Focus on fundamentals: Clients, communication, compliance

For those who have seen the movie Almost Famous, directed by Cameron Crowe, there’s a great scene that I have always liked, where Kate Hudson’s character says, with her hands in the air, “It’s all happening!” That seems like an appropriate statement if you work in the real estate field right now.

With a verdict rendered in the Sitzer | Burnett case, and while other suits, both pending and new, are taking shape across the country, the real estate industry seems to be going through a long-awaited shake-up, or ruthless shakedown, depending on where you stand on the underlying real estate commission issues involved. Accordingly, some real estate licensees are ready for change, while others feel uncertain or even apprehensive about what the future of real estate might hold. 

Although the onslaught of litigation is far from settled or resolved, along with the potential changes or consequences that they might bring, there are some agents and brokers who are not waiting around to find out what is going to happen; they are asking important questions, adopting new business protocols and procedures, and engaging in different types of conversations or scripts with their clients.

In other words, some real estate licensees, brokerage firms and organizations are using the current climate as an opportunity to simply evolve and prove their value as real estate professionals.

Putting competing conversations and arguments aside for the moment, I thought it might be useful to highlight a more straightforward narrative on the topic of real estate commissions. This storyline, which should not be new or complicated, is grounded in the simplicity of regulatory compliance, and in my opinion, might serve as a natural steward in these uncertain times.

Thankfully, when it comes to regulatory compliance in real estate, there is not a whole lot of room or tolerance for different interpretations. That is to say, we can actually agree on the rules and perhaps by rehashing them, agents and brokers might reboot their outlook, along with their performance of licensed duties, for a good cause.  

As a real estate compliance consultant, and former special investigator for the California Department of Real Estate, which is the state department responsible for the enforcement of real estate law, a lot of core principles come to mind when you talk about real estate commissions and fees.

Of course, if I am wearing my investigator hat, I would be first concerned about whether someone is properly licensed and authorized to receive a commission, or I might follow the money to ensure that the responsible broker properly disbursed and/or controlled the payment of commission to their “licensed” agents.  

However, with the heated discussions taking place, in the courtroom, news and in my office with brokerage clients, I tend to lean on, or take refuge in, two particular areas of compliance, namely, the negotiability of real estate commissions and disclosure of commissions and compensation.

In my opinion, these two topics and related compliance create an essential landscape for licensees when discussing real estate commissions with their clients, and can be achieved through clear and effective communication. Let me explain.

Real estate commissions are negotiable 

When it comes to selling or buying residential real estate in California, licensees must disclose in writing to their principals that real estate commissions are not fixed by law and are negotiable between the parties. In other words, there is no standard commission rate. Other states, like Texas and New York, for example, and I am sure many others, enforce similar rules. 

As such, any listing agreements with sellers, buyer representation agreements with buyers or any commission agreements concerning residential property, must contain a written disclosure covering the negotiability of real estate commissions and fees. Along these lines, such agreements should never contain any pre-printed commission rates or terms, as again, these terms are negotiable.

It’s worth noting that I have observed the use of this language in other commission agreements in connection with non-residential property, too, as it seems to be a best practice. As a real estate licensee, it is important to make sure you are using compliant forms and contracts, approved by your responsible broker, and in accordance with the laws that govern your licensed activity.  

But aside from the actual paper that you use, there is a critical compliance point that is worthy of discussion: As an agent, you have a duty to explain the documents that you present to your client. In this case, you should convey that commission fees are negotiable rather than simply inform your client what your fee is and move on to the next document. Communication regarding negotiability of real estate commission is important, and as you might imagine, is more crucial now than ever before.  

Also, because of the wave of commission lawsuits, you might anticipate more questions or dialogue on this subject with your principals. As a result, don’t shy away from this exchange, but instead, have some talking points geared up to best address any questions or concerns. In this fashion, I would also suggest having your value propositions in order which articulate the expertise, guidance, service and track record that you bring to the table. 

The other thing to keep in mind is that real estate transaction documents are often being sent to, and signed by, clients electronically. While this is incredibly convenient and efficient in moving a transaction along, an agent’s duties do not (and cannot) change.

That is, an agent should still be discussing and explaining the documents they present to their clients for signature. If you are a compliant-minded real estate professional, hopefully, you are nodding your head in agreement. 

Moving on, let’s discuss the disclosure of commission and compensation, and what this area of compliance requires of real estate professionals.

Disclosure of real estate commissions

Let’s call discussions about “commissions being negotiable” as the opener, and “disclosure of real estate commissions,” the main act. In California, a real estate broker is required to disclose the commissions or compensation that they receive in connection with licensed real estate activity to their principal.

It makes sense, right? Of course you have to disclose what you are going to be paid in exchange for your services. Now, while this usually happens between sellers and their listing brokers, vis-à-vis listing agreements, in my experience, the same cannot always be said for buyers and their brokers. 

