Necessary Components of a Real Estate Team Agreement: Case Studies and Examples

Understanding the Real Estate Team Agreement

As real estate industry experts recognize and understand, the real estate business has evolved from individual practitioners operating in a silo, into a cooperative profession of multimember groups working together toward real estate specific goals. Not surprisingly, most of the operators in the real estate industry have organized themselves into real estate teams to better compete in their respective markets.
Altering this highly competitive landscape further, during the last ten years or so, large real estate companies have sought to exploit the rise of real estate teams, by hiring top real estate team leaders, promising them that teaming up with the large company would supercharge the success of their real estate team, far beyond what those leaders could accomplish on their own. The lure of better commission splits, economies of scale generated by shared resources, and increased public exposure, goaded the top team leaders to move their teams to the large real estate companies. In the end, real estate team members benefitted, as major real estate companies’ efforts led to more business of larger real estate teams. It is not just leaders, however, who are attracted to a real estate team . Talented individuals at every level are drawn to teams, both large ones and small, because our profession demands that we do more, know more, produce more and lead more than ever before… and that is exactly what real estate teams provide.
Much like in other industries, real estate team members have discovered that teaming can produce outsized rewards. However, in the rush to put together a team, most real estate teams have neglected to develop an explicit written agreement between themselves, the real estate team members, and the real estate team leader. Instead, most real estate teams agree to work together without a formal written agreement. Yet, without a formal written real estate team agreements, many real estate teams expose themselves to unnecessary risks. For instance, real estate teams which have not bothered to develop explicit written real estate team agreements often face disputes over the commission splits, inaccurate distribution of commission proceeds, difficulties over ownership of leads, client lists, information in databases or CRMs, and the improper solicitation of clients. Many times without a written real estate team agreement, ownership of the business and the intellectual property go unresolved and result in value draining disputes.

Core Components of a Real Estate Team Agreement

One of the main reasons for drafting a real estate team agreement is to define the roles and responsibilities of each team member. Nothing brings more heartache and stress than misunderstanding over what is expected from each party. Remember, most disputes are about money, or at least some form of economic loss. Therefore, how profits or losses are split must be clearly defined. Parties can negotiate a number of ways to allocate revenues and expenses:

• An even split among all team members.
• An even split if less than 3 team members.
• Commission tier splits based on production.
• Charge each team member for all expenses incurred in that quarter and evenly distribute to remaining team members.
• Each team member pays their own expenses and receives full commission income.
• Each team member transfers 50% of their commission income to the broker and the broker splits with the team based on previously agreed compensation grid.
• One or more team members may receive a differential salary based on seniority or hardship to incentivize them to stay with the team, etc.
• A percentage of gross sales or net profit is set aside to pay for overhead and central services such as: lead generation, branding, marketing, enhancing public image and PR, reputation management, CRM, technology and training, and administrative support.

Aside from compensation, termination is a key topic for real estate teams to discuss upfront. Most team members are loyal by nature, so there will almost always be a dispute around terminating team member (or the team leader). Typically, there are three termination options in addition to the usual termination for cause or termination on the execution of agreement’s expiration date:
o Periodically Scheduled Termination:
o Freedom to Leave:
o Early Termination for Performance – 10% Exit Fee:
Some teams will even add a lock-in period range of 6 months to 2 years, in which no one can exit the team without pre-approval. Termination can also be grounded upon a specific event, such as:
o Antitrust Violation or Indictment
o Loss of License, Expired License, Restricted Licensure
o Termination of Listing Agreements
o Bankruptcy
o Disabilities
o Death
o No Sales in 30 Days
o Chronic Absence such as Vacation, Illness, Elected Office
o Departure from the Region
o Departure of Spouse from the Region
o New Baby
o Grieving
Finally, the parties should also consider Dispute Resolution provisions. Disputes may arise from the interpretation and enforcement of the Agreement. Establishing a workable and favorable resolution process is crucial to maintaining the team dynamic. Dispute provisions typically required mediation, and in some cases arbitration. Depending on the size and significance of the team members, some may prefer mediation directly with their Principal Broker. Standard remedy for breach provisions usually apply, and define the parties’ ability to recover attorney’s fees.

Sample Framework for a Real Estate Team Agreement

A typical real estate team agreement includes the following sections: (i) introduction; (ii) team roles and compensation; (iii) procedures; (iv) authority; (v) transition; and (vi) transition period. The substantive provisions of the agreement are often set forth in a concise manner with a short paragraph for each section.
I. Introductory Paragraph
This paragraph explains why the Team Members have decided to work as a team. For example, the pair of Realtors may have concluded that they can grow their business better by working as a team rather than as sole practitioners. The Team Members will often explain that they have complementary skills and a common vision and mission.

