Compensation Disclosure

Key Takeaways

• A Compensation Disclosure is the written substitute for a services agreement when a Washington broker serves a buyer solely for commercial real estate.
• The disclosure states the sources and amounts of any compensation the broker has or expects to receive from any party in the transaction.
• It must reach the buyer before the buyer signs an offer, and it must sit in a separate paragraph titled Compensation Disclosure.
• Commercial real estate for this purpose excludes property improved with one single-family unit or with a multifamily structure of four or fewer residential units.

What It Means

Compensation Disclosure is the narrow commercial alternative to a written services agreement in Washington. A real estate firm generally has to have a services agreement with its principal in order to be paid for brokerage services, and that agreement must spell out the amount the principal agrees to pay, any consent to share compensation between firms, and any consent to be paid by more than one party. Commercial buyer work is the exception. A broker rendering brokerage services to a buyer solely for commercial real estate may skip the services agreement and instead put the compensation facts in writing, delivered before the buyer signs an offer. The writing has to state the sources and amounts of any compensation the broker has or expects to receive from any party in that transaction, and it has to appear in its own paragraph titled Compensation Disclosure, either inside the agreement between buyer and seller or in a separate document carrying that title. It is a disclosure about money. It does not decide the agency question, and it does not change the duties that come with Buyer Agency.

How It Works in Washington

The rule sits in chapter 18.86 RCW. RCW 18.86.080(7) says that to receive compensation for rendering real estate brokerage services from any party or firm, a real estate firm must have a services agreement containing the terms of compensation, including the amount the principal agrees to compensate the firm and the principal's consent, if any, to compensation sharing between firms and to compensation of the firm by more than one party. RCW 18.86.020(3) carves out the exception in one sentence: a services agreement is not required when a broker performs real estate brokerage services as a buyer's agent solely for commercial real estate.

RCW 18.86.080(8) supplies the substitute. In lieu of obtaining a services agreement, the broker may disclose in writing to the buyer, before the buyer signs an offer on the commercial property, the sources and amounts of any compensation the broker has or expects to receive from any party in conjunction with the transaction, set forth in a separate paragraph titled Compensation Disclosure in the agreement between the buyer and seller, or in a separate writing with that same title. Commercial real estate takes its meaning from RCW 60.42.005, which excludes property improved with one single-family residential unit or one multifamily structure of four or fewer residential units. Being paid by two sides carries its own duty: RCW 18.85.361(10) makes it grounds for discipline to charge or accept compensation from more than one party in a transaction without first making full disclosure in writing of all the facts to all interested parties.

Example

Elena Marsh represents Cascade Dental Partners, a buyer hunting for a 12,000 square foot medical office building in Tacoma. The building is listed at $2,400,000, and the listing firm has offered to share 2.5 percent of the sale price with the buyer's firm. Elena's firm has also agreed with Cascade on a $5,000 flat fee for the site and lease analysis.

Because the property is commercial and Cascade is the buyer, Elena's firm does not need a Written Services Agreement. Before Cascade signs the offer, Elena delivers a one-page document titled Compensation Disclosure naming both sources and both amounts: 2.5 percent of the price, about $60,000 at the list price, expected from the listing firm through a Commission Split, plus the $5,000 payable by Cascade. Cascade signs the offer the next day at $2,325,000, and the shared portion settles at $58,125. The timing is what the statute cares about. The disclosure went out before the offer was signed, not with the closing statement.

Common Mistakes and Exam Traps

• The exception covers commercial buyer representation only. A residential buyer's broker still needs a written services agreement in order to be paid.
• A fourplex is not commercial real estate under the definition Washington borrows from RCW 60.42.005, so the services agreement rule still applies to it.
• Paying a broker does not create agency. RCW 18.86.080(2) says an agreement to pay or the payment of compensation does not establish an agency relationship with the payer.
• Timing is the tested detail. The disclosure goes to the buyer before the buyer signs an offer, not at closing and not when the commission is collected.