The NAR antitrust settlement brings with it many practice changes for REALTORS®. One of the key elements of the practice changes is highlighting that commissions are fully negotiable and not set by law, by any association, or by any MLS.

With that said, what does it mean for commissions to be fully negotiable, and when can you negotiate commissions? How do you ensure that you are negotiating commissions in an ethical manner?

Commissions are always negotiable as between you and a customer. When trying to convert a customer into a client, the commission or fee that you charge for your services is not set by law or by an association. Your firm chooses the fees you charge, and the customer is free to try to negotiate a different fee or an alternative fee for alternative services. Customers are free to shop around for different brokerage firms to find a broker whose fee is satisfactory to them.

Once a buyer customer is converted to a client, and an objectively ascertainable fee is set in writing, how that fee gets paid is also negotiable with the other side of the transaction. However, the way you ask the seller and/or listing broker to cover all or part of that fee matters.

The Code of Ethics, Article 16, Standard of Practice 16-16 states:

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 brokers’ 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.

Additionally, Article 3, Standard of Practice 3-2 of the Code of Ethics states:

Any change in compensation offered for cooperative services must be communicated to the other REALTOR® prior to the time that REALTOR® submits an offer to purchase/lease the property. After a REALTOR® has submitted an offer to purchase or lease property, the listing broker may not attempt to unilaterally modify the offered compensation with respect to that cooperative transaction.

Keep in mind that both these Standards of Practice refer only to cooperative compensation paid from broker to broker. These Standards of Practice do not refer to fees paid directly from a seller to a buyer or from a seller to a buyer broker.

If a buyer is interested in a home where the listing broker is not offering cooperative compensation to the buyer broker or the amount is not enough to cover the buyer broker fee, the offer cannot include a provision that the listing broker pay more in cooperative compensation to the buyer’s REALTOR®. Nor can the seller’s REALTOR® change the amount offered in cooperative compensation to a buyer broker after an offer is submitted.

Prior to an offer being submitted, the two REALTORS® may engage in discussions and negotiations to increase the amount of broker-to-broker cooperative compensation to cover the buyer-broker fee. Also, after an offer to purchase is submitted, the REALTORS® are free to negotiate a change in the cooperative compensation paid from listing broker to buyer broker. After an offer is submitted, any change in this fee agreement would need mutual consent, and one party cannot attempt to unilaterally change the amount.

It is important to remember the difference between cooperative compensation paid from listing broker to buyer broker and a seller paying a buyer broker directly or through concessions at closing. In an offer, the buyer may include a condition that the seller pay the buyer broker, or the seller concedes cash at closing for the buyer to pay the buyer broker. Again, the ethical distinction here is the buyer is asking the seller to pay, not asking the listing broker to increase the cooperative compensation offer.

Here are some common scenarios to consider:

Scenario 1:  

An offer includes the term, “Listing broker to increase offer of compensation to buyer broker by x% of purchase price.”

This is unethical because it violates Standard of Practice 16-16. The REALTOR® representing the buyer is using the terms of an offer to attempt to modify the listing brokers’ offer of compensation.

Scenario 2:   

After an offer is submitted, the seller’s REALTOR® sends the buyer broker a Broker Fee Agreement (VAR Form 500) with an amount in broker-to-broker cooperative compensation less than what was advertised.

This is unethical because it violates Standard of Practice 3-2. The REALTOR® representing the seller is unilaterally modifying the offered broker-to-broker compensation after an offer to purchase was submitted.

Scenario 3:

Two REALTORS® negotiate a change in the amount of compensation paid from listing broker to buyer broker to cover the buyer broker fee BEFORE an offer is submitted. The REALTORS® then execute a Broker Fee Agreement to codify the change.

This is ethical because it complies with both Standards of Practice 3-2 and 16-16. The REALTORS® negotiated a change in broker-to-broker cooperative compensation prior to an offer being submitted so that the offer does not include a term modifying broker to broker cooperative compensation.

Scenario 4:

The buyer’s REALTOR® refuses to accept any offer of broker-to-broker cooperative compensation even though the listing agreement states the listing firm will offer cooperative compensation. The buyer then submits an offer where the buyer broker fee is to be paid through a seller concession at closing. The two REALTORS® mutually agree to rescind the offer of broker-to-broker cooperative compensation.

This is ethical because it complies with both Standards of Practice 3-2 and 16-16. The REALTOR® representing the buyer did not make the change in broker-to-broker cooperative compensation a term of the offer, and the two Realtors® negotiated a mutual agreement to change the amount.

NOTE: This type of situation may require the listing firm and seller to amend the listing agreement because the seller may be contractually obligated to pay more in broker fees than originally expected.

Scenario 6:

An offer includes the term, “Seller to pay buyer broker x% of purchase price at closing to cover the buyer broker fee.”

This is ethical. The offer does not include a term requiring the listing broker to increase broker to broker cooperative compensation. This term, if accepted, would require the seller to pay the buyer broker x% of the purchase price at closing.

Scenario 7: 

An offer includes the term, “Seller to concede x% of purchase price to buyer at closing for buyer to pay buyer broker fee.”

This is ethical. The offer does not include a term requiring the listing broker to increase broker to broker cooperative compensation. This term, if accepted, would require the seller to concede x% of the purchase price as cash at closing to the buyer, and the buyer will use that cash to pay the buyer broker.

There are two big takeaways here. First, broker-to-broker cooperative compensation is negotiable so long as the negotiation is done prior to an offer being submitted, and the offer does not contain a term modifying the listing broker’s offer of compensation. After an offer is submitted, the two REALTORS® may negotiate a change in cooperative compensation so long as the agreement is mutual. Second, buyers and sellers are always free to negotiate seller concessions that may cover the buyer broker’s fee.

If you have questions about negotiating commissions, you can always contact us on the Virginia REALTORS® Legal Hotline.