II. Team Roles and Compensation
In the "Team Roles and Compensation" section, the team members typically spell out the specific responsibilities and expectations that each team member will be able to rely on when listing or selling a property. For example, one member may state that as the buyer’s agent, he or she will be responsible for……
The actual content of the main body of the agreement will depend on how teams actually team to work on a transaction. Some teams rely on one member to be the initial contact person with a new client. Others rely on both members to meet with a new client together. In each case, the Team Members are seeking to clearly delineate their roles and responsibilities if not their compensation.
Sometimes the sides divide the commission evenly. Sometimes the team leader receives a greater share because he or she secures the bulk of the leads. Conversely, sometimes the team leader will step aside during the transaction in order that the team member can work directly with the customer. In these cases, the team member will often receive a larger share because he or she is actually doing the majority of the work.
There are a multitude of ways that the team can allocate the commission but it is recommended that the allocation number be spelled out as accurately as possible.

III. Procedures
This section of the team agreement is often used to specify the procedures that the Team Members will use to oversee and supervise the team. Below are some examples of procedures which might be covered in this section:
a. Supervision and Delegation — Under this section, the team members will often specify their roles in terms of overseeing the work done by one another. This section is important because often one team member may actually supervise the majority of the procedures while the other responds to leads and/or meetings. In the event of a dispute, the agreement will lay out the delegation of responsibility and procedures.
b. Escrow Process — The escrow process is important to clearly delineate in the team agreement. This ensures that the escrow instructions and assume the management of the escrow proceeds are properly accounted for. This section allows the team to specify who will be responsible for opening the escrow; what happens to the escrow if one team member steps out and the other dies; what will happen to the escrow if the relationship is terminated prior to closing of the transaction as well as who in the team has the final say in how the proceeds will be distributed upon closing.
c. Closing — This procedure section will allow the team to specify which of the individual members will be responsible for organizing the closing by working directly with the escrow officer. As with the other procedures, each member has a right to know who has the final say in the process. For example, if the communication is coming from the buyer’s agent, the seller’s agent wants to know that she will be copied on those emails. As such, it becomes clear who has the responsibility for contacting the escrow officer and forming the closing documents.
d. Marketing — The marketing of a home is perhaps the most important aspect of a Real Estate Agent’s job. It is important for the team to set out how they will market the property. Examples include:
e. Lead Generation — Lead generation refers to attracting buyers and sellers to the team. A good deal of the discussion in this section of the agreement revolves around the source or sources of the majority of the leads.
f. Client File Management — Successful Real Estate Agent teams appreciate the value of documenting their efforts and maintaining a file of the paperwork generated during the marketing process. Team members should also discuss how they will protect their data base. This is particularly important where two or more agents share leads from open houses, advertising or other sources.
g. Allowable Disbursements — Team members should explain what they will be allowed to take as expenses. For example: Multiple Listing Service fees; dues to National Associations; car payments if they are making the payments at all, etc.
h. Modification and Termination — The Team Members will almost certainly want to describe how long the arrangement will last. For example, the agreement may run from January 1, 2013, to December 31, 2014. In addition, the agreement will describe how either party can terminate the agreement. For example, if one member is not generating enough leads or business, or is unhappy with the quality of the work the other member is doing, the unhappy party can give notice one month in advance, in writing, to terminate.

IV. Authority
The "Authority" provision of the agreement will describe how each party to the agreement plans to get the buyer or seller’s agreement on agency disclosures.

V. Transition
Here, the parties will specify what will occur as they transition away from the agreement. For example, the parties may agree to allowing the using the same signage once a listing is transferred or the same information on websites or in print materials. For instance, the agreement may require the use of the same logo.

VI. Transition Period
The transition period provision is designed to cover what happens after the team dissolves. For example, the team members may agree that they will not be competing for the same clients for three months after dissolution or the team members cannot use the same logos for a year.

Legal Essentials of Team Agreements

Language in a team agreement can significantly impact the interpretation, validity, and enforcement of a contract. An overly broad or vague non-competition clause could be interpreted as restricting an individual’s ability to sell properties or obtain future listings after an agreement terminates. While team members ordinarily have a fiduciary duty to one another (as long as they are not independent contractors), some state agency rules require team members to have a written agency agreement. In California, for instance, an agency agreement is required to delineate duties. A duty of loyalty applies to every team member – even independent contractors – and so having a written agreement will clarify individuals’ roles and otherwise cover topics necessary to satisfy agency requirements.
A real estate agent may be a team leader or team member with other individuals and still comply with state agency rules/regulations. Some state agency rules clarify that a team member may sign a listing agreement and receive commission from a listing, while others specifically note that it is only the broker that can sign a listing agreement. There may be state agency rules that require a team member to have their own license and that the name of the brokerage firm be listed in advertisements. There may be other state agency rules regarding potential misleading advertising. There may be restrictions on using a fictitious business name for advertising, and a buyer may have the right to know the name of the team creating a fictitious business name to advertise the team. Team members and the team leader generally share a duty of loyalty to the client and sometimes the duties owed can overlap. There may be additional duties owed to a buyer or seller based on specific agency agreements. State agency rules governing teams generally require written agreements and disclosure of team members when soliciting clients. State agency rules on teams vary on what constitutes misleading advertising and what is prohibited or non-disclosed advertising.

