Blocks & Lots

At what point does a real estate broker earn their commission?

According to New York’s Department of State website if a broker procures an eligible buyer they are entitled to a commission: “Although a broker is generally entitled to a commission when he produces a buyer ready, willing and able to purchase the subject property on terms acceptable to the seller, the broker’s right to a commission may be varied by agreement.”

What this means is that if the broker finds a buyer that the seller is in agreement with, they are still entitled to a commission even if the property does not close. That is obviously a contentious issue as if there is no closing where is the money to pay the broker? As the DOS website points out there have been numerous lawsuits where the broker has sued the seller for a commission because of their ability to produce a “ready willing and able” buyer.

What can a seller do to protect themselves from having to pay a broker if the sale does not go through?

A simple addendum to the contract between the broker and seller would solve this issue. It would state that the broker’s commission will be paid on the condition that the actual closing of title or consummation of sale occurs, not upon the broker’s production of a ready, willing and able purchaser. Many sellers do not read or understand the fine print in their contract with a broker and leave themselves open for a lawsuit. By making this change, which most brokers would be willing to do, it would give the seller flexibility and peace of mind when proceeding with the transaction.

What happens if the buyer and seller agree to split the commission?

It is usually the seller who pays the commission, as specified in the listing agreement. The money comes out of the sale’s proceeds. Sometimes the buyer and seller can agree to split the commission costs which will be stipulated in the purchase and sale agreement and shown on the settlement sheet. In this case, the addendum to the broker/seller agreement should be stating that the buyer and seller are agreeing to split the broker’s commission equally and both agree that the broker will be paid on the conditions stated above.