Disclosure of buy-side commissions: a compliance blindspot for some real estate brokers
By Summer Goralik
When brokers think about required disclosures in real estate, a variety of regulatory requirements and practices come to mind. For example, California real estate licensees must disclose specific licensing information when it comes to advertising content that is displayed, distributed, broadcasted or published. On the other hand, the topic of disclosure may cover agency law and the mandatory delivery of disclosures to consumers explaining a licensee’s statutory duties and different agency relationships. Along these lines, a conversation about disclosure might also focus on an agent’s responsibility to disclose any material information which he or she is aware of affecting the value or desirability of real property.
However, there is one area of disclosure that is often overlooked by some real estate professionals, and that is, the disclosure of real estate commissions. Specifically, while a real estate licensee is required to disclose to his or her client, who may be a seller and/or buyer, any commission, compensation or other profit earned, claimed or received in connection with real estate activity, this fundamental disclosure is commonly missed by real estate licensees who represent buyers in purchase transactions.
As a real estate compliance consultant who assists licensees for a living, I have observed the following pattern in residential resale transactions: Brokers representing sellers disclose commission earned. Brokers representing buyers tend to not. Admittedly, the disclosure of commission does not appear to be on some real estate brokers’ radars. Put another way, the failure to disclose real estate commissions is a compliance blindspot for some brokers and agents when working with buyers in their real estate business.
Now, to be fair, I should clarify that this non-compliant activity usually does not apply to those situations where a real estate broker enters into a written buyer representation or commission agreement with the buyer, and the buyer agrees to be responsible for payment of the buyer broker’s commission. Conversely though, the notoriously absent disclosure of commission by buyers’ agents and brokers to their buyers typically relates to those real estate transactions where the seller is responsible for the buy-side commission.
An important backdrop to this discussion, which has brought more widespread attention to similar disclosure issues, is the Department of Justice (“DOJ”) lawsuit filed against the National Association of Realtors (“NAR”) back in November of 2020. To summarize the relevant points briefly, the DOJ alleged, among other things, that NAR’s rules and policies prevent NAR-affiliated multiple listing services (“MLS”), and their agent and broker members, from disclosing how much commission is offered and/or will be paid to buyers’ brokers. It was also alleged that buyers’ agents could filter MLS listings by the amount of commission offered, enabling licensees to engage in unlawful activities such as selectively providing buyers with listings offering higher commissions, while steering them away from listed properties offering lower commissions. Finally, the DOJ alleged that NAR’s policies allowed buyers’ agents and brokers to misrepresent to buyers that their real estate services are “free”, when in fact, real estate commissions play a part in the purchase price of a property and settlement costs.
Collectively, the DOJ's complaint alleges that NAR’s policies have spurred anti-competitive behavior among real estate brokers, and as a result, lower the quality of real estate services. Equally troubling, they argue that the lack of disclosure of buyers’ brokers and agents’ fees have ultimately prevented buyers from understanding the true real estate settlement costs involved and has lessened their ability to rightfully negotiate their agents’ compensation. It should be noted that when the lawsuit was first announced, we were told that the DOJ and the NAR had come to a settlement, and that the NAR had agreed to take corrective actions to amend the rules which promoted the alleged unlawful practices. But, we have since learned that the DOJ withdrew from the settlement agreement and is now taking a broader investigative look into NAR’s policies and practices.
I should also point out that in addition to the above DOJ suit, there have been a number of legal complaints filed against NAR and other brokerages involving buy-side commissions. One accusation that has been made is NAR’s Buyer Broker Commission Rule, requiring all brokers to submit listings to the MLS which include non-negotiable offers of buyer broker compensation, is anti-competitive and harmful. This argument claims that such rules, among other things, have restricted competition among buyer brokers, unfairly requires the payment of buy-side commissions by sellers, and prohibits the possibility for buyers or their brokers to make purchase offers which are contingent upon the reduction of the buyer broker commission.