Tailoring the Agreement for Your Team

Before jumping into the specifics of these aspects of a real estate team agreement, the first thing you need to do is to customize the agreement to fit your team. The various elements in these agreements are not one size fits all, so read through this list and think about the way in which your real estate team operates. Make notes of the things that are most likely to be an issue for you, and learn how to either create a strategy to address the concerns or work with your partners to negotiate the necessary changes to make things fair for everyone.
Be flexible. In any agreement, flexibility is important in order to build teams that are not only effective, but are also fun to be a part of. For example, a partner may want to change the way that an attendance policy is enforced. Being flexible with the policy and working with the other partners to come up with a solution to the problem will often allow everyone to achieve their goals in the long-run.
Negotiate. Although you hope that you and your partners agree before you even sit down at the bargaining table , this is rarely the case. Instead, it is important to go in prepared to negotiate the terms of the contract to arrive at the desired outcome. Most importantly, make sure you listen to the other party and consider what you have heard before making a decision.
Keep aligned with team goals. Most real estate teams have well-defined goals that are understood and agreed upon by all partners. So, as you sit down to create an agreement that outlines the way that the team will function in the future, remember those goals and what everyone is hoping to achieve as a group. Use that as the foundation upon which your team agreement is built, and it will enjoy a level of success that could have only been dreamed of in the beginning.

Frequent Pitfalls When Creating Team Agreements

One of the most common mistakes teams make when drafting a team agreement is failing to document the agreement at all. It is not uncommon for team members to work together for a period of time without ever documenting their agreement in writing. Then when relationships go south, or team members start to wonder what is expected of them, you are left trying to recall all the verbal discussions and emails that lead to you working together in the first place. For some situations, this may be okay. But, if anything goes wrong, you will have no way to enforce your team’s agreement on how commissions are split, or any other aspect of the relationship. A team that hopes to continue in the long term should document their agreement in writing.
Another common pitfall is failing to craft the right team agreement for the right team. For example, different agreements make sense for different business structures (LLC, corp, sole proprietor, etc.). If you are in a team arrangement but still functioning as two or more independent contractors, then a 1099 relationship agreement makes sense. But if you intend to operate through an LLC that will only pay out money to employees, you may need a different type of agreement, one that explains the terms of your employment as well as how commissions are split. Not every form of agreement is appropriate for every type of relationship, and the wrong agreement can have real consequences on how your business functions and how your taxes are filed.
A third mistake is being vague on how commission splits are determined. Sometimes teams fail to create an accurate accounting on how commissions from transactions are calculated. If the agreement is vague, there will be more room for dispute as to the formula by which commissions were calculated, if you do not specify how commissions from each transaction are calculated, you leave room for an argument (e.g., how to deal with a sale of a luxury condo where the listing agent obtained a buyer in addition). To combat this, every team agreement should be very specific and detail, in writing, the specific formula by which commissions are calculated.

Procedure for Reviewing and Modifying the Agreement

Due to the ever-changing nature of the real estate industry and careers, an agreement with your team members should be reviewed and updated as needed. If the salespersons start to drift further apart in their development plans and long term goals, or if difficulties arise in the working relationship, the team will need to come together to evaluate the agreement. There may also be specific changes that need to be made over time to adapt to new agency regulations or the competitive marketplace. A periodic review will help identify issues to address so that team members can continue to work together toward mutual goals.
While I recommend that teams should revisit the agreement on an annual basis to consider whether changes should be made, there are some circumstances when immediate changes may be warranted . For example, if a team member plans to leave the team, teams should address the fact that the departing member will no longer be entitled to compensation after the date of departure. Likewise, if one team member is promoted or starts new development plans, consideration should be given to adjusting the compensation terms accordingly, which could mean a compensation increase for the member, compensation change for other members, or an adjustment to the bonus structure. These are just a few examples where changes may need to be made outside of the normal review cycle.
Ultimately, if the team members are unhappy with the terms of the agreement, it is advisable to revisit the agreement or create a new document. Transparency and open communication are essential to a successful real estate team.