Real Estate Salesperson · Real estate practice · 8 min read
Commissions, MLS and Trust Accounts
- Explain how real estate brokerage commissions are earned, negotiated, and distributed under different types of listing agreements.
- Describe the function of the Multiple Listing Service (MLS), its listing submission rules, and broker cooperation guidelines.
- Identify the legal and professional requirements for handling client trust funds, avoiding commingling and conversion, and resolving escrow disputes.
Earning and Negotiating Brokerage Commissions
A real estate broker generally earns a commission by producing a ready, willing, and able buyer on the terms agreed to by the seller, subject to the terms of the listing agreement and applicable state law. A ready, willing, and able buyer is legally defined as a purchaser who is prepared to buy on the agreed-upon terms and possesses both the legal and financial capability to complete the closing. In many transactions, earning a commission depends on establishing procuring cause, which is an uninterrupted chain of events initiated by a broker that leads to a successful transaction. While procuring cause points to the broker who set the transaction in motion, a completed closing is not always required to establish it.
A broker's entitlement to compensation is governed by the specific compensation agreement signed by the parties and applicable state law. While written listing and buyer representation agreements are common practice across the industry, specific writing requirements vary from state to state. Under an open listing agreement, a broker must actively prove that they were the procuring cause of the transaction to earn a commission. In contrast, under an exclusive right-to-sell listing, the listing broker generally earns a commission if the property sells during the listing term, regardless of who finds the buyer, subject to the agreement's terms. Under an exclusive agency listing, the listing broker earns a commission if that broker or another broker finds the buyer; however, the listing broker is not entitled to a commission if the seller finds the buyer independently without broker assistance.
A seller who accepts an offer is expected to move forward in good faith. If a seller breaches a binding purchase contract with a ready, willing, and able buyer, the listing broker may still be entitled to the agreed commission, subject to the listing agreement and state law. For ordinary brokerage transactions, no standard commission rate is set by law; the principal and broker negotiate compensation, subject to applicable law and any special rules governing the transaction. Furthermore, federal antitrust laws strictly prohibit competing brokers or boards of Realtors from engaging in price-fixing of commission rates.
| Listing Agreement Type | Who Earns Commission If Broker Procures Buyer? | Who Earns Commission If Seller Sells Without Broker Assistance? |
|---|---|---|
| Open Listing | Procuring cause broker earns commission | No commission owed to broker |
| Exclusive Agency Listing | Listing broker earns commission | No commission owed to listing broker |
| Exclusive Right-to-Sell Listing | Listing broker earns commission | Listing broker generally earns commission |
Common mistakes
- Assuming that earnest money is a mandatory legal requirement to create a valid, binding purchase contract; it is not legally required, though it serves as evidence of buyer good faith.
- Believing that an affiliated salesperson can directly accept compensation, referral fees, or bonuses from clients, customers, or cooperating brokers, rather than having all payments processed through their supervising broker.
- Confusing commingling with conversion; commingling is the improper mixing of client funds with brokerage funds, whereas conversion is the actual spending or unauthorized use of entrusted client funds.
- Thinking that submitting a listing to the MLS automatically offers a commission split to cooperating brokers; compensation is not offered by MLS submission alone and must be arranged outside the MLS.
Key points
- A broker generally earns a commission by producing a ready, willing, and able buyer, and commission entitlement is strictly governed by the listing agreement and applicable state law.
- Commission rates and fee structures are always negotiable between the principal and the broker; federal antitrust laws prohibit price-fixing among competing brokers or boards of Realtors.
- A salesperson must receive all compensation for licensed activities exclusively through their supervising broker and cannot accept payments directly from clients, customers, or cooperating brokers.
- Entering a listing in an MLS does not itself offer compensation to cooperating brokers, and participating brokers must follow listing deadlines, accuracy rules, and Clear Cooperation policies.
- Trust funds must be handled separately from brokerage operating funds as state law requires, and salespersons must promptly deliver received funds to their supervising broker or an authorized escrow holder as directed and permitted by state law.
- Commingling is the improper mixing of trust funds with operating funds, while conversion is the unauthorized use or misappropriation of funds held for others; both can lead to license discipline, and misappropriation may also lead to criminal charges.
- When earnest money disputes between buyer and seller cannot be resolved, the broker holding the funds may file an interpleader action to deposit the funds with the court.
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