Taking these legal actions and issues under consideration, which are ongoing and quite controversial, I will return to the subject of this article. It might be poignant to begin with a simple question: When representing buyers, do brokers and/or agents representing buyers disclose the commissions they will be paid (by sellers) to their buyers? The answer should be a resounding “yes”, but interestingly enough, I have found that the opposite is true. It is important to stress that this disclosure is mandated by the California Real Estate law which is enforced by the California Department of Real Estate (“DRE”). The law clearly requires that a real estate licensee disclose any and all commission, compensation, fees and/or profit earned, claimed or received to his or her contracting client in connection with licensed real estate activity [California Business and Professions Code 10176(g)].
The DRE can actually revoke or suspend the license of a real estate broker or agent for, “the claiming or taking by a licensee of any secret or undisclosed amount of compensation, commission, or profit or the failure of a licensee to reveal to the buyer or seller contracting with the licensee the full amount of the licensee’s compensation, commission, or profit under any agreement authorizing the licensee to do any acts for which a license is required under this chapter for compensation or commission prior to or coincident with the signing of an agreement evidencing the meeting of the minds of the contracting parties, regardless of the form of the agreement, whether evidenced by documents in an escrow or by any other or different procedure.” Therefore, the failure to disclose, or the withholding of, this information is a serious violation of the Real Estate law.
It is worth clarifying here that real estate commission, fees, compensation and/or other profit in connection with licensed real estate activity could mean many things. For example, a real estate broker performing property management activity must disclose all property management fees and other compensation received. If you are a broker who performs in-house controlled escrows, then you must disclose your escrow fees, along with any other fees charged for handling the escrow transaction, to the parties. The same is true for real estate brokers who make, arrange or service loans and their legal obligation to disclose all loan origination and/or other loan charges earned and received. Of course, there are other ways a real estate broker or agent may financially benefit from licensed real estate activity which warrants disclosure to their principals. This includes, without limitation, the mark-up of fees charged to clients or the receipt of earnings credits in connection with the handling of trust funds using analyzed trust accounts.
But, for the purposes of this article, I will highlight the lack of disclosure of real estate commissions by some brokers involved in residential sales and purchases. Let’s walk through a typical real estate sales transaction involving residential real property. If an agent for XYZ Realty takes a listing on Seller John’s property, the exclusive right-to-sell listing agreement typically spells out in writing the terms of compensation to be paid to the brokerage by Seller John if a ready, willing and able buyer is procured. The listing agreement might state that Seller John will be responsible for paying XYZ Realty six percent (“6%”) of the purchase price, of which three percent (“3 %”) will be shared with any cooperating real estate broker. In this case, the cooperating broker is ABC Realty, who represents Buyer Jean.
Now while XYZ Realty disclosed the compensation to be earned and paid to their firm by Seller John in the listing agreement, what about ABC Realty? Does ABC Realty disclose to their client, Buyer Jean, that they will be paid three percent (“3%”) of the purchase price for their services at the closing of the sale? The truth is, probably not. Moreover, if the DOJ’s allegations are true, and licensees are filtering MLS listings based on commission data, generally failing to disclose their commissions to buyers, or even misrepresenting that their services are free, then when and how does a buyer find out how much their broker and agent are being paid for their services?
In my experience, based upon the countless real estate transactions that I have personally reviewed, buyers’ brokers and agents tend to not disclose the commissions that they will be paid by sellers, to their buyer clients in the real estate purchase agreement. In addition, they do not share a copy of the MLS listing disclosing the percentage of commission offered, and/or to be paid, with the buyer either. Furthermore, it is rare that I would find the disclosure of commission to be earned by a buyer’s broker or agent to a buyer in any separate written disclosure, addendum or real estate form. And it just happens to be that most escrow holders only prepare commission instructions between the party paying for the commission and the broker, which means, these instructions are usually between the seller and broker(s), and buyers are not privy to such documents.
So, what happens next? Well, nothing. The transaction closes and the disclosure of buy-side commission to buyers usually does not occur. When I raise this issue with some of my real estate clients, and tell them that they have not been properly disclosing their commission to the buyers that they represent, it is met with complete surprise and sometimes resistance. Even as I write this article, I just received an email from one of my clients, a broker, who told me that some of her agents are demanding to know why they must disclose their buy-side commissions to their clients.
