splitting commissions or paying fees to an unlicensed person, the Ohio Division of Real Estate does not consider the rebating of a commission to a party of the transaction to constitute such an illegal payment. This is because the buyer or seller was not engaging in conduct that requires a real estate license. Therefore, such a rebate would be permissible.
It should be noted that if this rebate were offered to induce the buyer or seller to enter into a purchase contract, Ohio license law would require that this rebate be disclosed in the purchase contract.
Compensation, Commission & Fees: Commissions
Q 1: Can I pay a referral fee to a broker licensed in another state?
A: Yes. Under ORC 4735.20, you are permitted to pay a referral to a licensed broker in another state.
Q 2: An agent transferred her license from my company to another brokerage. A transaction on which she was the listing agent just closed. Do I have to make out her commission check to her new broker?
A: No. This check can be paid directly to the salesperson.
Q 3: One of my salespersons has asked that I return her license to the Division of Real Estate. She has a contract pending that will close after her license is returned. Can I pay her a commission on this transaction after I return her license?
A: Yes. Because she was licensed at the time the commission was earned (when the purchase contract was written) you may legally pay her.
Q 4: If I show a property, am I automatically considered to be the procuring cause and therefore entitled to the selling portion of the commission?
A: Not necessarily. There are no set rules that provide that a REALTOR is automatically the procuring cause merely because they showed the property. Instead, procuring cause is based upon the entire course of events that led up to the procurement of a ready, willing and able buyer.
Q 5: Can a seller or a listing broker offer to pay a bonus to any agent who sells the property?
A: Salespersons can only collect compensation in the name of the broker with whom they are licensed. Therefore, any bonus has to be paid to the selling agent’s broker. It is then up to the broker to pay their sales agent.
Q 6: As a REALTOR, am I required to offer compensation to a buyer broker?
A: No. How a REALTOR compensates other brokers is up to the individual REALTOR. Each listing broker should individually set their brokerage policy on the amount of compensation, if any, they will offer a buyer broker.
Q 7: If a buyer broker agreement provides for compensation to the buyer broker in an amount in excess of what the listing broker is offering to compensate a buyer broker, can the buyer include as a term of his offer to purchase that the seller pay a specific amount of the buyer broker fee?
A: Yes. The buyer can include a provision whereby the seller will compensate the buyer’s agent.
Q 8: Does procuring cause apply to buyer brokers?
A: Yes. NAR has made it clear that the concept of procuring cause does apply to buyer’s agents as well as to subagents.
Q 9: If a listing broker is offering compensation to buyer brokers but not to subagents, must you be a buyer broker in order to be paid by the listing broker?
A: Yes.
Q 10: Must buyer’s agents disclose to a FSBO at first contact that he/she will be seeking compensation from the seller?
A: Yes. Both Real Estate License Law and Standard of Practice 16-11 provides that a buyer’s agent must disclose to a FSBO that he represents the buyer and make any request for compensation from the seller at first contact.
Q 11: Can a buyer make a purchase contract contingent on the seller paying the buyer broker’s commission?
A: Yes. While Standard of Practice 16-16 prohibits a REALTOR from making an offer contingent on the listing broker paying a commission different than the amount indicated in the MLS, this section does not apply to negotiations between buyers and sellers. Therefore, a purchaser could negotiate for the seller to pay his broker’s fee just like he negotiates for payment of his closing costs.
Q 12: If the listing broker or seller is offering a bonus to the selling agent, am I required to tell the buyer this?
Answer: If you are acting as a buyer’s agent, your fiduciary duties would require you to disclose this to the buyer. Make sure you document your disclosure in your files. If you are acting as a subagent, you are not technically required to disclose an incentive that you are receiving from your own client, the seller, or the listing broker. Remember, any bonus that you receive must be made payable to your brokerage.
Q 13: Does the fact that a licensee is acting as a buyer’s agent or have a written buyer agency agreement automatically entitle the licensee to the compensation offered in MLS?
A: No. Under the NAR arbitration guidelines, entitlement to compensation offered in the MLS is determined by whether a broker can show he was the procuring cause of the sale or lease. NAR’s position is that agency relationships are not synonymous with compensation; instead they are separate issues.
Thus, the fact that you are acting as a buyer’s broker or have a written contract with the buyer will not, by itself, automatically entitle you to the compensation offered to buyer brokers in the MLS. Instead, you will still have to show you were the procuring cause of the sale/lease.
Q 14: I have just taken a listing that I am planning to place in my local MLS. However, the seller does not want a particular brokerage to show his property and does not want me to offer compensation to this broker. Can I do this or would I be violating the Code of Ethics?
A: If you take this listing, you would be required to follow the seller’s instructions.
