Commission Procedures and Regulations Flashcards
This chapter is all about compensation, and more specifically, commissions! Let’s start by defining terms:
Compensation is any fee, commission, salary, money, or other valuable consideration for services rendered in the course of a real estate transaction. It can also refer to the promise of consideration.
A commission is a fee paid in exchange for services in a real estate transaction. The size of a commission is commonly measured as a percentage of the sales price. Real estate sales agents usually make their money from real estate sale commissions.
Compensation and Commission
So, as an agent, how do you know how much you’ll be paid? When you sign on with an employing broker, the agency representation agreement must include:
Amount of compensation to be paid or how the amount will be calculated (most commonly, as a percentage of the sales price, but sometimes as a flat fee)
How the licensee will earn the compensation
When the compensation is considered earned
How compensation will be split in co-brokerage
How licensees will split compensation with their brokerage (if applicable)
Agency Representation Agreements
When licensees from different brokerages work together on a sale, it’s called co-brokerage. For example, if a broker lists a house, but works with another firm to find buyers, the brokers are cooperating brokers.
Co-Brokerage
Some people think it’s tacky to talk about money. Well, guess what – in real estate, everyone’s gotta know who is paying whom. Talk away! 🗣
In other words, all compensation must be disclosed. So, for instance, if a seller tells you, “Bring me a buyer by February 3rd and I’ll give you a bonus!,” you need to tell every buyer-client or customer, “Hey, friend, I’ll get a bonus if I bring the seller a buyer by February 3rd.” It’s only fair for a client or customer to know all your motivations, don’t you think?
Similarly, you also need to disclose referral fees. (This goes for if you are giving or receiving the referral fee). So, for instance, if you get a referral fee from referring a customer to a listing agent, the customer needs to know that.
Note that under the Real Estate Settlement Procedures Act (RESPA), you may not receive referral fees from mortgage brokers, title representatives, or other individuals who work for settlement services. More on that later in the course.
Disclosing Compensation
Sometimes, fees will be deducted from commissions. The policy manual should describe exactly what these fees are. One common deduction is the licensees for Errors & Omissions insurance, which covers prescribed errors that the licensee might make (such as unintentional acts of negligence).
Deductions from Commissions
Now, onto commission! A commission is a percentage of a total. To figure out how much that percentage is worth, you just need to multiply the total by the percentage.
Formulas
These are the formulas that can help you solve for different parts of a commission, whether you are looking for the commission total, the commission percentage, or the sales price.
Part ÷ Percentage = Total
Total x Percentage = Part
Part ÷ Total = Percentage
Do you see how these are all different configurations of the same formula?
Solving for Part
Let’s do a quick example together before I ask you to take one on your own.
The Story
A licensed real estate sales agent helped a client buy a home for $250,000. The listing agreement states that 6% of the sale will be given to license holders — 3% to the seller’s agent and 3% to the buyer’s agent.
How much money did the buyer’s agent make in commission from this sale?
Step 1: Insert known variables
So we know the total is the total sales price of the house: $250,000. And we know the percent is the 3% commission that the buyer’s agent made on the sale. Let’s put those numbers into the formula.
Answer: $250,000 x 3% = Part
Step 2: Convert the percentage to a decimal and multiply
Once the variables are filled in with numbers and our percentage has been transformed into its decimal form, all you have to do is multiply the two numbers to find the part (the commission the buyer’s agent made).
$250,000 x 0.03 = $7,500
Final Answer: The buyer’s agent made $7,500 in commission.
Solving for Commission
The Story
Let’s go back to the same story we used before, but switch around our missing variables.
An agent made $7,500 on the sale of a home that sold for $250,000. What was their commission rate?
Step 1: Insert the known variables
We know that the total is the sales price of $250,000 and the part is the amount the agent received in commission ($7,500).
So, here’s what the formula looks like with those variables plugged in.
Answer: $7,500 ÷ 250,000 = Percentage
Step 2: Divide the part by the total
$7,500 ÷ 250,000 = 0.03
Answer: 0.03
Step 3: Convert the decimal to a percentage
To convert .03 into a percentage, we’ll need to move the decimal point to the right two spaces. Then just drop the decimal point and slap on a percent sign.
3% = Percentage
Final Answer: The agent’s commission rate was 3%.
Solving for Commission Rate
So far, we’ve been talking generally about how commissions work. Let’s now get into Arizona specifics. 🌵
Everyone Needs a License
This will not surprise you, but everyone who receives money for performing a task requiring a real estate license… needs to have a real estate license.
An employing broker can only employ and pay active licensees.
The employing broker who pays compensation must be licensed.
Remember from the last chapter that unlicensed assistants cannot receive commission!
Compensation Only Comes From the Broker
You already know this, but it’s worth repeating.
A licensee may only accept employment and compensation from the employing broker.
If the licensee is licensed through a professional corporation or an LLC, the employing broker may pay the licensee only through that corporation.
Compensation for Residential Leasing Agents
Brokers may employ residential leasing agents or managers of residential rental properties. These agents and managers do not need a license under Arizona law, as long as certain conditions apply. Of course, the designated broker needs to supervise them, just as they need to supervise everyone else.
As you know from the previous level, a residential leasing agent or onsite manager of residential rental properties does not need a license if all of the below apply:
They perform residential leasing activities at only one location.
They do not receive special compensation for preparing leases/renewals/amendments, collecting security deposits or rent, showing residential units, executing lease agreements, or delivering notices on behalf of the owner.
A bonus does not count as special compensation as long as it is not received more than monthly and it is not more than half of the total compensation for that time period.
In other words, these conditions carefully ensure that a residential leasing agent or manager is not performing tasks that require a real estate license, and is not receiving anything that might smell like commission. 👃
EXAMPLE
Melanie is a residential leasing agent. She does not need a real estate license because she only works at one location, does not perform any tasks that require a real estate license, does not receive special compensation for her ordinary round of duties (collecting rents, showing units, etc.), and is only allowed to receive bonuses under a certain amount.
Loan Negotiation
A licensee cannot collect compensation for negotiating loans unless all of the following apply:
They are licensed as a mortgage broker. Alternatively, the individual can be an employee, officer, or partner of a corporation or partnership licensed as a mortgage broker.
They have disclosed to the person giving the compensation that they are receiving compensation for both real estate brokerage AND mortgage broker services.
The compensation does not violate any other state or federal law.
Compensation-Sharing Disclosure
A broker must disclose to all the parties in a transaction:
The name of each employing broker who represents a party to the transaction, and
Who will receive compensation from the transaction.
This must be done in writing and before closing.
Court Action to Collect Compensation
A licensee may take action in court to collect compensation earned (that is, they can file a lawsuit, as I mentioned earlier). The licensee will need to show that at the time of the claim, they were, in fact, a license holder.
Remember that the ADRE does not take complaints from licensees about the earning, splitting, or nonpayment of compensation. However, if you belong to the Arizona Association of Realtors, they will mediate or otherwise try to help you resolve commission disputes.
Payment of Commission After License Expiration
A licensee who earned a commission while in the employment of a broker, and then leaves that employment, is still entitled to that commission.
A licensee may not be involved in a transaction after leaving that broker, though.
Arizona Rules for Commissions: Part 1
