Real Estate Commissions and Procuring Cause

I.How Real Estate Commissions Work

This post comes at the suggestion of my wife.  Until she met me, she apparently had no idea how real estate commissions worked.  I, on the other hand, grew up around this stuff.  My dad has owned a real estate brokerage in Maryland since the late 1970’s, so I probably understand it too well for my own good. This leads me to assume it is all common knowledge, but as in most cases, my wife is probably right. 

While there are always exceptions, real estate commissions generally work in the following manner.  A seller lists a property for sale with a listing broker.  If the property sells while listed, the listing broker will earn a commission for providing brokerage services to the seller.  The listing broker may choose to offer a cooperating buyer-broker a portion of the listing commission.   If the cooperating buyer-broker is successful in bringing a buyer to the transaction, he will earn a portion of the listing commission.  On the other hand, if a buyer is unrepresented and does not have a broker, the listing agent gets to keep all of the commission.  Essentially, the seller pays the entire commission up-front. Whether the commission is shared or not is simply a matter of whether the buyer has representation and wants the seller to pay for it.  The bottom line is, if you buy a property without a buyer-broker, there is a good chance you made the listing broker very happy by doubling their money!

The majority of real estate transactions happen in this manner, but something that is not nearly as well-known as it should be:  COMMISIONS ARE NEGOTIABLE!  At least they are negotiable in Washington DC, Maryland, and Virginia.  While there are some states that prohibit the practice of negotiating commissions, I find such a ban to be ridiculous.  It seems to be the opposite of creating an efficient marketplace, but that is a discussion for another forum.  If you interview a broker, they might mention that they cannot negotiate their commission.  There is a good chance that is simply a company/office policy, and not an actual law.  When you go to sell your home, you have every right to negotiate who gets paid, how much, and under what circumstances.  Of course, just like everything else in life, you get what you pay for.

II. How Procuring Cause Relates to Commissions

If a buyer contacts a listing broker via phone, email, open-house, or in-person, and does not immediately claim that she is already working with an agent, the listing broker may be able to declare that they were the "procuring cause" of the sale.  When this happens, no commission will be paid to a cooperating buyer-broker, giving rise to a potential conflict between a buyer and her broker.  While this is pretty rare, it does happen, especially in the context of new developments that keep model homes open around the clock.  As soon as a potential buyer walks in the door, the listing agent for the new development catches them.  This can lead to a situation where a buyer that already has a broker may cost their buyer-broker their commission split.  By no means is the issue a simple one, and there is a ton of gray area resulting in plenty of litigation over commission splits.  Different states have different case law, and each transaction has a unique fact pattern.  Rest assured though, if a buyer-broker has to argue about receiving their commission split in court, everyone involved has already lost, at least in my opinion.  So, while it is good to check out properties at open-houses and the like, buyers should always clearly define whether they are currently working with a buyer-broker, and should do so as soon as possible.  Otherwise, seemingly friendly conversations between the buyer and the listing agent can turn into a hot mess down the road.