Article 17 of the NAR Code of Ethics provides that REALTORS must “cooperate” with other REALTORS, unless it is not in the best interests of the client. Certainly the fact that the seller (your client) does not want this other broker to be involved in the sale of his property would be sufficient to relieve you from your ethical obligation to cooperate with this other broker.
Your local MLS rules probably include the provision that is in the NAR Model MLS Rules that addresses how these kinds of situations are handled. This section provides that a listing broker must notify another broker by letter, prior to that broker producing an offer, if the compensation that is reflected in the MLS on this property is not being offered to him. In your situation, the letter should also specify that per the seller’s request, cooperation is also not being extended.
Q 15: There is a broker in my Local Board that offers a much lower “coop” fee than I and most other brokers in the Board offer on our listings. Can we notify this broker that we are only going to pay him the same amount that he pays us?
A: Both Federal and State Antitrust laws prohibit price fixing. This includes not only prohibiting you and your friends from setting what amount the public will be charged, but also what fee will be paid to cooperative brokers. These antitrust laws also prohibit boycotts–where two or more persons agree that they will not pay or will pay a lower amount to a competitor with whom they are displeased.
Because of these antitrust laws, you and the other brokers in your Board should not discuss how to respond to this other broker in your Board and in no way should enter into any type of agreements as to what you will all pay him. Instead, each broker in your Board must individually determine how much compensation they wish to offer this other broker.
If you individually decide that you wish to pay this other broker the amount that he pays you on his listings, you may do this. As described in the previous question, MLS rules specify that you can send another broker written notice that you are offering him a different amount on your listings than is reflected in the MLS. As long as you make this decision unilaterally and notify the broker in writing, you will not run afoul of the Antitrust laws, Code of Ethics, or MLS rules.
Q 16: I wrote an offer to purchase on behalf of a buyer on property that was listed with another broker. This offer was ultimately accepted. Now the listing broker has notified me that he had previously reduced his commission, and that the amount he is paying me is one percent less than what was included in the MLS. Can he do this?
A: Standard of Practice 3-2 provides that REALTORS must notify other REALTORS of any change in the offer of compensation before an offer to purchase is produced. If this listing broker did not notify you of the reduced commission until after you had submitted an offer to purchase, he has not complied with this Section. If he does not pay you the amount stated in the MLS, you can file for arbitration at your Local Board of REALTORS and you can file an ethics complaint as well.
Q 17: I put a listing in the MLS offering X percent commission to buyers’ brokers. I have just received an offer to purchase from a buyers’ broker that includes a provision that makes the offer contingent on the sellers paying the buyers’ broker X1/2 percent of the purchase price. Isn’t that a violation of the Code of Ethics?
A: No. Standard of Practice 16-16 prohibits a REALTOR from using the terms of an offer to attempt to modify the listing broker’s offer of compensation. However, this Section does not prohibit a buyer from including in an offer to purchase, a provision that asks the seller to compensate the buyers’ broker. Because in your scenario, the contract is contingent on the seller, not the listing broker paying a higher amount than was offered by the listing broker, Section 16-16 is not violated.
Q 18: In the above question, would this mean the buyers’ broker would be paid twice–X percent from the listing broker and X1/2 percent from the seller?
A: It is probably only intended that the buyers’ broker will be paid the X1/2% from the seller. But to avoid any confusion this should be clarified in writing with the buyers’ broker.
Q 19: If the seller agrees to pay X1/2 percent to the buyer’s broker, does this mean that I have to reduce the total commission the seller agreed to pay me under the terms of the listing by X1/2 percent?
A: No, as the listing broker you are entitled to the full commission provided for in your listing agreement. Although the seller may place considerable pressure on you to reduce the listing commission if he is paying the buyers’ broker directly, you are not required to reduce your commission accordingly. However, you may choose to reduce the commission to maintain good will with the seller.
Q 20: A broker from another county has submitted an offer to purchase on property I have listed. This broker is not a member of my Local Board or MLS, but does belong to another Board. Do I have to pay this broker the amount I indicated in the MLS I would pay to cooperating brokers?
A: No. The offer of compensation you made in the MLS only applies to participants of that MLS. Since the broker who submitted this offer is not a participant in your Board’s MLS, this offer of compensation in the MLS does not apply to him. Instead, this is an issue you and this other broker should have discussed in the beginning of your relationship.
Compensation, Commission & Fees: Referral Fees
Q 1: Can I pay a finder’s fee or give a free month’s rent to tenants who refer other prospective tenants to me?
A: No. Referring a prospect for the lease, purchase or sale of real estate for a fee or anything of value is conduct that requires a real estate license. Therefore, this tenant may not legally accept a finder’s fee for or free month’s rent and a licensed agent or broker may not pay an unlicensed person for such conduct.
