What Exactly is a Cooperative Brokerage Agreement?
A cooperative brokerage agreement is created when a real estate broker agrees to cooperate with another broker in representing different parties in the sale of real property. In many cases this involves a listing agent on a brokered sale and a selling agent bringing a buyer to the table. The listing agent represents the property’s seller or homeowner and the selling agent represents the homebuyer.
In past posts we have discussed bilateral and unilateral contracts. A cooperative brokerage agreement is typically a unilateral contract because the listing agent on behalf of the seller , may not represent an equal fiduciary relationship with the selling agent. In a unilateral agreement, one party does not have to provide a mutually binding commitment until the other party meets their duties and obligations under the agreement. The buying agent agrees to find a buyer and assist in attesting that the property is what is represented by the listing agent. The listing agent agrees to allow access to the home for the buying agent to show the homeowner’s property to interested prospects. Many cooperative brokerage agreements provide for payment of co-op commission to the buying agent.
Key Players During Closing
When a cooperative brokerage agreement is executed and the underlying transaction closed, various parties may be involved. The buyer’s broker, seller’s broker and attorneys for the buyer and seller can all play a role in closing the transaction. Other parties, such as title companies and inspectors can also interact with one or more of these closing parties.
In a commercial real estate transaction, the buyer’s broker typically conducts the closing and holds the commission in escrow on behalf of both the buyer and seller. When holding funds in escrow, the broker must make sure that any and all required payments are made. The buyer’s broker is also responsible for making sure that the closing documents are signed and delivered at closing. When one broker, typically the buyer’s broker, closes a commercial real estate transaction, their duties are significantly broader than just those listed above and it is customary for the broker to receive a higher commission.
The seller’s broker is involved in a limited way. While the seller’s broker is typically present at closing so that they can verify the parties and receive payment, their role during closing is usually limited to the delivery of the payment and execution of documents required by the seller.
Attorneys for each party are also typically present at closing. While the attorney is not a party to the contract, they represent the buyer or seller and act in the best interest of their client. The attorney’s job does not include performing the due diligence associated with the transaction. Attorneys typically present a closing statement for signing by the parties and submit a request for payment from funds held in escrow. The attorneys also typically prepare new deeds that will be filed in the appropriate county office following the closing.
Other parties that may be present at closing and assist in the process include inspectors and title companies. Title companies are is responsible for handling title insurance claims and assisting lenders with closing.
Explaining The Closing Process
The closing process on a cooperative brokerage agreement follows the same process as most real estate closings. The buyer and seller of a property have negotiated the buyer’s purchase of a particular property and as a part of that, the seller and the broker who is representing that seller have negotiated what the broker’s commission will be as a part of that cooperative brokerage agreement. The key item that needs to be negotiated by the seller is the amount of commission the seller will pay. Typically, the seller agrees to pay the broker who is representing the seller a specific percentage of the sales price of the property upon closing of the sale.
With the context understood, the closing on a real estate transaction involving a cooperative brokerage agreement will typically follow this basic sequence:
- The buyer and seller through negotiations enter into a binding agreement on the sale of the property that is subject to all types of conditions including financing, inspection, and etc.
- The seller has agreed in the negotiation for the sale of the property to pay 5% commission to his/her broker.
- The buyer has agreed to pay 2% commission to his/her broker for representing her in the transaction.
- The buyer and seller agree to and close the sale.
- The title company sets up an escrow account for the closing. Typically, the earnest money deposit that the buyer placed into the trust account of the real estate agent who is representing the buyer is the initial money that goes into escrow. That creates equity in the account.
- When closing the sale, the current mortgage on the property is paid off and the closing agent (title company) distributes the funds in the following way:
a. First, the closing agent will pay off the existing mortgage on the property.
b. Second, the closing agent will be paid a portion of the sale, but typically under the terms of the closing contract will not receive their full commission. This is because the commission is typically earned and paid out of the sale proceeds.
c. Third, the appropriate entities are paid their fees: the title company, the insurance and the real estate brokers.
7. Finally, the balance of the sale proceeds, if any, are delivered to the seller.
Who Does The Closing?
Typically, the Buyer’s lender has the final say in determining when a loan will close. So the Buyer’s lender will be the party who "closes the deal" by providing a Closing Disclosure (replacing the HUD-1) and has the Buyer execute that document along with a promissory note and deed of trust or mortgage.
