Understanding Compensation

BY KATHLEEN DARTEZ, ESQ

In this issue’s “CEO Corner,” (read "My Kingdom for a Crystal Ball" here) Maryland REALTORS® CEO Chuck Kasky offers a brief history lesson, outlining the evolution of buyer representation and of the compensation model under which the listing brokerage offers cooperative compensation to subagents and buyer’s agents. Pending seller class-action litigation against the National Association of REALTORS® (NAR) and four corporate brokerage defendants has increased both awareness and scrutiny of the existing compensation model.

Although the litigation demonstrates a certain level of misunderstanding about compensation and the role of local MLS broker marketplaces, we should recognize this as an opportunity to become more transparent about compensation. While the litigation is being handled by attorneys in a courtroom, each of us has a role to play in reducing or eliminating any confusion about the value that REALTORS® provide to consumers, how the MLS works, and how we are compensated. Each of our clients should understand how much we are being paid, how we are being paid, and how the other agent in the transaction is being paid. NAR offers a variety of resources on www.competition.realtor, including information on fostering competition, equal consumer access and opportunity, as well as incredibly helpful FAQs. Please take the time to review the data, reports, infographics, and other information and to share it with your clients, customers, and colleagues.

The Law and Rules Changes

Let’s begin with a brief refresher on Maryland law. The Brokers Act specifies that a brokerage relationship begins when the client enters into a written brokerage agreement. The Brokers Act identifies the mandatory provisions of such written brokerage agreements, requiring, among other things, that the brokerage agreement “state the amount of compensation to be paid to the broker and whether the broker is authorized to receive the compensation from a person other than the client;” and “state whether the broker is authorized to cooperate with other brokers and share compensation with the other brokers and the amount of the compensation.”

Consistent with this, the Maryland Code of Ethics mandates that “financial obligations and commitments regarding real estate transactions are in writing, expressing the exact agreement of the parties.” Thus, Maryland law already imposes an obligation of transparency and certainty regarding compensation.

Recent rule changes by Bright MLS have resulted in an increased focus on compensation. Previously, Bright MLS’s Rules and Regulations provided that each listing must include the compensation unconditionally and unilaterally offered to Cooperating Brokers, and that such offer must be a “positive value.” A positive value could be as little as $1.00 or even $0.01. As of August 9, 2023, however, the Rule was revised as follows:

1.13 Offers of Compensation

1.13.1 Each listing must include entry of a value in the Bright Service fields describing offers of compensation unconditionally and unilaterally offered to compensate a Cooperating Broker as the procuring cause of a sale (also known as an enforceable, unilateral, blanket offer of cooperative compensation). The amount entered may be any value, from zero and greater. Bright does not set or suggest compensation values or the cooperative division of compensation.

Transparency and Certainty

Let’s return to the concepts of transparency and certainty in the context of the Maryland REALTORS® brokerage agreements. The Exclusive Right to Sell Residential Brokerage Agreement (“Listing Agreement”) states “The amount of Broker compensation is not prescribed by law or established by any membership organization with which the Broker is affiliated. In the event of a sale, exchange, or transfer, the Compensation to be paid by Seller to Broker shall be ___________ .”

The Listing Agreement also includes language whereby the Seller may authorize the Listing Broker to share fees with Subagents or Buyer Agents (collectively “Cooperating Brokers”). The Seller and Listing Broker agree on any offer of compensation to be paid by the Listing Broker to such Cooperating Brokers, with such amount being inserted as a specified dollar amount or as a percentage of the Compensation The Listing Agreement also includes language whereby the Seller may authorize the Listing Broker to share fees with Subagents or Buyer Agents (collectively “Cooperating Brokers”). The Seller and Listing Broker agree on any offer of compensation to be paid by the Listing Broker to such Cooperating Brokers, with such amount being inserted as a specified dollar amount or as a percentage of the Compensation.

Listing Brokers will have to respond to Bright’s Rule change by having a thorough understanding of how cooperative compensation works and by being able to explain to Seller clients the advantages and disadvantages of offering or declining to offer compensation to Cooperating Brokers. The impact of the Rule change is likely to have a more immediate impact upon Cooperating Brokers, particularly Buyer Agents. It may be helpful to review the Maryland REALTORS® Exclusive Buyer/Tenant Representation Agreement (“Buyer Agency Agreement”) to understand its terms, allowing us to explain it to our clients clearly and effectively. The Buyer Agency Agreement includes the following verbiage:

BROKER’S COMPENSATION: The amount of Broker compensation is not prescribed by law or established by any membership organization with which Broker is affiliated.

Compensation to be Paid by Buyer: In the event of a sale or lease, the Compensation to be paid by Buyer to Broker shall be: ____________.

Fee Paid By Seller: Broker is authorized to receive compensation from the listing broker/seller. Compensation may be offered from the listing broker to Broker through the multiple listing service or from seller as negotiated by Broker and seller for real property which is not listed with another broker. The amount of compensation received by Broker from a listing broker or from a seller shall be credited against the Compensation agreed upon in [the previous paragraph]. Buyer shall be obligated to pay any difference between the amount owed and the amount paid by the listing broker/seller.

Avoid the words “Per MLS”

Let’s walk through these provisions, starting with the Compensation to be paid by Buyer to Broker. We have heard that some Buyer’s Agents will insert “Per MLS” or “$0.00” in the space provided to specify their compensation. We have heard that some Buyer’s Agents explain “that means that my services are free to you,” or “you might as well sign the Buyer Agency Agreement because you aren’t paying me, the seller is.” If you are completing the Buyer Agency Agreement or explaining it in this way, you need to stop immediately. While this has never been a good practice, in the context of Bright MLS’s recent Rule changes and in the context of the pending class action lawsuits, this is now clearly a terrible practice. Many of us remember the late Maryland REALTORS® General Counsel Al Monshower explaining why “per MLS” was ill-advised with this pearl of wisdom, “Congratulations—you’ve just agreed to work for $1.00.” With Bright’s recent rule change, “Per MLS” could mean that you’ve agreed to work for zero compensation.

