What Is a Real Estate Team Agreement?
A real estate team agreement is a contract or formal understanding between two or more agents or broker-owners who decide to work together as a team. In such agreements, the duties and responsibilities of each team member are defined. While the formality of these agreements can vary from informal understandings to a legal contract , it is important that a team agreement clearly delineates what each team member is required to do for the team and speaks to how income generated by the team will be shared. Real estate teams can be comprised of the broker-owner(s) of a real estate office and other brokers and associates associated with that office, or a team can be formed by unrelated brokers and associates from different real estate offices. Regardless of the composition of the team, a written agreement should be entered into when the team members first begin working together.
Fundamental Components of a Real Estate Team Agreement
Every real estate team should have a written team agreement that sets out the rights, responsibilities and obligations of the individual team members. The basic components are: (i) who is responsible for what (including duties and scope of authority); (ii) the division of commissions (separate from the MLS commission agreements with buyers and sellers); (iii) joint venture (a formal tax and liability risk mitigation tool and the most popular arrangement beyond independent contractor relationships); (iv) termination; (v) remedies for breach; (vi) resolution of disputes; and, (vii) non-compete agreements. Most real estate teams fall into one of 3 categories: (a) independent contractor arrangements, where each team member remains independently associated with their broker and has a separate agreement, including the MLS agreement where commissions are paid; (b) joint venture agreement, where the team agrees to function as a separate business entity; or (c) joint venture/independent contractor hybrid, where some team members are mutually bound, others opt out as independent contractors. While each type has its pros and cons, each arrangement should require a written agreement. Joint venture arrangements are almost always pre-tax "pass through entities" and have substantial benefits including: (1) protection of individual team members from liability arising from the acts or omissions of other team members; (2) tax benefits – all earnings, losses, deductions and tax credits of the joint venture pass through to each individual team member’s personal tax returns resulting in substantial advantages over traditional independent contractor relationships and permitting relatively simple estate planning (e.g., avoidance of probate); (3) lower income taxes as a result of deductions available to "business owners"; and (4) creating greater business value as each team member builds an independent and recognizable saleable brand.
If there is any issue on which team members might disagree it is on the split of the commissions. The most commonly used formula is as follows: Total commission is calculated on the gross commission before deductions and all commissions due to the involved brokerage(s). The full earnings and expenses for the year are calculated and the net profit/loss is allocated to each member. The team must be sure to document and define all expenses (especially those members pay) to assure that the agreement is validated by the IRS, which will closely scrutinize its terms and operations at tax time. Finally, the agreement should be drafted to provide that any earnings accrued under the agreement and not distributed to a team member during the term of the agreement yet paid after termination, will be paid to the appropriate team member.
Legal Aspects of a Real Estate Team Agreement
Legal Issues to Consider
In addition to the terms related to the substance of the business relationship, a Real Estate Team Agreement must be crafted with an eye to ensuring compliance with applicable real estate licensing laws and regulations. Some states, such as Texas, impose strict rules and requirements regarding the permissible use of team names, use of a broker’s name by sponsored sales agents, use and maintenance of a common website and other advertising; locations where teams can conduct business, including open houses; and restrictions on use of team members’ names, photographs, likenesses, and biographies in marketing materials, standards of team member performance and livability requirements for team office space.
The manner in which the team is formed, organized and operated may have to comply with applicable rules regarding anti-competitive behavior. State and federal antitrust laws prohibit practices broadly defined as price fixing, group boycotts and inappropriate allocation of customers, products or services.
Real estate team agreements should address liability issues, including indemnification provisions and requirements for the maintenance of errors and omission insurance for the teams; applicable state licensure requirements and a representation that all team members are duly licensed and qualifying brokers and that they will comply with all state and federal disclosure requirements applicable to the forms of business they operate.
Team leaders should also remind team members of their ethical responsibilities, including those obligations imposed by applicable agency and fiduciary duties and their obligations under the National Association of Realtors Code of Ethics.