To be clear, excluding those instances where a buyer representation agreement actually exists between a buyer and their broker which spells out this information, I have not come across too many real estate transactions (and I have reviewed a lot of them) where brokers, representing buyers, disclosed their commissions (paid by the sellers) to their clients. Historically, in my experience, this particular disclosure is not common.

Part of the problem might stem from the fact that because homesellers typically pay for the buyer agent’s commission in a residential transaction, and not the buyers themselves, the broker believes they do not have an obligation to disclose it.

Whatever the reason for, or misconception regarding, this absent disclosure, I think the California Department of Real Estate set the record straight in their Summer 2019 Real Estate Bulletin when they wrote,

“Compensation for licensees can come in many forms, typically including commissions, escrow fees, property management fees, loan origination, and loan servicing fees. Compensation, however, can also take different forms and can be received from other parties apart from the licensee’s direct clients, and should be disclosed appropriately.”

To quickly digress, I wrote an article about the disclosure of buy-side commissions last year and there were definitely a few readers who did not agree with me.  Coincidentally, I was not surprised by the mixed reactions that I received, as I have personally encountered resistance when discussing this issue with some brokers.

Some licensees have argued that they have no duty to disclose that information, and others have simply retorted that they are not comfortable with having those conversations with their clients.

Notably, even when I have discussed this issue with licensed real estate attorneys in the past, many of them seem to think that it’s never been an “enforced” issue, which might explain the widespread failure, particularly by brokers representing buyers, to disclose a licensee’s compensation to their client. Even if that is or was true, I think we can agree that this issue is officially on the radars of consumers, too. 

Here’s the thing: Rather than exploring or dwelling on the reasons why the disclosure of real estate commissions has been lacking (which I will defer to others to opine on), I think there is more value in evaluating how you are doing business and determining if any changes need to be made. Obviously, the time to get compliant is now and I believe brokers and agents, no matter which party they represent, will be more diligent and transparent with clients when discussing real estate commissions.

Right now, there are conversations buzzing about, and new scripts in the works, to help make this part of real estate more transparent going forward. Real estate brokers, as well as organizations, are creating new forms, disclosures and, quite frankly, an updated mindset, to make sure that principals, sellers and buyers alike, are fully aware of how real estate commissions work, how they will be paid and by whom, and preparing themselves for discussions that they may have never experienced before.

For me though, it all comes back to being a fiduciary. When you act as an agent on behalf of another in the course of licensed real estate activity, you owe the highest standard of care to your principal.  For those reasons, you are prohibited from just handing your client forms to sign without explanation, or skipping over the compensation discussion because it might not be comfortable.

It’s your job to be a professional. In fact, it is the law; an agent is actually bound by and subject to statutory duties, and owes a duty of utmost faith, honesty, loyalty and full disclosure to their client. Therefore communication with your client about real estate commissions, and the disclosure of the same, falls under the scope of these duties.

Communication is key

For some of you, this article merely reinforces what you have already been doing as a licensed real estate professional. But, for others, this piece might help nudge you in the right direction at the right time.

Fortunately, clear and effective communication with your client can get you where you need to be. In particular, communications with clients (both potential and actual) should be by spoken word and in writing.

In writing this piece, I reached out to Wayne Bell, former Real Estate Commissioner of the California Department of Real Estate. As always, he provided a thoughtful and instructive message with some solid advice to licensees: 

“Real estate licensees have played, and will undoubtedly continue to perform, a crucial role in facilitating successful residential purchase/sales transactions. While the current, nascent, and — most likely — future lawsuits will have impacts on the real estate industry that are not currently known, real estate licensees are always well advised to effectively educate their clients and fully communicate and explain the value that is being provided for the proposed commission/compensation to be earned.

As part of that ‘value proposition’ instruction, licensees can and should (as applicable) emphasize their special market knowledge and expertise, discuss their negotiation skills and prior bargaining successes, outline the skills and tools they will use to effectively market properties, quantify their value with case studies and success stories, and be completely transparent on the proposed commission/compensation structure.

Some licensees might even decide to forego negotiating commission rates based on the prices of homes and agree with their clients on fees for services, such as preparing and presenting an offer(s), reviewing title documents, drafting correspondence, and the like. The key for real estate licensees is to provide full transparency by communicating and explaining the ‘valuable’ services that will be performed, and then striking an acceptable and mutually agreeable compensation structure and agreement.”

In closing, because there is a lot going on in real estate right now and it’s easy to get bogged down by the unknown, it might be helpful to stay focused on the fundamentals. In this real estate environment, constructive and transparent communication with clients may be key to staying compliant, proving your value and achieving longevity in this business.

As a consultant helping brokers and agents do right by the law, and right by their clients, I believe doubling down on compliance might help you wade through the uncertainty of the many commission lawsuits bombarding the industry.