When Does a Broker Earn Their Commission?

A broker’s commission is a fee for services, typically in a transaction like a real estate sale. This compensation, often a percentage of the transaction’s value, is how brokers earn income. While the concept seems straightforward, the precise timing of when a commission is “earned” can involve complexities. It depends on the brokerage agreement and transaction circumstances. Understanding these nuances is important for anyone involved in a brokered deal, as the earning of a commission does not always align with its actual payment.

The Core Concept of Earning Commission

A commission is earned when a broker fulfills their agreement obligations, often by completing a transaction. This “earning” is distinct from actual payment, which may occur later or be subject to additional contract conditions. For real estate agents, commissions typically range between 5% and 6% of the final sale price, though these rates are negotiable.

The brokerage agreement’s terms are important in determining when a commission is earned. This agreement details the broker’s responsibilities and compensation structure. While a broker may perform extensive work, such as marketing a property or identifying potential buyers, their right to a commission crystallizes upon meeting the contractual conditions. The compensation model for brokers is usually commission-based, but can also include flat fees or hourly rates, depending on the agreement.

Real estate agents receive payment only after the transaction closes. This means efforts like showing properties, marketing listings, and negotiating deals are performed without upfront payment. Once the sale is finalized, the commission is disbursed from the closing proceeds and then distributed between the agents and their respective brokerages. This commission-based structure incentivizes agents to work diligently towards a successful transaction, as their income is directly tied to the outcome.

Impact of Different Brokerage Agreements

The type of brokerage agreement influences when a broker earns commission. An exclusive right to sell agreement grants the broker exclusive marketing rights for a specified period. Under this agreement, the broker earns a commission if the property sells during the contract term, regardless of who secures the buyer, even if the seller finds the buyer independently. This agreement provides strong protection for the broker, ensuring compensation for their marketing efforts.

In contrast, an exclusive agency agreement offers more flexibility to the seller. While one broker has exclusive selling rights, the seller can find a buyer independently without owing commission. If the broker, or another broker through the Multiple Listing Service (MLS), procures the buyer, the listing broker earns the commission. However, if the seller’s independent efforts lead to a sale, no commission is due to the broker.

An open listing is a non-exclusive contract where a seller can engage multiple brokers simultaneously. With this agreement, only the broker who successfully brings a ready, willing, and able buyer, or finds the desired property, receives a commission. If the client sells or buys independently, they are not obligated to pay any commission. Real estate agents may be less motivated by open listings due to increased competition and the possibility of not earning a commission.

Buyer representation agreements also dictate commission earning. These agreements clarify the broker’s role in representing the buyer and can be exclusive or non-exclusive. An exclusive right to represent agreement means the buyer works with only one agent, while a non-exclusive agreement allows the buyer to work with multiple agents. The terms within these agreements specify how and when the buyer’s agent will be compensated, often through a portion of the seller-paid commission.

Key Conditions for Commission Entitlement

Beyond the agreement type, specific conditions must be met for a broker to earn commission. One concept is procuring cause, referring to the broker’s efforts as the direct and uninterrupted cause of the sale. If multiple agents are involved, determining procuring cause can be complex, often involving arbitration to identify which agent’s actions directly led to the buyer’s decision to purchase. The agent must initiate negotiations and remain involved to be considered the procuring cause.

Another condition is presenting a ready, willing, and able buyer or seller. A “ready, willing, and able” buyer has the desire, financial capacity, and legal preparedness to purchase a property under the seller’s specified terms. This means they are prepared to sign a binding contract, have the necessary financial resources, and are committed to proceeding with the purchase. If a broker presents such a buyer, they may earn their commission, even if the seller later declines to proceed or withdraws the property.

While commission may be “earned” earlier based on these conditions, many agreements stipulate that actual payment is contingent upon the closing of the transaction. This means that even if a broker has found a ready, willing, and able buyer and is deemed the procuring cause, they may not receive payment until the property sale is finalized. This distinction between earning and payment is important, as contractual clauses often tie the disbursement of funds to the successful completion of the deal.

Circumstances Affecting Commission Payment

Even after a commission is earned according to the agreement, circumstances can affect its payment. If a deal falls through after a contract is signed, the payment of commission becomes a complex issue. If the sale fails due to reasons beyond the control of the buyer, seller, or broker, the broker may still be entitled to their commission, especially if they fulfilled their contractual obligations by finding a ready, willing, and able buyer. However, many listing agreements specify that commission is only payable upon the successful close of escrow.

Issues such as financing falling through, inspection failures, or a party defaulting on the contract can prevent a closing. In such cases, the broker’s right to payment depends on the precise wording of the agreement. Some agreements may allow for a portion of a forfeited deposit to be paid to the broker if the buyer breaches the contract. Brokers often anticipate continuing to market the property and receive their commission upon a successful subsequent sale, rather than pursuing a claim on a failed transaction.

A breach of contract by a party can also impact commission payment. If a seller refuses to sell after an offer is accepted or a buyer defaults, the broker may still have a claim for their commission. Real estate agents can sue for breach of contract if their client fails to uphold their end of the agreement, particularly if the agent performed their duties and the transaction completed without commission payment. The enforceability of commission agreements in such disputes often hinges on the clarity of the terms and conditions outlined in the contract.

Agreements may include conditions precedent to payment, meaning specific events must occur before the commission is paid. While the commission may be earned earlier, the contract might explicitly state that payment is contingent on the successful closing of the deal, transfer of title, or other defined milestones. These conditions ensure that the broker’s compensation is tied to the ultimate success of the transaction, reflecting the inherent risk in a commission-based profession.