Agent Fails to Explain Commission Reduction Properly: Faces Discipline
The Real Estate Council of Ontario just looked at a case involving a proposed commission reduction.
The Agent offered an inadequate but self-serving explanation to the clients and later faced disciplinary action.
Robert Zimmerman knew his Buyers for over 30 years as friends. He just acted on the purchase of a property and received the co-operating portion of the commission in the amount of $65,000.00. His Buyers now needed to sell, so they were hoping for some additional consideration. He listed their property at $799,000 with a 3.5% total commission, offering the co-operation Brokerage 2.5% out of that amount.
As good fortune would have it, there were three interested purchasers:
Represented by two agents at Robert’s office, Bill and Mary, $811,000.00 conditional upon financing and home inspection,
A real estate agent, Charles acting on behalf of himself, personally, $795,000.00 firm, and indicated that was the final Offer, and he would not participate in a bidding war,
Independent purchaser, David, having selected Robert as his “agent” (open house), offering $821,000.00 firm.
The Bidding War
Having presented their Offer for Buyer #1, as they were leaving, Mary advised Zimmerman that their client would be willing to raise the amount of their offer if needed, but probably not prepared to waive the conditions.
Charles was told by Zimmerman that the sellers would not be accepting or countering as they already had better offers on the table.
Zimmerman did not have this offer from his buyer at the time he arranged the offer presentation for the other two buyers. (Note: this took place in 2014 prior to Bill 55)
Having presented the $821,000.00 Offer, Zimmerman and Brokerage ABC were engaged in a multiple representation scenario, as he was representing the interests of both the sellers and a potential buyer.
Zimmerman made it clear to everyone (the other agents and his own clients) that he was representing the buyer behind the $821,000.00 Offer.
Pre-Selection of Bids Conversation
The Sellers wanted to negotiate a lower commission on the sale, if Zimmerman ‘double-ended’ the deal, but, Zimmerman advised them that the rules prevented him from adjusting this commission downwards in a competing offer scenario.
The Sellers indicated in their complaint that if they have been advised that competing offers do not preclude the option of requesting a commission reduction, they would have requested that Zimmerman reduce his commission if he also ‘double-ended’ the transaction.
Also, when Bob and Mary inquired whether Zimmerman would be reducing the total commission payable by the sellers if Zimmerman’s buyer’s offer was accepted, he told them that he could not cut his commission because it was a competing offer scenario.
The Sellers were pleased with the amount of the $821,000.00 Offer since it was $22,000.00 over their asking price. They were also pleased with the fact that it did not have conditions. They accepted the $821,000.00 Offer that evening.
RECO Discipline Decision
The decision dated 6 March 2016, included the agreement as follows:
1 Contrary to sections 4, 5, 9 and 37(1) of the Code of Ethics, Zimmerman advised the Complainant and relative that he was precluded from reducing his commission in a competing offer scenario.
It is agreed that Zimmerman breached the following sections of the Code of Ethics:
4 A registrant shall promote and protect the best interests of the registrant’s clients.
Conscientious and Competent Service, Etc.
5 A registrant shall provide conscientious service to the registrant’s clients and customers and shall demonstrate reasonable knowledge, skill, judgment and competence in providing those services.
9 A registrant shall not indicate to any person, directly or indirectly, that commissions or other remuneration are fixed or approved by the administrative authority, any government authority, or any real estate board or real estate association.
37(1) A registrant shall not knowingly make an inaccurate representation in respect of a trade in real estate.
Zimmerman was assessed a fine in the amount of $6,000.00.
There was no obligation to attend any courses for further education, which is often the case when the rules are not properly utilized.
So, what did Zimmerman do wrong?
He referred to non-existent rules which prevented his further negotiations with his Sellers.
He simply should have explained things properly, and he would have been fine. Unfortunately, he decided to use the “weasel way out” and blame the legislation (the rules). People are not going to argue with that. It’s done. It’s over. It’s not worth talking about anymore!
There was nothing wrong with indicating to Bob and Mary that there was no commission reduction since it was a competing offer situation. That was a fact. If he did reduce the commission, then he would have to tell them. The reason is to allow them and Charles to be on an equal playing field.
But, here’s the trick:
· Charles was invited with the 2.5% commission,
· Bob and Mary were invited with the 2.5% commission,
· Had they not been present, then we would not have a bidding war or a competing Offer situation,
· If Robert reduces his own co-operating commission to 1%, then he will have to tell the others,
· In order to compete, Bob, Mary and Charles would need to consider reducing their commissions to 1%, as well,
· That step at 11:00 pm is unfair,
· It is the competition which has bid up the price to $821,000.00, no conditions,
· That’s worth the additional 1.5% (actually, $12,315.00),
· The Buyers’ agents should not be asked to reduce their commissions to 1% from 2.5% at this late date, when had this been posted on MLS earlier in the afternoon, there may not have been a bidding war at all.
In essence, the analogy is “eating your cake and having it too”.
Robert needed to explain that ahead of time. That explanation should have taken place when the listing was signed. No commission reductions whatsoever in the case of competing offers.
Here is the relevant section from the Code of Ethics:
Agreements relating to commission
25. (1) If a brokerage has a seller as a client and an agreement between the brokerage and the seller contains terms that relate to a commission or other remuneration and that may affect whether an offer to buy is accepted, the brokerage shall disclose the existence of and the details of those terms to any person who makes a written offer to buy, at the earliest practicable opportunity and before any offer is accepted.
(2) Subsection (1) applies, with necessary modifications, to a brokerage that has a seller as a customer, if the brokerage and the seller have an agreement that provides for the brokerage to receive written offers to buy.
The requirement is to disclose the reduction to the Agents of the other two Buyers. It does not state that you can’t reduce the amount. If you do, then you must tell.
However, it is important for the Sellers to understand and appreciate that there should be no reduction and that is to their advantage. They need to know and understand this ahead of time. Their INFORMED CONSENT is a requirement. That was the missing step in this case.
Note: As a rule, I use fictitious names. The actual case is published on RECO’s website and is available to the public. For educational purposes, the names of the parties really don’t have any bearing. If you need to quote the case, you will have to obtain the proper legal citation.
Brian Madigan LL.B., Broker