This is often contrary to how agents perceive it should be done and agents may have an understanding that the closing agent (also called the escrow agent), usually an attorney, should have the final say and provide the closing documents. In reality, however, the closing agent may complete the document preparation, but the lender generally does and , if the transaction is a non-lender closing, the attorney prepares the documents for the parties to execute and the documents are then exchanged and/or sent to the clerk’s office. So although the attorney may believe that he or she should have control over closing procedure, in actuality, the lender, or sometimes the borrower, has the final authority on closing.
If your Cooperative or Broker-Owner chooses to request modifications to a Closing Disclosure, it is essential that they not just be verbal requests to modify the form, but written. Those requests need to be provided to the lender for review. The lender is then required to honor or reject those requests per RESPA.
Closing Legal Issues to Beware
The legal implications of a cooperative brokerage agreement start to come into play at the end of the process when there is a closing in the transaction. The closing is an important milestone in the life of any real estate contract. While much of the work is done in advance of this happy occasion, it’s important to remember that you’re still not done.
It’s at the closing that the actual transfer of ownership happens, and from the point of view of a real estate broker, it’s where the money for your commission is actually paid out and your fee is protected. In the days before electronic closings and online transfers of funds, all the money exchanged hands in the same room, so it was critically important for agents and their clients to ensure that everything was in order before they left the closing and took possession of their new property.
With the advent of things such as wire transfers, it’s actually become easier than ever to make sure everything closes properly. All you have to do is get the right people in one room at the right time, and then let technology do its job.
So does that make representation of the parties or the transaction in a real estate agreement for cooperative brokerage any less important? By all means no. The legal implications of this part of the process are as important as any other.
Specific legal implications that can arise during the closing of a cooperative brokerage agreement include:
Obviously, the enforcement of a legally binding contract is the most important legal implication to consider, as this document is commonly the basis for all other legal actions, including the collection of a commission.
As previously described, real estate sales contracts and agreements for cooperative brokerage contain a lot of moving pieces and many different ways in which legal disputes can arise. If you plan to represent buyers or sellers in these transactions, or simply to participate in a real estate transaction as an agent, it’s important to understand all of the different potential legal implications that could arise each step of the way.
Tips for the Best Closure
To ensure that the closing process goes smoothly, all parties involved must avoid the following common closing pitfalls associated with the cooperative brokerage agreement:
Timing
Even though New York City co-op transactions can be time-sensitive, the closing date of the sale problem should never be an issue. Unfortunately, some sellers believe they are doing buyers a favor by selling their unit to them prior to the co-op going on the market when, in fact, no one has made them a 6-figure offer. Not only is that untrue, but sellers who do so jeopardize their financial well-being and may actually be acting in bad faith. For each day, week or month that the closing is unnecessarily delayed, the buyer could suffer market losses of many thousands of dollars, in addition to the emotional trauma that results from having built-up expectations unnecessarily only to be (for whatever reason) thwarted in some manner. Remember, on the closing date, banks will want the seller to provide whatever payoffs the bank might be owed on existing mortgages, and if the seller is not able to do it in a timely manner, the entire closing process will be impacted. In many cases, delays cause a backlog with all the back-office people at the banks and it can take many days on top of other types of delays associated with closings.
Documentation
Every party to a transaction has a duty to make available to all of the other parties every document they have in their possession, even though not legally required by law to do so. An example includes stock powers that are needed to transfer the ownership of stock from one person to another . Many times, the seller will forget that his name, among others, is stated somewhere on the stock receipts, and when it turns out that the stock powers could not be located after closing, the attorney title company would have to act in a manner that resembles fraud by requiring a one-million-dollar bond as a substitute for a lost stock power which was never lost in the first place. Think of it like an iceberg, where the bulk of its mass is below the surface. By requiring all documents and verifying all information provided, there will be no surprises later.
Dispute Resolution
The parties to a co-op transaction often forget, or do not care to know, how disputes are resolved. Because of the involvement of institutional financing entities, lenders, banks, etc., these entities are required to be added as parties to the contract, with the right to impose document review fees, and possibly, certification fees. The closing paper trail can also become massive and never-ending. If someone is unhappy with the closing, they may create a situation where they will (most likely, secretly) refuse to sign certain documents that need to be signed following the closing, which can delay the closing process. They may do this because they haven’t received enough money, or believe that something was left undone. Often, especially in litigation, trilogies are used to resolve the dispute or deadlock between any two parties, which are then forwarded to the third party, who then decides (in the case of a real estate board, for example) as to who takes which position in a closing. All of these scenarios can lead to closing delays which, in essence, make everyone unhappy.