Bonuses and Conditions on MLS Offers of Compensation

Ok, so I posted earlier about why I think bonus offers are bad PR for the industry. But it is also unclear to me whether bonus offers can be allowed in MLS.

Policy background

If we take the example of MLSs affiliated with the National Association of REALTORS® (NAR), they should be complying with NAR policy. NAR’s model MLS rules address inter-broker compensation in pretty strict terms: One section provides that “The amount of compensation offered by the listing broker must be indicated either by showing a percentage of the gross selling price or by showing a definite dollar amount.” (At local option, MLSs can permit the compensation to be expressed as a percentage of the ‘net sales price’ instead of the gross.) Another section says “The listing broker shall specify, on each listing filed with the Multiple Listing Service, the compensation offered to other Multiple Listing Service Participants for their services in the sale (or lease) of such listing. Such offers are unconditional except that entitlement to compensation is determined by the cooperating broker’s performance as the procuring cause of the sale (or lease).”

(Note that a listing broker can under NAR policy vary the compensation she offers to other brokers by correspondence outside of MLS – e.g., by sending a letter to a particular broker saying, “Despite what I offer on my listings in MLS, I’m paying you y%.” This practice also deserves a couple posts, but that will have to wait. But even these superseding offers have to come in the form a dollar amount or a percentage of the gross or net selling price.)

The “unconditional” thing is important. It’s not consistent with NAR policy for a listing broker to put a comment on the listing that says, “buyer broker receives compensation only if she shows up at all finish selection conferences with buyer and builder” (as some builders have tried to do). It cannot say “buyer broker must do X and Y to be compensated.” The only condition for the buyer broker’s compensation is whether she is the “procuring cause” of the sale.

The procuring cause standard of NAR is a test that takes into consideration many factors but with no factor being predominant. So, from the procuring cause standpoint, the absence or presence of any one condition is not determinative, and the demands of the listing broker are probably irrelevant.

But most MLSs, even those that aggressively enforce the “no conditions on offers of compensation” strictures, permit brokers to make bonus offers in MLS. Some MLSs have requirements about how bonus offers are expressed and indicated on listing records, but most accept them.

The bonus exception swallows the unconditional rule

The exception swallows the rule. Isn’t a bonus offer just a conditional offer of compensation? And couldn’t the bonus exception to the “no conditions” rule eventually swallow the rule? For example, as a listing broker, I could put a listing in MLS offering $1 of cooperating compensation, but then, in the remarks, say “Cooperating broker will receive compensation equaling y% of the net selling price if she meets the conditions on listing broker’s web site at www.xyzrealty.com/compconditions.htm.” Now, the listing broker can demand all sorts of things from the cooperating broker not contemplated in the MLS policies.

It’s hard to imagine the variety of creative ways that listing brokers might describe cooperating brokers’ obligations in the previous example. The probability is that there will be many poorly drafted statements of performance requirements. Arbitration panels will be confronted with the need to interpret those statements; and panels will not be able to rely on the (relatively) well-understood procuring cause standard.

I’m also worried about listing brokers using bonus offers to disadvantage new brokerage models. I’ve already seen one case where a listing broker has said in MLS: “Coop compensation is 1%; if cooperating broker does A & B, compensation is 2.5%.” This would be prohibited in this form, but would it be permitted if the listing broker characterized the additional 1.5% as a “bonus”? What if other brokers pick up on the practice (because these offers are all published in MLS)? Will brokers who tend not to do A&B (despite the fact they are procuring cause of their transactions) end up effectively boycotted by listing brokers? I don’t really want to think about it…

To the extent you think compensation through MLS is important, allowing it to be muddled in this way without some clear guidance as to how these provisions should be interpreted is a bad idea.

What do you think?

-Brian