All Compensation Now Must Be Disclosed

Dear Forms Guy: I don’t know, but I’ve been told there’s some new form out there that we have to use whenever we get paid a bonus. Is that right? Sincerely, Lefty

Dear Lefty: The Real Estate Commission changed its rule regarding the disclosure of brokerage fees and other compensation earned by a real estate agent during a real estate transaction. These changes were prompted by publicized allegations of certain buyer agents failing to disclose to their clients that they would receive incentives from a home builder when their clients purchased new homes. NCAR developed a disclosure form to help agents and firms comply with the revised rule. The name of the form is “Confirmation of Compensation” (form 770). There is also a set of Guidelines (form 770G) to aid in completing the form.

Lefty: What’s the new rule say?

Forms Guy: The revised rule requires real estate agents in sales transactions to make “full and timely disclosure” to their clients of “any compensation, incentive, bonus, rebate, or other valuable consideration” that the agent may expect to receive from a third-party, and to confirm that disclosure in writing before the client makes or accepts an offer to buy or sell.

Lefty: So it’s not limited to disclosure of bonuses?

Forms Guy: That’s right, Lefty.

Lefty: What does “full and timely” disclosure mean?

Forms Guy: The rule says that “full disclosure shall include a description of the compensation, incentive, bonus, rebate or other consideration, including its value and the identity of the person or party by whom it will or may be paid.”

Lefty: Okay, suppose I’m representing a buyer and we use one of the standard residential buyer agency agreement forms (standard forms 201 and 203). My buyer is interested in a property listed in the MLS. Would the new rule require me to disclose to my buyer-client the amount that the listing agent is offering cooperating agents and disclose it in writing to my client before she makes an offer on the property?

Forms Guy: That would depend, Lefty. If the buyer agency agreement indicates that you will be entitled to a commission of X% of the purchase price of the property, and you determine that the listing firm is offering cooperative compensation of X% of the sales price, you would not be required to make further disclosure regarding the commission you would receive if the buyer purchases the property. In other words, the buyer agency agreement itself serves as the written disclosure. On the other hand, if the listing agent is offering cooperating agents a commission of X% plus 1, you would be required to disclose to your buyer client any compensation above X% that you would expect to receive if the buyer purchases the property and to confirm such disclosure in writing before they make an offer.

Lefty: Okay, here’s another question. Suppose a builder has an incentive program in which agents who sell three of the builder’s homes in a specified period of time will receive a free trip to a Caribbean island upon the closing of the third sale. Say I’m aware of the program and show one of the builder’s properties to my buyer client. If the buyer wants to make an offer on the home, would I be required to disclose the incentive to the buyer before they make the offer, even though I won’t get the trip unless I sell two more of builder’s properties during the specified time frame?

Forms Guy: Yes, you must disclose the potential compensation to all three buyers or potential buyers. Note that the rule would also require you to disclose the value of the trip.

Lefty: Will the client have to sign the form?

Forms Guy: The rule does not require the client to sign the written confirmation of the incentive. However, it is strongly suggested that the client sign the form to clearly show evidence that the agent has complied with the disclosure obligation.

Lefty: But what if they won’t sign?

Forms Guy: If a client refuses to acknowledge receipt of the form, the agent should note on the agent’s copy of the form the date and time that the agent gave the form to the client and that the client refused to sign it, and the agent should send it to the client in a manner that provides proof it was sent.

Lefty: If they don’t sign, does that mean I can’t get the incentive?

Forms Guy: No, but you do need to get the client’s consent to receive any extra compensation in the first place. Both the Exclusive and Non-Exclusive Buyer Agency Agreement forms authorize the firm to receive additional compensation, etc. If additional compensation is offered, the new rule now requires agents to disclose the actual value of the compensation and confirm it in writing before the client makes or accepts an offer to buy or sell.