Real estate professionals cite growth in discounters and real estate technologies, a booming real estate market and an increase in competition among brokers as being among the contributors to a surge in low commissions and uneven commission-sharing in some markets.
Uneven splits are an aspect of the changing structure of commissions in real estate, with the traditional but unofficial 6 percent commission shared by listing agent and buy-side agent sinking to a low of about 5.12 percent in 2002 and 2003, according to industry research by Real Trends.
The results of an informal Inman News survey on uneven commission splits, tallied today, found that 77 percent of respondents see “a growing practice of uneven commission splits between listing agents and buyers’ agents.”
While uneven splits in commissions between the buy-side and listing-side brokers are legal, the manner in which these splits are implemented can make them illegal. Also, Realtors have a professional responsibility to disclose their own practices related to uneven commission splits.
Laurie Janik, general counsel for the National Association of Realtors, said brokers must make independent business decisions about commissions to avoid illegal splits.
“Two or more brokers cannot say, ‘How much are you going to offer?'” she said. For example, the law does not allow broker “A” and broker “B” to jointly set a low share of the commission split for broker “C” in order to drive company “C” out of the market.
Uneven splits in commission “are going to be treated as lawful unless they are the product of some type of conspiracy between competitors, or in the unique circumstance where a company that is imposing an adverse split may have some monopoly power in the market where they operate,” Steve Squeri, general counsel for RE/MAX International, explained.
It is also legally questionable, he said, whether listing agents who offer a lopsided commission split are somehow breaching their duties to the seller.
“The argument would be that you’re not acting in the best interest of the (seller). That has yet to be completely tested,” Squeri said.
Janik said that as a rule “so long as (brokers) make independent business decisions they’re fine.” She added that the issue of illegal commission splits “is not an issue that the courts have really dealt with that much.”
Take an Inman Pulse survey on uneven commission splits.
Even so, the National Association of Realtors amended its Standards of Practice in recent years to provide for disclosure relating to compensation amounts.
Thomas O. Gorman, a lawyer who represented Realty One in commission-split litigation with RE/MAX, also said uneven commission splits are typically legal unless there is a conspiracy to harm a particular company. Gorman said data gathered for that litigation did not uncover any rampant trends with uneven commission splits.
“It was very difficult to collect the data on it,” though the information that did surface showed that “generally the splits were pretty even,” he said.
There were a few instances where the differential in commission splits was “fairly significant,” he said. The uneven splits were typically in favor of the listing agent and seldom gave the listing agent more than 70 percent of the total commission.
Perhaps the great regulator of uneven splits is the fact that real estate companies “are at once cooperators with each other but at the same time competitors,” Gorman said. Companies that impose uneven splits might expect retaliation from competitors.
Squeri said national data collected about uneven splits showed this practice was typically limited to a single company, and the practice typically lasted no longer than three to six months.
“Firms generally don’t do it because the market doesn’t allow them to do it,” he said.
In the RE/MAX vs. Realty One and Smythe, Cramer Co. case, which went to trial in April 2000, RE/MAX alleged that brokers associated with RE/MAX’s franchisees received lower commissions on split-commission transactions, and that this practice was “designed to drive RE/MAX out of business in Northern Ohio by deterring its agents from doing business there,” according to court documents.
The splits were typically 70/30 or 75/25 in favor of Realty One and Smythe, Cramer, court documents state, and the practice began in 1987.
The jury initially “returned a verdict finding that Realty One and Smythe, Cramer had illegally agreed to restrain trade,” court documents state, though a mistrial was declared after the jury began deliberations to consider additional elements of RE/MAX’s claims. RE/MAX settled the case with Smythe, Cramer in July. The settlement process with Realty One became contentious, though those parties eventually settled for $6.67 million.
RE/MAX collected about $10 million in total from its two competitors related to the settlement, according to court testimony. In November 2001 the U.S. Court of Appeals in Cleveland affirmed the settlement agreement, which limited Realty One’s ability to set adverse splits for RE/MAX franchises.
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