In my opinion, and putting the DOJ’s heavy claims aside for a moment, I think part of the problem may stem from lack of visibility on this issue. Although we are talking about this today, likely because of the legal actions on the table and possible outcomes, I don’t think the disclosure of buy-side commissions was ever a common talking point in the real estate industry. Also, if I am giving law-abiding brokers and agents the benefit of the doubt, I might also blame this lack of transparency on a more innocuous misconception than wilful disregard for the law. Namely, some real estate professionals tend to think that they only need to disclose what they are being paid to those who are actually paying it. In turn, because a buyer does not typically pay for their commission in a typical real estate sales transaction, a broker representing a buyer does not recognize their duty to disclose this information to their client. Unfortunately, the reality is, without this disclosure, a licensee is guilty of violating a fundamental disclosure requirement in real estate which may warrant disciplinary action by the DRE.
Speaking of the DRE, I think they might have said it best in their 2019 Summer Real Estate Bulletin (page six). In their article entitled, “Secret or Undisclosed Compensation”, they state, “For activities requiring a real estate license, a licensee is required to disclose to their contracting parties the full amount of compensation, commissions, or profit earned according to Business and Professions Code (Bus. & Prof. Code) section 10176(g).” Additionally, the article says, “Compensation for licensees can come in many forms, typically including commissions, escrow fees, property management fees, loan origination, and loan servicing fees. Compensation, however, can also take different forms and can be received from other parties apart from the licensee’s direct clients, and should be disclosed appropriately.”
And it is this latter point that brings this issue home. It doesn’t matter who pays the licensee for real estate activity. Regardless of the source, a licensee has a statutory duty to disclose any commission(s) or fees he or she will earn, claim, demand or receive in connection with licensed acts to his or her client. Thus, the absence of this disclosure, even if unintentional, is activity which runs afoul of the law.
If you are reading this piece and realizing that this may be a compliance blindspot in your own real estate business, please know that there is value in corrective practices. When representing any client, buyer or seller (tenant or landlord, etc.), please make sure that you disclose, in writing, any and all commission, fees, profit and/or other compensation to be claimed, earned or received in connection with the real estate transaction or licensed activity performed. Also, if you are a responsible broker supervising agents and transactions which require a real estate license, I highly suggest adding this disclosure item or requirement to your internal file checklist and ensuring it is accounted for when reviewing and approving transaction files. Similarly, it would be prudent to create a brokerage policy and procedure around this requirement, and fully enforce it in order to ensure regulatory compliance.
In closing, my hope is that this article has shined some light and perhaps needed clarity regarding the importance of disclosing buy-side commissions to buyers. With the new year here, there is an opportunity to change and correct any unlawful or misguided practices of the past and make sure you are compliant in 2022. While there are myriad compliance blindspots when it comes to real estate, some that may be even outside of your control, please don’t let the failure to disclose your real estate commission be one of them.
Author’s Note: Some real estate contracts, forms or templates relied upon or used by California licensees may or may not include boilerplate language covering, or an opportunity for, the disclosure of real estate commissions. Regardless of the type of templates or documents used, and whether they allow for such disclosures or not, it is ultimately up to real estate licensees to properly disclose this information to their clients.
About the Author
Summer Goralik is a Real Estate Compliance Consultant and licensed Real Estate Broker (#02022805). Summer offers real estate brokers a variety of consulting services including assistance with California Department of Real Estate investigations and audit preparation, mock audits, brokerage compliance guidance, advertising review, and training. She helps licensees evaluate their regulatory compliance and correct any non-compliant activities. Summer has an extensive background in real estate which includes private sector, regulatory and law enforcement experience. Prior to opening her consulting business in 2016, she worked for the Orange County District Attorney's Office as a Civilian Economic Crimes Investigator in their Real Estate Fraud Unit. Before that, Summer was employed as a Special Investigator for the DRE for six years. Among many achievements, she wrote several articles for the DRE, four of which were co-authored with former Real Estate Commissioner Wayne Bell. Prior to her career in government and law enforcement, Summer also worked in the escrow industry for nearly five years. For more information about Summer's background and services, please visit her website, www.expertdrecompliance.com.