Compensation Issues: How to Handle Them

Recently the Commission created an Incentive Disclosure Advisory Committee charged with determining whether changes in Commission rules are needed to reasonably assure that real estate purchasers and sellers are properly informed of any compensation received by or offered to their real estate agents from another party to the transaction.

In addition to concerns about disclosure of compensation to agents, Commission staff regularly receive inquiries about a variety of other scenarios. Here are a few do’s and don’ts related to compensation issues:

If you are acting as a buyer agent in a transaction:

• DON’T negotiate with the seller or builder to increase the amount of agency compensation being offered without the knowledge and consent of your buyer client.  As a buyer agent, it is your duty to represent your buyer client to the best of your ability. This means getting your client the property they want at the lowest cost to them.

• DON’T take a larger commission with the understanding that you will “kick back” or “rebate” a portion of the commission to the buyer after closing.  ALL COMMISSION REBATES TO BUYERS MUST BE DISCLOSED TO THE LENDER IN THE TRANSACTION AND MUST BE SHOWN ON THE CLOSING STATEMENT.  If the lender won’t allow it on the closing statement, the rebate CANNOT be made outside the closing.

• DO disclose to your buyers that any commission rebate you have agreed to is SUBJECT TO LENDER APPROVAL and MUST be shown on the closing statement. Again, if the lender will not allow the rebate to be shown on the closing statement, it CANNOT be paid to the buyer. Lenders often permit certain percentages of the purchase price to be offered as incentives to buyers. Once they have met the defined percentage, a buyer is not permitted to receive further incentives in the transaction under the loan as approved.  Buyers should be alerted up front that they will only receive such a rebate if the lender allows it. Because it will affect the lender’s calculation of loan-to-value ratio for buyers’ loans, the lender may not permit the buyer to receive the rebate.

Regardless of who you represent:

• DON’T allow a charitable group, church or school to advertise that you will donate a portion of each commission you receive to that group as an incentive for buyers or sellers to work with you. You may not pay incentives to unlicensed persons or firms, including charities, to help you obtain business. You MAY advertise that you regularly contribute to a church or charity or other organization.

• DO disclose to your clients that you will receive a referral fee if you are referring clients to another agent and you have or will ask to be paid a fee.  Referral fees must be agreed to by the agents involved in advance of the referral.

• DON’T advertise your commission in such a way as to indicate there is any industry standard.  Commissions are always negotiable between the firm and its clients.

• DON’T pay rebates, incentives, or referral fees to unlicensed persons or entities who are not buyers or sellers in the transaction.

• DO pay agents licensed in another state BUT NOT IN NORTH CAROLINA referral fees or real estate commissions after verifying licensure ONLY if the out-of-state licensee did not enter North Carolina at any time to take part in any aspect of the transaction in question.  If an out-of-state licensee enters the state to show or list a property, or participate in any way in the transaction, they cannot be compensated.

Licensees with questions about these issues are encouraged to contact the Commission’s Legal Staff for clarification.

This article came from the January 2008-Vol38-3 edition of the bulletin.