Show Me The Money
Whenever I’m out teaching classes, I always notice that I have rapt attention during any discussion of commissions, rebates, inducements, etc. After all, everyone likes to get paid for their hard work. So I thought I’d spend some time talking about compensation related issues for real estate professionals.
First tip, make sure you always, and I mean always, collect commissions through the brokerage and not individually. This means do not accept a promissory note from your seller client that obligates the seller to pay you directly, outside closing. It also means do not run a property management practice on your own, separate from your brokerage. The Ohio Real Estate Commission treats infractions relating to compensation very seriously, so make it a practice to always receive any compensation through the brokerage.
What is an inducement? In Ohio license law, an inducement is something that a real estate licensee offers to compel a client to enter into a purchase agreement. Some I’ve seen include: I’ll replace the windows for you, I’ll rebate a portion of my commission to you, and I’ll pay for the sump pump repair. You get the idea. All of these things constitute something of value, or a concession, you’re providing to a principal in the transaction in order to get the deal done. Inducements are legal, but are required to be disclosed in the sales contract or addendum. This way all parties to the transaction and any lenders, appraisers or other professions are informed of the inducement.
How is a rebate different than an inducement? A rebate is something that occurs after the transaction and can also be an inducement. For example, if an agent promises to rebate a portion of their commission to the seller to get the deal done at a purchase price acceptable to the buyer, such is both an inducement and a rebate. Like inducements, rebates are legal in Ohio, however they must be disclosed as part of the transaction. Oftentimes I see the disclosure either in the sales contract (which is required if it is an inducement) or on the settlement statement.
Brokers have an obligation to pay their agents “within a reasonable time” of receipt of the commission. This has traditionally been interpreted to mean 3 days. Specifically, the broker has to render to the salesperson an accounting and remit to the salesperson the salesperson’s earned share.
I’ll write separately about the commercial broker lien, as that is bit topic all by itself, however for purposes of this article a commercial broker in some circumstances has a right to a lien on an owner’s property for unpaid commissions.
Finally it is an essential business practice to get all agreements with clients in writing. Such makes sure there are no disagreements over compensation and also may assist if you find it necessary to engage in collection efforts. The common thread through all of the compensation issues discussed above is disclosure. Taking care to make sure inducements, rebates and commission agreements are in writing is an important step in a successful transaction .. that includes getting paid for all of your hard work!