Q 2: Can a lender pay a referral fee to a REALTOR for referring a buyer to the lender?
A: No. The Real Estate Settlement Procedures Act (RESPA) expressly prohibits the referral fee.
Q 3: A buyer came to my open house. The buyer wanted representation–but didn’t want me to represent him–so I referred the buyer to another agent. The buyer is purchasing my listing. Do I have to act as a dual agent because I referred the buyer to the other agent and can the agent pay me a referral fee?
A: Ohio Administrative Code Section 1301:5-6-02 provides that a licensee will not be considered to have helped establish an agency relationship or be bound by that relationship merely by referring a buyer or seller to another licensee or receiving a referral fee. If a licensee who refers a buyer or seller to another licensee is later involved in a transaction with that party and will receive a referral fee, that fact must be disclosed to all parties to the transaction.
Compensation, Commissions & Fees: Paying Commissions to a Corporation
Ohio law permits agents to have their commissions paid to a corporation or other legal entity. This allows REALTORS to take advantage of any tax benefits that may exist for them by incorporating. The following are answers to some of the questions asked about this new law change.
1 Q: Does the law only permit an agent to have their commissions paid to a corporation? Could I form a limited liability company if my CPA recommends that instead?
A. HB 272 permits a licensee’s commissions to be paid to either a partnership, association, limited liability company, limited liability partnership or a corporation in which the licensee has an ownership interest or is an officer.
2 Q: Is there a minimum amount of ownership interest that an agent must have?
A. No, there is no minimum amount of stock or other ownership interest required. Therefore, even a 1 percent interest would be sufficient.
3 Q: Can unlicensed persons such as my spouse or children have an ownership interest in a corporation to which my commissions are paid?
A. Yes. The corporation does not need to be wholly owned by licensees.
4 Q: I work as a team with another agent. Could we form a corporation and each own 50 percent?
A. Yes, more than one licensee can have an ownership interest in the corporation to which they direct their commissions be paid.
5 Q: What type of tax savings can an agent realize by incorporation?
A. That depends on each agent’s individual financial situation. Income level, deductions, retirement plans, etc. are all factors that effect whether a corporation or some other structure will produce a tax savings for an individual. In fact for some agents, once the expense of forming and maintaining the corporation is factored in, there may be no tax benefit whatsoever. For this reason it is extremely important for each agent to receive advice from a tax attorney, CPA, or other tax professional before incorporating or forming any other type of business entity.
6 Q: Will I be shielded from personal liability by incorporating?
A. No. The license law clearly states that an agent is not relieved from personal civil liability by incorporating.
7 Q: As an agent if I form a corporation, limited liability corporation, etc., do I have to get that entity licensed by the Division of Real Estate and Professional Licensing?
A. No, HB 272 did not create a new category for licensure of these entities. Instead, you will still be licensed as an individual. The new law merely allows your broker to now legally pay your commissions to whatever legal entity you form.
8 Q: I am licensed as an individual broker with a brokerage, but I really function as a salesperson. I have no ownership interest or managerial position in this brokerage. Can I form a corporation and have my commissions paid to it, or does the new law only allow agents to do that?
A. The new law applies to both individual agents and brokers. Therefore, you may take advantage of the new provisions as well.
9 Q: Can I advertise and conduct business under my corporate name?
A. No, you must still advertise and conduct all real estate activity in your individual name as it appears on your license.
10 Q: As a broker what is required of me if my agent asks that their commissions be paid to their corporation, limited liability corporation, partnership, etc.?
A. You are required to verify that your agent is either an officer or has some ownership interest in the legal entity to which they want you to pay their commissions. You also must keep a record of this verification for a period of three years along with the following additional information:
1. The name of the licensee who earned the commission, fee or other compensation;
2. The amount paid; and
3. The name of the entity to which it was paid
11 Q: What type of verification should I get from the agent?
A. Examples of verification would be:
- A copy of the articles of incorporation listing the agent as an officer;
- A copy of a stock certificate demonstrating an ownership interest;
- A copy of the partnership or association agreement;
- A copy of the articles of organization for an LLC
A broker may want to ask the agent for a copy of the entity’s authorization to do business in Ohio. Although not specifically required by law, a broker may also want to ask the agent to sign a statement that they:
- Are an officer, stockholder, etc.;
- That the legal entity is authorized to do business in the state of Ohio;
- That the entity is properly registered and in good standing;
- That the entity will not engage in an activity that requires a real estate license
And that they will notify the broker if any of that information changes or is no longer true (i.e., the agent no longer has an ownership interest, the entity is not in good standing, etc.)