Paying a Sales Commission When There Is No Sale

Selling a home is a difficult and often disappointing exercise these days. Paying a hefty commission to a real estate agent can add to the frustration – though an agent who sells a house at a reasonable price right now certainly deserves to get paid.

But have you ever considered the possibility that you might have to pay a sales commission even if you do not sell your house?

Most people, I would wager, have never heard of such a thing, yet it probably happens more often than we might guess.

A standard listing agreement proffered by an agent could call for the agent to receive a 6 percent commission when the sale closes. This commission is often split between two agents, when another agent who is working with a potential buyer brings the customer to the listing agent. The listing agent also may split the commission with the brokerage firm with whom the agent is affiliated. Still, agents are often willing to negotiate on the 6 percent commission, dropping the rate in order to get the listing. Many sellers these days realize they can bargain on the rate.

But not many sellers pay attention to the other terms in the listing agreement, particularly the language that governs when the agent is entitled to be paid. We assume agents are paid when a sale closes because, ordinarily, that is how it works. But a standard listing agreement may include language that entitles the agent to be paid as long as the agent has produced a buyer who is “ready, willing and able” to purchase the property. This means that once the seller accepts an offer from the buyer, and once any contingencies (such as the buyer’s ability to get a mortgage) have been satisfied, the agent can count on a payday.

If this is the case, the agent will expect to be paid even if the buyer backs out of the sale and forfeits a deposit. Listing agreements may call for the agent to take a portion (I have seen half) of the forfeited money, up to the amount of the full commission on a sale. Of course, if the agent subsequently finds another buyer, the agent gets another commission – and is thereby paid twice for selling the same house. Owners, who must pay the cost of carrying the property while trying to arrange another sale, should seek to keep any forfeited money.

Things can get even worse if the seller decides, for some reason, to cancel the contract. A Midwest brokerage is currently suing one of our clients, a recently widowed woman in her 70s, for a substantial commission as well as punitive damages following a canceled sale.

The woman listed her property for sale in 2010, a couple of years after her husband died. Ten months later, the brokerage’s agent produced a buyer who made an offer well below the listing price. It was a take-it-or-leave-it bid that was set to expire in 24 hours. The agent told the seller to take it. She did.

She soon had second thoughts, however, and told the agent that she wanted to cancel the contract. It appears that she might have been able to do so without penalty, as the buyer may have failed to satisfy some of the contingencies within the deadlines provided in the contract. But the agent did not tell the seller she could walk away; the agent urged her to stick with the sale.

A few weeks later, our client opted to cancel the contract anyway. She hired an attorney, who negotiated a $65,000 payment to the buyers for not forcing the sale. Then the attorney tried to negotiate a settlement with the brokers. But the brokers demanded most of the commission, and after a few months, they sued to get it. Some of the documents produced in the litigation indicated that while our client was negotiating to cancel the sale, the listing agent communicated with the agent who brought the buyer, urging that the buyer insist the settlement agreement blame the seller for canceling the sale. The listing brokerage “intends to pursue full commission,” the seller’s agent wrote to her counterpart.

We got involved after the suit was filed. We helped our client locate new attorneys to handle the lawsuit and to bring potential counterclaims against the brokerage and the listing agent for failing to advise her that she could have canceled the deal without penalty. In light of the brokerage’s failure to assist its client in canceling the sale and its collusion with the other agent, our client is now demanding that the brokerage drop its suit and pay her a small amount to defray her legal expenses. We do not yet know whether she will bring any claims against the prior attorney for advising her to pay $65,000 to cancel a sale she might not have been required to complete, or for advising her to accept language in the cancellation agreement that put the responsibility on her her for canceling the deal, thus exposing her to the real estate agents’ claims.

One thing is certain: A tired and bereaved woman who simply wanted to sell her residence and get on with her life has been burdened with a lot of stress, grief and expense that could have been avoided.

Everything in a real estate listing agreement is negotiable, not just the commission rate. One of our clients who wanted to sell a home in Florida found a real estate agent and sent me his listing agreement. In this case, I was directly involved because I am a trustee for the seller’s family and, in that role, I had an ownership interest in the property. (Otherwise, since I am not an attorney, negotiating the agreement would have been outside the scope of my practice, though I could have reviewed the document, highlighted questionable terms and advised the client to negotiate or seek legal counsel.)

The Florida agent’s standard listing agreement entitled the agent to be paid for finding a ready, willing and able buyer, and to keep a share of any forfeited deposits. I refused to grant the listing unless the language on deposits was deleted, and unless the agent’s commission became due only upon the closing of a sale. The agent needed a little time to check with his brokerage’s lawyers. A day later, he told me to insert the exact language I wanted.

In less than a month the agent found a buyer, and a month after that, the sale closed and the agent was paid. An easy transaction with a happy ending, right?

Right. But in my experience, even easy transactions have their difficult moments. In this case, an attorney working with the buyer got needlessly obstreperous. I was not too worried, since the buyer really wanted to buy the house and we really wanted to sell it; in such cases a problematic service provider is easily dealt with. It was comforting to know, however, that if the sale happened to fall through, we would not have to worry about a commission claim from a disappointed agent.

For all the grief they get, and despite the fact that commissions can seem disproportionate to the services rendered in selling a house, real estate agents who deliver for their clients deserve to be paid the agreed-upon price for their efforts. There is no need, however, to pay an agent twice for selling a house once, or to pay a sales commission when there is no sale.

Seller beware.

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About Larry M. Elkin 564 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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