Selling A Home: Listing Contracts and Commisiions

A listing contract is a personal service contract between you and a licensed real estate broker. This contract authorizes the broker to act as your agent by finding someone to buy your house. The listing contract contains two basic promises: The broker promises to do his or her best to find a buyer for your property, and you promise to pay the broker a commission. Legally speaking, the definition of a listing contract is a bit more complex:

An employment contract: A listing contract specifies the exact terms and conditions of your employment contract with a licensed real estate broker. It also authorizes the broker to represent you during the sale of your property.

A compensation agreement: Although the listing broker's pay is almost always a commission based on a specified percentage of the sale price, compensation doesn't have to be a commission. Other negotiable options include paying your broker a set fee for selling the property or compensating the broker on an hourly fee basis.

Although the listing contract doesn't obligate you to sell your house, it may obligate you to pay the broker a commission even if you don't sell.

Considering the types of listings

All your various listing options boil down to variations on two types of listings: exclusive listings and open listings.

An exclusive listing is exactly that -- an exclusive authorization giving only one broker the right to find a buyer for your house -- though there are two very different types of exclusive listings. Exclusive right to sell listings is the most common listing type and popular with both sellers and brokers.

An open listing is a non-exclusive authorization for brokers to find a buyer for your property. You can give as many brokers as you wish an open listing on your house.

See each section for details on how each type works, their advantages, disadvantages and risks.

Exclusive Listings

The broker designated in an exclusive agency listing is the one and only agent authorized to sell your house during the term of the listing. If any other licensed real estate broker or agent finds a buyer, your broker gets paid.

Because you aren't a licensed real estate agent, the listing contract excludes you Under the terms of an exclusive agency listing, owners specifically reserve the right to sell their own house directly and ace the broker out of a commission. Your broker - who should be your strongest ally - is your competitor.

The adversarial relationship isn't good for you or your broker. Exclusive agency listings discourage brokers from spending time or money marketing property because the arrangement offers no assurance of a reward for their efforts.

Exclusive right to sell listings
An exclusive right to sell listing is also referred to as an exclusive authorization and right to sell or just a plain, old exclusive. The exclusive is the most widely used form of listing contract in the United States. Here are the reasons it's popular with sellers and brokers:

Maximum incentive for brokers: Under this form of exclusive listing, the listing broker gets paid if anyone -- even the owner -- finds a ready, willing, and able buyer for the property during the life of the contract. Owner and broker are allies, not adversaries, with a mutually beneficial goal of getting the listed property sold as quickly as possible for as much money as possible.

Maximum effort for seller: An exclusive right to sell listing gives your listing broker a strong monetary incentive to focus his or her time, energy, and advertising dollars on one priority -- a fast, top-dollar sale of your house. To that end, the listing broker should immediately cooperate with any and all other brokers who might have buyers for your property by offering to split the compensation 50/50 (or whatever split is customary in your area) with the broker who generates a ready, willing, and able buyer.

Nothing is wrong with giving your listing broker a day or two head start on other brokers, if you approve. However, good brokers don't keep your listing quiet for long before advertising it and opening it up to cooperating brokers.

Exclusive right to sell listing contracts vary widely in length, wording, and complexity from one state to another and from city to city within any given state. Regardless of the wording in your contract, here are a few fundamental facts to keep in mind about all exclusive listings.

Open Listings

An open listing is a non-exclusive authorization for brokers to find a buyer for your property. You can give as many brokers as you wish an open listing on your house. You're obligated to pay a commission to the first broker who fulfills either of the following conditions:

Finds a buyer ready, willing, and able to enter into a contract that meets the exact terms of your listing.

Procures the buyer whose offer you ultimately accept. If you find the buyer by yourself, you don't have to pay any of the brokers. And you can cancel an open listing any time you want without penalty.

If this arrangement sounds wonderful, think again. Smart sellers won't give brokers an open listing and good brokers won't accept them.

