A real estate regulatory agency in New Jersey has advised that it is unlawful for brokers to set a commission-sharing policy on property listings that retaliates against a discount competitor.
The New Jersey Real Estate Commission announced in a notice today that state code “prohibits variations in commission splits that are ‘punitive or retaliatory’ in response to another broker taking listings at a lower gross commission rate than that charged by the broker offering the modified commission split.” This notice elaborates on a Nov. 29 commission advisory issued in response to inquiries that the commission received.
On Dec. 2, the New Jersey Association of Realtors trade group had sent a written request to the state Real Estate Commission in an effort to delay implementation of the commission’s advisory notice until a public hearing could be held, according to a notice posted at the commission’s Web site.
Marshall McKnight, a spokesman for the New Jersey Department of Banking and Insurance, said that there hasn’t yet been a determination as to whether the state’s Real Estate Commission will hold a public hearing on the commission splits issue. The commission’s advisories are based on guidance from the state Attorney General’s Office, McKnight also said, and violators of real estate commission policies can be subject to fines up to $5,000 for the first offense, and possible suspension or revocation of a real estate license.
Inman News earlier reported that real estate discounter Foxtons, which has a U.S. headquarters in New Jersey, cried foul to state officials about the commission practices of its competitors. While Foxtons had listed properties for a total commission of 3 percent of the sale price and offered 1 percent commission to the brokerage that represented a buyer in the transaction, some brokers began to offer Foxtons 1 percent of a larger gross commission for bringing a buyer to the table. Foxtons officials claimed that this was an unfair and retaliatory commission practice, as it would receive a smaller share of the gross commission in such deals.
The notices by the state Real Estate Commission appear to support Foxtons’ position on the issue. Officials at Foxtons did not immediately respond to calls by Inman News seeking comment about the advisories.
There are several other examples across the country of real estate practices and policies that have led to clashes between traditional, full-service real estate brokerage companies and discount real estate companies, and federal antitrust enforcement agencies have taken several actions this year in an effort to stamp out potentially anticompetitive industry practices and regulations.
Joyce Andreoli, association executive for the New Jersey Association of Realtors, said that the New Jersey Real Estate Commission had denied the group’s requests to delay the advisory notice, which is currently in effect.
She said that the association has sent another letter to the commission seeking clarification of the original advisory notice, and still has questions about how real estate brokers should comply with the policy, given that “the full commission amount is not something that is generally known in the real estate brokerage industry.”
The Nov. 29 New Jersey Real Estate Commission advisory states, “Licensees may not discriminate or retaliate against a licensee who takes listings at lower commission rates. The specific intent of the anti-discrimination provision in the commission’s regulation was and is to prohibit licensees from using discriminatory tactics to retaliate against other brokers who were taking listings at lower commission rates.”
In a typical real estate transaction, the broker that lists a property for sale will establish a total commission — usually a percentage of the sale price — that will compensate real estate professionals who participate in the transaction. The listing broker typically shares a percentage of this total commission with a broker representing a buyer in that transaction.
Also in its Nov. 29 advisory, the New Jersey Real Estate Commission offers an example of a listing broker that offers 1 percent of a 3 percent gross commission to a cooperating broker. The other broker, in this example, “frequently takes listings at a 6 percent commission rate.” If that cooperating broker, as a result, adjusts its own property listings compensation practices so that it offers the discount company 1 percent of a 6 percent gross commission to cooperate in a transaction, the advisory states that this is “inconsistent with the regulation.”
That is because 1 percent of a total 6 percent commission is not an equivalent commission share as 1 percent of a total 3 percent commission, according to the notice.
“The commission also notes that any discriminatory action would also be violative of a licensee’s obligation to fully cooperate with all other licensees. Such action may … also constitute a violation of a licensee’s fiduciary obligations to protect and promote the interests of his client,” the advisory states.
While “punitive or retaliatory” commission practices against lower-commission companies violate New Jersey real estate law, the commission states in its advisory today that “commission splits may be varied for other lawful reasons and further provides that if a listing broker varies its commission split policy with any selling broker, the listing broker must maintain a file that contains an explanation for the variation and a statement of who made the decision to vary the commission split.”
Also, the latest advisory states that the reasons given for these variations in commission splits “should be consistent with law, and with licensees’ fiduciary duties to their clients and their obligation to cooperate with other licensees.”
Then-Foxtons CEO Van Davis told Inman News in June that the company “received letters from more than 80 Realtors in New Jersey outlining their intention to offer discriminatory commission splits to our agents. Each of the letters states, in similar wording, that the listing agents will only pay a Foxtons broker a 1 percent commission on the sale of any of their listings. We believe these activities are designed to limit competition and ultimately to preserve the high commission structure that brokers have operated with for decades.”
Barry S. Goodman, general counsel for the New Jersey Association of Realtors, wrote in a May article in the trade group’s magazine that listing brokers can independently decide what share of a commission to give to specific companies that participate in the other side of the real estate transaction. “If you decide to vary the commission you will be offering in the (multiple-listing service) for a specific broker, you should advise that broker by sending him/her a letter. The letter should solely be between you and the other broker so as to avoid any implication that you are encouraging others to make the same decision (remember, no group boycott),” Goodman wrote.
Also, Goodman stated that real estate brokers who adopt such practices “must inform the seller for each listing you take that your policy is to provide a lower commission to that broker and that this policy may limit the number of potential buyers who will submit an offer for the property.”
Derek Eisenberg, president of Continental Real Estate Group in Hackensack, N.J., who helped launch a flat-fee discount real estate network, said he received a letter from another real estate company representative stating that the company planned to offer the same compensation to him for its listings that Eisenberg’s company offered to the other brokerage.
Eisenberg said it was an interesting letter, considering that his company doesn’t have a standard formula for compensating cooperating brokers, and leaves that decision up to sellers that it works with. “I cooperate differently on all of my listings,” he said. “I don’t have a standard package. Which one of my listings are you going to base it on? They’re all different,” he said.
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