In addition to the negative impact on your bottom line, completing or explaining the Buyer Agency Agreement in this way likely violates NAR’s Code of Ethics. Article 12 of NAR’s Code of Ethics provides, in relevant part, that “REALTORS® shall be honest and truthful in their real estate communications and shall present a true picture in their advertising, marketing, and other representations.” Standard of Practice 12-1 provides additional direction:

REALTORS® must not represent that their brokerage services to a client or customer are free or available at no cost to their clients, unless the REALTORS® will receive no financial compensation from any source for those services. (Amended 1/22)

To the extent that any of us have used “Per MLS” or said “my services are at no cost to you” as a way to sidestep a direct conversation about compensation, we need to not only stop doing so, but we also need to become comfortable talking about compensation. A Buyer’s Agent must also be prepared to explain to the Buyer what will happen if the Seller chooses to offer zero compensation, or some amount less than what the Buyer and Buyer’s Broker have agreed upon as the amount due to the Buyer’s Broker. As noted above, the Buyer Agency Agreement states that any Compensation paid through the MLS shall be credited against the amount of compensation the buyer has agreed to pay. It is quite possible that the amount offered through the MLS is zero. The Buyer’s Agent will have to discuss various options that may be available to the Buyer to pay the difference between the compensation the Buyer agreed to pay, and any amount paid per the MLS.

Moving Forward

Section 1.13.2 of Bright MLS’s recently revised Rules and Regulations provide some additional nuance and possible strategies for the Buyer and/or Buyer’s Agent. In the interest of brevity, we’ll summarize these rule changes here, while encouraging everyone to take the time to read the Rules in full. As stated above, the Seller must approve any amount entered in the Bright Service fields describing offers of compensation made to compensate a Cooperating Broker that will be paid in any way by the Seller. This approval may also (but need not) reflect whether the parties agreed that payment will be made by the seller or by the Seller’s Broker, to the buyer or to the Cooperating Broker.

A Cooperating Broker may propose to the Listing Broker that an amount of compensation different from the amount entered into Bright be paid to the Cooperating Broker. While this has always been permissible, it is likely that these discussions may become more frequent. Any such agreement between the Listing Broker and Cooperating Broker should be confirmed in writing. Negotiating a different offer of compensation directly with the Listing Broker is likely the simplest resolution.

If the Listing Broker is unwilling or unable to negotiate, the Buyer’s options will obviously vary depending upon the Buyer’s situation and financial resources. While many of us have had this conversation with our Buyer clients for years, it may be new territory for others. The basic concept that the Buyer must understand is that the Buyer is responsible for paying the Buyer’s Broker in the agreed upon amount.

A move-up buyer, in receipt of significant seller proceeds from the sale of their current home, may not have any difficulty paying the compensation owed to their agent in the purchase transaction. A client purchasing a second home, or an investment property may have more significant financial resources and, again, may be able to pay their agent’s compensation in full. The challenge of requiring a buyer to possess funds to be able to compensate their agent directly will likely have a disproportionate impact on first-generation buyers and first-time buyers, many of whom are already struggling to save enough for a downpayment and closing costs. What options are available to these Buyers?

One suggestion that you may have heard is to include an Addendum to the Contract, asking the Seller to pay the compensation due to the Buyer’s Agent. While this is an option, it is an option that must be exercised with caution, to avoid violating Article 16 of NAR’s Code of Ethics, as supported by Standard of Practice 16-16, which provides:

REALTORS®, acting as subagents or buyer/tenant representatives or brokers, shall not use the terms of an offer to purchase/lease to attempt to modify the listing broker’s offer of compensation to subagents or buyer/tenant representatives or brokers nor make the submission of an executed offer to purchase/lease contingent on the listing broker’s agreement to modify the offer of compensation.

While it is not permissible for the Buyer’s agent to use the offer to purchase to renegotiate the compensation offered by the Listing Broker, it is permissible for the Buyer to include such an Addendum with their offer to the Seller.

We’ve discussed two ways for the Buyer’s Agent or the Buyer to respond when the Seller instructs the Listing Broker to offer Cooperating Compensation of either zero or some nominal amount. Each of these options involves going back to the Listing Broker and/ or the Seller to try to renegotiate the Cooperating Compensation offered. We cannot predict the likelihood of success with such negotiations.

Additionally, Fannie Mae and Freddie Mac will finance “closing costs,” which generally include an origination fee, title exam, title insurance, survey, attorney’s fees, prepaid items such as taxes and insurance escrow payments, and any discount points paid but does not include commissions paid to a Buyer’s Broker. It’s impossible to say whether this policy will change and, if so, when it may change.

No Easy Answers

There are not a lot of options for buyers, particularly first-generation or first-time buyers. One option is “save more money.” We are currently in a seller’s market, with a shortage of inventory, increasing sales prices, actual or perceived high interest rates, and a relatively high level of inflation overall. Increasing the amount of money a first-generation or first-time buyer will need to bring to the table may put the American Dream of homeownership out of reach for many of these buyers.

While there are no easy answers, Listing Agents must be prepared to explain to Sellers the possible consequences of offering only a nominal amount or zero Cooperating Compensation. Buyers Agents will have to realistically assess the impact of requiring the Buyer to pay the Compensation directly. While there’s been some speculation that this may help to cool down an overheated market, we must all be cognizant of the impact this will have on housing affordability and who will be most impacted.