What the final episode in this series contributes to the discussion: See how the broker and their agent engineer a greater likelihood of a successful closing — and increase transaction transparency — by offsetting the fee earned on a sale by the amount of the seller’s cost of third-party investigative reports.

In this new video series, we break down how to increase transparency and mitigate risk, ensuring a smoother transaction for both buyers and sellers — plus the agents who represent them.

Reasonable likelihood of producing a sufficient fee

Implicitly, the dollar amount of the fee a broker seeks for marketing a property, locating a buyer and closing a sale is related to the:

  • sales price the seller will accept for their property compared to the sales price of comparable properties;
  • time, effort and money spent marketing a like-type property and advising the seller; and
  • probability of locating a buyer willing to acquire the property under current market conditions.

When a property appears likely to sell within the representation, an agent is in position to decide whether to enter into a representation agreement with a seller. Simply: Does a reasonable likelihood exist for producing a sufficient fee?

Consider a broker who requires agents to attach a marketing package cost sheet to all seller representation agreements entered into with sellers. By including the addendum, the seller does (or does not) authorize their agent to order out reports needed to market the property and screen prospective buyers. [See RPI Form 102 and 107]

The broker requires inclusion of a cost sheet addendum to increase the productivity of their agents. Property reports might add administrative tasks for a broker, but they reduce the time spent:

  • locating a buyer;
  • negotiating a purchase agreement; and
  • closing a sale of the property.[See RPI Form 107]

As part of the agent’s negotiations to set the fee, the broker instructs the agent to ask for and encourage the seller to authorize the ordering of reports necessary for marketing and risk reduction.

Offsetting broker fees — an economic inducement

As an economic inducement for full disclosure when employed by a seller, the broker and their agent may offer to offset the fee earned on a sale by the amount of the seller’s cost of the reports. Also avoided is the unsavory habit of a broker using their own funds to pay the cost of reports, or any corrective work or staging undertaken on the seller’s property to make it marketable.

Brokers render services. They are not in the business of advancing costs to finance seller-clients in an effort to “buy” an employment to sell a property. [See RPI Form 107 §3.3]

Alternatively, the broker may offer a reduction in the broker fee by, say, one-quarter of one percent to induce the seller to pay for reports ordered for marketing at inception of the employment. The reduced fee reflects the greater likelihood of a successful closing of a sale, devoid of complications before or after closing.

Thus, agreeing to a lesser fee amount may be considered an offset of:

  • the reduced time and effort necessary to market the property for sale;
  • the reduced risk of loss of the time, talent and money expended by the broker and their agent; and
  • a more effective marketing plan, which, on average, produces more transactions annually for the broker.

Further, a transparent sales transaction rewards a broker and their agent with goodwill in current and future transactions.

Requesting authority from the seller

A seller who refuses to pay for property reports is advised that a prudent, knowledgeable buyer or buyer agent orders out reports when the seller does not produce them. In turn, the buyer inevitably uses the reports against the seller as a “punch list” to demand completion of repairs and replacements before the buyer closes escrow.

It is worth noting that none of the items listed on the advance cost sheet are, in any way, part of the broker’s overhead for maintaining a brokerage office. All the costs listed, when incurred, are related solely to establishing the condition of the seller’s property, which then is marketed and sold by the agent.

The costs of reports on property conditions are not incurred by the seller as compensation for the agent’s services. They are incurred to assure buyers the seller’s property is what it is. Thus, the costs are properly the obligation of the seller and are not to be advanced by the seller broker or their agent.

Further, the reports on property conditions sought to assist in the marketing are generally the same reports the seller needs to provide when a buyer is located. However, the agent needs the reports when they post the availability of the property for sale. [Jue v. Smiser (1994) 23 CA4th 312]

When and how to pay

A seller may choose when and how to pay for the cost of the reports when filling out the advance cost sheet. The seller may opt to pay the charges directly to the third-party provider once billed. Here, the broker coordinates the arrangements for payment with the provider. The seller’s check is thus payable to and delivered directly to the provider, not to the broker.

Funds advanced by a client payable directly to a broker belong to the client. As money held for a client, the broker places all advance cost deposits the broker or their agent receives in a trust account in the broker’s name as trustee. [Calif. Business and Professions Code §10146]

When a check is handed to the seller broker for delivery to the provider, the check constitutes trust funds. As trust funds, the broker or their agent makes an entry in the trust fund ledger maintained by the broker. [See RPI Form 107 §4.1]

Alternatively, the seller may deposit the estimated cost of the reports with the broker by making the check payable directly to the broker, called advance costs. The broker then pays the charges for reports from the deposit when billed by the provider. [See RPI Form 107 §3]

A broker who fails to promptly place advance deposits payable to the broker in their trust account or who later fails to deliver proper trust account statements to the client, is presumed to be guilty of embezzlement. [Burch v. Argus Properties, Inc. (1979) 92 CA3d 128; Bus & P C §10146]