When Can a Listing Broker Change their Offer of Compensation?
You’re a real estate agent who has just received a hot new listing. As you get ready to upload it to the MLS, your seller poses an interesting question – “Can I change the buyer’s agent commission after we get an offer?” You scratch your head, unsure of the ethical and legal implications. Don’t sweat it! By the end, you’ll be a pro at understanding exactly when a listing broker may change an offer of compensation.
When is Compensation Established?
Before we dive into changing commissions, it’s important to understand when contractual obligations around compensation are formed. As a listing agent, you must follow MLS rules about division of commissions and offers of compensation. These rules state that any commission percentages advertised to cooperating brokers are unconditional – sort of like a blanket offer out to any agent who wants to work with your listing. There’s no backsies here!
Now, let’s say you bring an eager buyer’s agent to the table for your listing. If that buyer’s agent ends up being the “procuring cause” of a successful sale, then bam – you’re on the hook to pay out whatever commission you offered in the MLS. A binding brokerage contract has been formed through their actions as procuring cause. Pretty straightforward so far, but this means you can’t just arbitrarily decide to reduce their commission after the fact.
Making Changes After an Offer is a No-Go
Here’s the crucial distinction. Once a buyer’s agent submits an offer on your listing, you are prohibited from unilaterally modifying the offered compensation. For example, if you had advertised 2.5% commission to cooperating brokers, you have to pay that full amount to whichever agent earns it through procuring cause. Make sense? Changing it retroactively would rightfully tick off the other brokerages!
Situations Where Compensation Changes are Allowed
While compensation can’t just be changed on a whim, there are in fact many situations where listing brokers may alter or negotiate commissions contractually owed to buyer’s agents:
1. Before any Showings or Offers
In the beginning stages of your listing, feel free to update and experiment with the cooperative commission as much as makes sense for your situation! For example, perhaps you originally offered 2%, but decide to increase to 2.5% to attract more buyer’s agent interest. Or alternatively, reduce because you receive direct feedback that 2% will still incentivize showings.
The key is making these changes transparently through MLS updates before buyer’s agents have relied on your advertisement. This maintains cooperative integrity through the open MLS platform.
2. During Contract Negotiations
Once you have an offer in place, compensation negotiations open back up again. As part of finalizing a mutually agreeable contract, explicit discussions happen between listing and buyer’s agents to modify previously advertised commission rates. For example, a buyer’s agent might request a .5% increase to handle some specialized contract contingencies.
This even applies in scenarios where you as the listing agent aren’t thrilled about an offer. Don’t unlawfully try to reduce their pay as retaliation! Instead, facilitate honest win-win conversations.
3. Buyer Makes Offer Contingent on Compensation Change
Here’s an interesting alternative – the buyer themselves could propose to only move forward contingent on you altering the cooperative compensation. While subtle, this sidesteps restrictions around the listing broker unilaterally changing commissions. For example, perhaps they agree to your full asking price in return for increasing buyer agent commission by .5%.
4. Broker to Broker Compensation Negotiation
At any stage of the transaction, listing and buyer’s brokers can mutually come to new compensation terms through direct negotiation. The change just needs to happen transparently with written understanding from both sides on the altered cooperative compensation. For example, you realize your listing was dramatically underpriced for the neighborhood so agree to increase the buyer’s side commission.
The key distinction across all these examples is that compensation changes aren’t made unilaterally without the cooperating broker’s consent. Buyer’s agents are protected against unexpected detriments to their commission rate.
Scenarios Where Compensation Can’t be Changed
We just covered many situations where altering the cooperative compensation violates no rules or ethical standards. However, listing brokers should still be aware of a few scenarios that definitively do not allow changes:
After Procuring Cause is Established
We touched on it earlier, but it’s worth emphasizing again. Once a buyer’s agent becomes “procuring cause” through actions leading to a successful offer, you may absolutely not alter their compensation subsequently. At this point, an implied binding contractual relationship has been formed through MLS advertising. Changing it now unjustly erodes the contributing brokerage’s delivery of procuring cause rights.
Using Offer Terms to Demand Changes
Another clearly prohibited tactic is rejecting or stalling offers due to inadequate cooperative compensation. Intentionally delaying contract finalization unless the buyer broker consents to reduced pay definitely qualifies as unethical coercion. For example, making up excuses why you can’t sign the proposed purchase agreement until they renegotiate down to 1.5% commission.
Unilateral Modifications Without Notice
Finally, one more scenario that should be obviously avoided is changing the cooperative compensation without transparently notifying MLS and impacted brokerages. Sneakily trying to get away with a lower payout than what you advertised erodes trust in the listing brokerage profession. Make any substantive modifications clear through updated MLS documentation.
Navigating Compensation Changes Ethically
Given the many intricacies around commission negotiations, it’s wise to view compensation discussions through the lens of professional codes of ethics as well. For REALTORS, Article 3 along with Standard of Practice 3-2 directly govern negotiations cooperating brokers to avoid underhanded practices.
Ultimately, ethics codes aim to balance the interests of buyers, sellers, listing brokers, and cooperating brokers fairly. Your fiduciary obligation is to your client, but win-win solutions exist where no party feels cheated in negotiations. With transparency, consent, and good faith from all sides, altered compensation terms get successfully worked into contract finalization without issue.
What Factors Prompt a Listing Broker to Change Offer of Compensation?
When a listing broker decides to change the offer of compensation, it is often due to the desire to attract more potential buyers and increase the visibility of the asset for remarketing list. By adjusting the commission structure, brokers can entice more agents to show and sell the property.
Alternatives If a Commission Feels Inadequate
Occasionally even if contract negotiations are smooth, a buyer’s broker might still walk away feeling shortchanged if the listing side commission doesn’t reasonably cover their efforts. Buyer’s agents have several professional alternatives if an offered cooperative compensation ends up being inadequate:
- Proactively address it through your initial buyer representation agreement. Define what services you will provide along with establishing a reasonable fee. For example, stating you will seek the MLS commission first, but if that falls below 2.5%, the buyer owes the difference.
- If already in a transaction with unsatisfactory payment, request the seller contribute additional funds as part of the offer terms rather than demanding the listing broker pay more. This allows you to still represent your buyer’s best interests without conflicts of interest muddying the waters.
- As a last resort if no alternatives pan out, have an open conversation with your buyer client explaining why you unfortunately cannot adequately represent them on this particular property. Refer them to another agent friend who you know will loyally fight for their best interests!
Key Takeaways for Listing Brokers
Few real estate topics have as many intricacies as commissions and compensation negotiations. As a listing broker, know that you absolutely maintain flexibility to modify cooperative offers under the right circumstances. Seek win-wins through transparent broker discussions instead of making unilateral decisions. When in doubt, carefully parse MLS and REALTOR association rules in your state along with overarching codes of ethics.
And with that, you should feel empowered in your newfound mastery over the ins and outs of when a listing broker may change an offer of compensation! Exciting times ahead.