Tuesday, May 7, 2013 View
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Seller-Funded Buyer Brokerage Fees
New Regulation Proposed
Under a new rule proposed by the Louisiana Real Estate Commission, sellers cannot pay buyer brokerage fees out of closing costs, unless there is a written agreement, which must specify the amount to be paid by seller. This proposed rule was approved by the LREC on April 18, 2013, although it will not go into effect until it goes through the formal rulemaking process. This means the rule would have an effective date of September 20, 2013 at the earliest. The actual text of the proposed rule is as follows:
Buyer broker compensation shall not be included as part of closing costs paid by the sellers, unless such compensation is disclosed in a written offer and accepted by the seller, which specifically states the amount of compensation being paid to the licensee.
This new rule applies only in cases where there is a buyer brokerage agreement that obligates buyer to pay a commission to his/her broker. If the buyer with this obligation wants the seller to pay all or part of this commission, the seller must agree to do so in writing, as part of the purchase agreement, with the amount to be paid by seller included in the agreement.
Why Was This Rule Proposed?
This rule was developed in response to complaints from consumers and licensees. These complaints involved transactions in which the seller and seller’s agent were surprised at the closing table to learn that buyer expected the buyer brokerage fee to be paid as a seller-funded closing cost. Typically, these complaints involved purchase agreements that provided that “Seller will pay (up to) $X,000.00 in closing costs on behalf of buyer.” In these agreements, there was no definition of “closing costs” that specified that a buyer’s brokerage fee was included.
Some licensees argued that existing rules prohibited this practice. The relevant provisions of license law provide:
§1455. Causes for censure, suspension, or revocation of license, registration, or certification.
. . .
(22) Failure to advise all parties to a real estate transaction in writing of compensation being received from any source in connection with that real estate transaction.
. . .
(25) Failure of a licensee to inform the buyer and seller at the time an offer is presented that either party may be expected to pay certain costs such as discount points, etc. and the approximate amount of said costs.
On the other hand, defenders of the practice of including buyer brokerage fees as part of a generic seller-funded closing cost provision argued that adequate disclosures were made. The agreement that seller would pay the closing costs was in writing, and the disclosure of the amount of compensation was made on the HUD-1. The new rule, however, makes clear that more specific disclosure is required.
Other Disclosures of Compensation Required
As noted above, the current rule provides that a licensee can be sanctioned for “[f]ailure to advise all parties . . . in writing of compensation being received from any source.” On its face, this rule requires that all licensees have to disclose their compensation to all parties. For example, listing brokers must notify buyers of the compensation provided for in the listing agreement and buyers’ brokers must notify buyers of the cooperative compensation they will receive. Louisiana REALTORS® is concerned that many licensees could be unknowingly in violation of this broad and somewhat vague rule.
Future Rule Changes
At the recommendation of Louisiana REALTORS®, the LREC has agreed to take a closer look at the rules governing disclosure of compensation. The plan is to determine exactly when, how and to whom licensees must disclose compensation. Based upon that determination, new rules will be developed with clear and specific guidance for licensees.
If you have input you would like considered on this issue, please share your thoughts with Scott Johnson at email@example.com.
Red Stick Report is intended to keep Association members abreast of legal developments affecting real estate brokerage and sales, and to supplement educational programs. Questions about this or future newsletters should be addressed to Louisiana REALTORS. Information included in the Red Stick Report should not be construed as specific legal advice, and Louisiana REALTORS strongly encourages its members to consult with their own legal counsel.
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