A Lieb School student recently took a final exam for our Conflicts of Interest ONLINE course and explained how commission rates are set by the Department of State.

They are NOT.

In fact, the Department of State says the following about commission rates:

Yesterday, Chris Matthews’ article “Real estate agents may be colluding to rip you off” was published by Fortune while citing to a paper published by the National Bureau of Economic Research and authored by Panle Jia Barwick, Parag A. Pathak, and Maisy Wong.

According to the authors of the cited article, Conflicts of Interest and the Realtor Commission Puzzle,

“[t]hese adverse outcomes reflect decreased willingness of buyers' agents to intermediate low commission properties (steering) rather than heterogeneous seller preferences or reduced effort of listing agents.”

So, in English, it’s not that seller’s agents’ efforts are adversely affected by lower commissions, but instead, that buyer’s agents, who are generally compensated by seller’s agents, are less likely to bring buyers to properties where they are offered a lower percentage for procuring.

As an industry, we need to make sellers capable of gauging the quality of what they’re buying; to make informed decisions as to commission payments.

Seller’s agents need to explain that buyer’s agents and/or broker’s agents are money driven and will steer their buyers to the properties where they are compensated at a higher level (as stated in the study).


To illustrate, if a seller is paying a broker 6% one cannot deduce that the cooperating broker, who procures, will always get 3% for their efforts. Instead, the cooperating broker will get whatever percentage that is listed on the cooperating brokerage listing (i.e., Stratus) agreement by the seller’s agent (each region in New York has a different cooperating brokerage agreement and therefore this blog’s suggestion does not hold true everywhere).

1. The commission percentage to pay the seller’s agent for merely listing the property and negotiating for the seller;
2. The commission percentage to pay the seller’s agent if such agent individually lists and procures the purchaser (i.e., direct deal);
3. The commission percentage to pay the seller’s agent if such agent lists, and the commission percentage to pay a colleague within the same brokerage if such colleague procures the buyer  (i.e., in-house deal; this will be one total commission number for both the listing and procuring because the brokerage and not the salespersons is paid the commission);
4. The commission percentage to pay the cooperating broker where the seller’s agent lists only, but another brokerage procures the buyer while such cooperating broker is negotiating for the interests of the seller (i.e., broker’s agent);
5. The commission percentage to pay the cooperating broker where the seller’s agent lists only, but another brokerage procures the buyer while such cooperating broker is negotiating for the interests of the buyer (i.e., buyer’s agent)

The Appellate Court recently decided Harris v. Clancy, a case where the Court ruled that a seller had the burden to prove that a broker had "agreed to forgo a commission" or the Court stated that one would be implied by the Court regardless of the nonexistence of a brokerage agreement.

The Court found support in precedent that held "[a]bsent an agreement not to pay a commission, where a broker has performed as a broker and the seller has accepted the broker's services, an agreement to pay a commission will be implied even in the absence of an agreement regarding a commission ..., and the court will be charged with determining the amount of the commission".

So brokers, while you should always have a brokerage agreement with your client or co-broker to prove how much you are owed, its really your client or co-broker who benefits the most from the agreement, not you. Remember this case the next time that your client or co-broker resists signing your brokerage agreement; then, you may want to share this case with them and say that you are only asking them to sign your agreement to help them out.

Many look with envy at the good fortune of the broker, who reaps a large pot from simply introducing the parties to the deal, but to those who do not live in his shoes, think this:

"[A] broker is never entitled to commissions for unsuccessful efforts.

The risk of failure is wholly his.

The reward comes only with his success.

That is the plain contract and contemplation of the parties.

The broker may devote his time and labor, and expend his money with ever so much of devotion to the interests of his employer, and yet if he fails, if without effecting an agreement or accomplishing a bargain, he abandons the effort, or his authority is fairly and in good faith terminated, he gains no right to commissions.

He loses the labor and effort which was staked upon success.

And in such event it matters not that after his failure, and the termination of his agency, what he has done proves of use and benefit to the principal.

In a multitude of cases that must necessarily result.

He may have introduced to each other parties who otherwise would have never met; he may have created impressions which, under later and more favorable circumstances, naturally lead to and materially assist in the consummation of a sale; he may have planted the very seeds from which others reap the harvest; but all that gives him no claim.

It was part of his risk that failing himself, not successful in fulfilling his obligation, others might be left to some extent to avail themselves of the fruit of his labors."

This is the life of a broker as articulated by NY's Highest Court in the case of Sibbald v. Bethlehem Iron Co. in 1881, which remains true to this day. A broker deserves everything he gets as he must live in an all or nothing world. Here is to the broker who makes the deals happen!

In opposition, the online travel companies argued that the City was taxing “a service fee under the guise of a tax on hotel rent” and therefore the tax was improper. The Court explained that the online travel companies were incorrect. The Court stated: “[u]nder the statute, the City may tax a ‘rent or charge,’ and it may collect the tax from a hotel ‘owner . . . or . . . person entitled to be paid the rent or charge’".  Further, “the City may tax any service fee that is a ‘condition of occupancy.’”

Aren’t brokerage fees on landlord / tenant a condition of occupancy? Maybe, but maybe not. Doesn’t a condition mean that its failure prevents the result? Can a broker prevent the result? No, therein is the difference between brokerage companies and travel sites. Real estate brokers often are cut out of deals and cannot prevent occupancy in order to get paid, but instead have a claim for commission that is separate from occupancy. In fact, no Lis Pendens is available to brokers and a mechanic’s lien is only available for a lease with a term of more than 3 years for non-residential property.

However, doesn’t Airbnb do just the same as Expedia? So, will companies like Expedia try to level the playing field next by lobbying that this tax is imposed on Airbnb as well? Right now, the cost of doing business for Airbnb just got cheaper and they now have a strategic financial advantage in the City of New York. What happens next is tantalizing.