At his very first closing, Brooklyn broker Luke Constantino was stunned when the seller’s lawyer told him and his co-broker that the deal would be dead unless they each shaved a point off their commissions. Both were green and accepted, but Constantino, who’s now at RE/MAX Metro in Brooklyn, vowed it would be the last time.
“She had no idea what to do and I didn’t know how to react; it was the blind leading the blind,” he said. “People pull this all the time when they see the costs pile up at the closing and they look at my commission and figure they can take me down a little. But every time they ask, I just smile and say ‘no’ and that’s it.”
He fully supports the state’s new commission escrow act, signed into law in August and taking effect January 1, which says that sellers who do not pay their commissions when the deed is transferred can be forced to deposit the contractually agreed-upon commission, taken from the proceeds of the residential sale, into an escrow account held by the county clerk. Brokers are then able to file a motion for a hearing before an arbitrator, an administrative law judge or the courts to retrieve the money.
The law does nothing to slow down the closing, since there is no ability to place a lien on the property, but it does keep the disputed commission under the care of the state. The new law only applies to sellers’ brokers.
Michael Gianaris, a state assemblyman from Queens, sponsored the bill after the Long Island Board of Realtors convinced him that the problem is endemic to the industry.
“Typically, at closing, the parties are negotiating the final remnants of a deal with all the different costs thrown in and it adds up to a lot of money, so they turn to the brokers and put the onus on them, in effect coercing them to take a lesser commission and claiming that no one will get paid unless they play along,” Gianaris said. “It’s not fair.”
The bill has a long history. In 1982, the state allowed brokers to file an affidavit of entitlement to commission for completed brokerage services. In some instances, this filing process led to payment by the seller, but the law lacked teeth and delinquent sellers got away with keeping all of part of the commission.
“Let’s say a seller moves to France or to Montana. If they don’t pay at the closing, you can forget about tracking the party down and getting payment,” said Steven Spinola, president of the Real Estate Board of New York, who helped shepherd the law’s passage. “Now, if you think something like that may happen to [a broker] between the time the broker earns his or her fee and the closing, the money stays within the jurisdiction and it’s much easier to collect.”
The law combats the related problem of a seller shortchanging the broker at the closing.
“Sometimes the seller hands the broker a check and says if you don’t like it, sue,” said Assemblyman Gianaris.
Faced with this take-it-or-leave it choice, brokers often factor in the cost of litigation and decide to accept lower commissions, said Linda Page, head of the New York State Association of Realtors.
Three years ago, a bill similar to the commission escrow act passed in the state Assembly and Senate, but then-Governor George Pataki vetoed it.
“It was a hard sell,” Assemblyman Gianaris said. “Entrenched interests opposed it.”
The New York State Association of Realtors identified the New York State Bar Association as being particularly skeptical of the new law. To add heft to its lobbying efforts, the state realtors association commissioned a survey that found 36 percent of brokers had lost out on a commission during their careers.
Often, the broker’s nemesis at a closing is the seller’s lawyer.
“They make $800 to $2,500 at a closing and they don’t understand that it normally takes an average of 125 working hours to sell a listing; these days it takes twice that,” Constantino, the Brooklyn broker, said.