Here's why:
Limited advertising and marketing of your property: In many places, depending on the local rules, brokers can't put open listings into the multiple listing service (MLS). This restriction is a big disadvantage. The MLS is a highly effective tool brokers use to internally advertise listings to other MLS members who may have buyers for their listings. Nor do brokers produce fancy brochures or put bigclassified ads in the newspaper to tell the world about an open listing.

Brokers only advertise or market open listings as a last resort: They disdainfully refer to open listings as pocket listings because brokers tuck them away "in their pocket" passively waiting for a buyer to come along.

No control: If you give 10 brokers an open listing on your house, you'll end up doing work that a listing agent normally handles. All the agents will call you to coordinate showings of your property. You must prepare the house for showings. You also have to debrief agents after showings to find out if you're getting an offer and, if not, find out why not. If you like chaos, you'll like an open listing.
Your broker is your competitor: Because you don't have to pay any broker if you sell the house yourself, brokers see you as a competitor. This adversarial relationship encourages brokers to work for buyers, not you.

An open listing is barely better than no listing at all. Unless you have an extremely compelling reason that you absolutely, positively must list your house with a bevy of brokers, you'll be better served with an exclusive listing.

Commission Basics

In the following list, we try to answer every question you've ever had about commissions but were too embarrassed to ask:

Who pays the commission? Usually sellers pay the commission, although in rare cases, buyers pay their agent directly. After all, sellers get money when property sells.

Are commissions set by law? There's no such thing as a legal minimum commission or a mandatory percentage. Commissions vary from one area to the next. The price and type of property being sold also affect the percentage. Commissions on houses, for example, usually range from 4 to 7 percent of the sale price, and commissions on vacant land can go as high as 10 percent.
Are commissions negotiable? Yes. In fact, most listing contracts contain language similar to the following notice "The amount or rate of real estate commissions is not fixed by law. They are set by each Broker individually and may be negotiable between Seller and Broker."

Seller Disclosure Statements

The days of buyer beware are gone forever. In fact, given the flood of federal, state, and local consumer protection laws enacted over the last couple of decades, this is the era of 'let seller beware.' As a seller, you may think that some of the disclosure requirements are overly protective of buyers. Because, however, you probably intend to purchase a new home to replace the one you're selling, you can benefit from disclosures as a buyer. All things considered, it's a fair trade.

What information should you disclose?
Disclosure statements differ widely from state to state and from one area to another within any given state. Generally speaking, the law requires that you disclose to prospective buyers any information you have that materially affects your property's value or desirability. This disclosure must cover facts that you, as an owner, are expected to know about your property and the neighborhood that couldn't be known by (or wouldn't be apparent to) the buyer. For example:

Physical condition: Are your built-in appliances in good working order? Do you know about any hidden defects or malfunctions in your house's major components (roof, foundation, electrical system, plumbing, sewer, insulation, windows, doors, walls, and so on)? No one expects you to be a professional property inspector, and disclosure laws are one reason why getting a premarketing inspection of your house is wise. You and your agent should also encourage buyers to conduct their own investigations and obtain inspections from their own experts instead of relying solely on your inspections or the information you provide about the property's physical condition.
Health, safety, and environmental hazards: You must comply with federal, state, and local disclosure laws regarding property problems related to asbestos, formaldehyde, lead-based paints, underground fuel or chemical storage tanks, radon gas, and other health hazards. Is your property in harm's way from earthquakes, floods, hurricanes, or other natural disasters? Does your property comply with local energy or water conservation ordinances?
Legal condition: Are any lawsuits pending that affect your property? Did you make any modifications or alterations to your property without getting the necessary building permits? Do these modifications or alterations comply with state and local building codes? If you're selling a condominium, you must give the buyer copies of the Covenants, Conditions, and Restrictions (CC&Rs), the Homeowners Association bylaws, and the budget.
Subjective areas: Subjective questions can't be answered with a simple yes or no. The environment that you think is extremely quiet, the buyer may consider a boiler factory. Answer all subjective questions to the best of your ability, and then encourage buyers to familiarize themselves with the area so they can draw their own subjective conclusions about these issues.If you're not sure whether or not you have to make this type of disclosure about your property, consult your listing agent or a real estate lawyer.

Click to go back