Advantages of a Real Estate Team Agreement Template
In the world of real estate, time is of the essence. When agreements are left to verbal anecdotes or handwritten notes on a napkin, many things can go wrong and lead to costly disputes. Rather than start from scratch and spend hours drafting an agreement from the ground up, it can be much more practical to save a template of a real estate team agreement to save time in the process. A template can be adjusted as necessary later to serve a specific purpose or to account for particular terms that may not have been included in your initial template .
A template will expedite the process of developing a new agreement, sometimes even saving time. A template will hold the core components of most agreements that you can use again for subsequent agreements, with only minor tweaks. Saving templates such as this will require getting into the habit of saving these templates whenever you draft a new agreement so that they can be used later to cut down on time in the future.
How to Use a Real Estate Team Agreement Template
While a real estate team agreement template can provide a solid foundation, it is critical to customize it to meet the specific needs and dynamics of the team. One size does not fit all when it comes to team agreements, so tailoring the language to fit your situation can make all the difference.
For example, consider the personalities involved in the team and how that may impact the agreement language. If the team members are already familiar with one another, the agreement should be a reflection of the mutual respect and understanding that they have. Conversely, if the team members don’t know each other well, the tone of the agreement should be professional and courteous, but not overly warm or friendly. If the team is made up of existing co-brokers or existing relationships, the team agreement could be less formal, but still cover the basic terms.
It is also important to customize how you allocate resources, including money, listings, leads, contracts, and office space. Think about how the division of these items could impact the future relationships of the team members and make sure that the process only enhances the relationship. For example, if you choose to share leads based on a rotating system, once again, how can you customize that process to ensure team members don’t feel like they’re losing out on potential sales. Making sure the process is fair is important to the ongoing success of the team.
Finally, customizing the agreement terms to fit your scenario will help you create enforceable terms. If you put terms in writing that don’t work for the team, they are less likely to be enforceable if it comes time to break up the team or split from the team partially or fully. For example, in some cases, the team will want to create a cohort where the team members can take some clients but not all with them. However, this is often a difficult thing to accomplish, especially if it creates a real estate commission situation. Make sure you create an agreement that is enforceable and isn’t ready to be litigated if it comes to that point, which is much more likely to happen if you create a list of terms that do not work for your scenario.
A Real Estate Team Agreement Template Guide
In addition to crafting a solid agreement, having the right tools for collaboration can make a huge difference in how smoothly a real estate team operates after the agreement is signed. Here are a few tried-and-true tips for effective real estate team collaboration:
Clarify each team member’s role and responsibilities.
For some teams, having a strict divide can make sense in terms of efficiency. When team members know precisely what they can expect from each other, all members can work in confidence, without constantly checking in on other’s progress. However, in other cases, it makes more sense for team members to pitch in and help one another out as needed. No matter what works best for you, it’s important to agree up front on where the lines are drawn—dig into this in your team agreement.
Keep the lines of communication open.
Especially in large and complex real estate transactions, it’s easy to assume that other team members are already on top of certain issues, or may simply drop the ball. You can prevent these misunderstandings by committing to open lines of communication and collaboration . In your real estate team agreement, specify preferred methods of communication (i.e. email, text, phone calls, etc.), and indicate ideal response times. Many teams use centralized software for managing communication and tasks, which can keep everyone on the same page.
Make sure a primary decision maker is in place.
When it comes to complex real estate purchases and sales, many cooks can spoil the broth. Before you dive into a project, make sure that you have a clear chain of command so that decision-making does not become a bottleneck. Weigh the pros and cons of whether a single decision maker is ideal, or whether decision making would work best on a committee model, and customize your real estate team agreement accordingly.
Use a central workspace.
By having easy access to digital documents, notes, contracts, emails, etc., team members can spend less time searching for information and more time focusing on moving the deal forward. You can get organized and stay organized with the right software and by using a cloud-based workflow management platform.