After successfully completing this topic, you will be able to
• list the most important types of contracts ordinarily used by brokers,
• distinguish between “find a purchaser” and “effect a sale,”
• describe the characteristics of the three major types of listings, and
• calculate the purchase price of a property in a net listing given the seller’s required amount and the broker’s desired commission rate.
A listing contract is an agreement between a real estate broker and a property owner or a buyer. When the contract is between a broker and a buyer, the agreement is called a buyer brokerage agreement.
Important Types of Contracts
There are several contracts that are used by real estate brokers and sales associates in their professional practice
• listing contracts,
• sales contracts, and
• option contracts.
A listing agreement between a broker and a seller requires the broker to either
• find a purchaser, or
• effect a sale.
Find a purchaser requires the broker to bring a buyer who offers the price and terms specified by the seller, or at any price and terms acceptable to the seller. The buyer must be ready, willing, and able to complete the purchase. If the seller signs a contract, regardless of the price, the seller owes a commission to the broker. If the buyer can’t get the required financing to purchase, he is not “able” and the broker does not get paid.
In the case of a buyer brokerage agreement, the broker must find a property that the buyer agrees to purchase.
Listings may be written or oral. It is good business to put all agreements in writing to reduce the possibility of misunderstandings. Listings are not covered under that statute of frauds unless the agreement is for more than one year.
If the listing is in writing, the broker must give the seller a copy within 24 hours after the seller signs it.
A listing may not have an automatic renewal feature, or the listing is void. The seller must sign each renewal.
|Example: A seller lists a farm with a broker for a six-month period. The broker has a clause that automatically renews the listing until specifically revoked by the seller. Several years later, when the broker’s sign has deteriorated, the owner sells the property himself. When the broker sues for a commission, the court will look at the self-renewal feature and deny any compensation to the broker.|
A listing does not give the broker the right to sign a sales contract in the absence of the seller. The broker can do this only if the seller has signed a power of attorney for the broker.
There are three principal types of listings
• exclusive right of sale,
• exclusive agency, or
An exclusive right-of-sale listing is the most desirable from the broker’s standpoint. The broker is entitled to a commission whether sold by him, the owner, or another brokerage firm. This is a bilateral contract with the broker promising to market the property by, for example, putting it in the Multiple Listing Service, advertising it and holding open houses. The owner promises to pay the listing broker a commission, and the listing broker may split the commission with cooperating brokers.
An exclusive agency listing is very similar to the exclusive right of sale listing except that the seller can sell the property himself without paying the broker a commission. If the listing broker or any other broker sells the property, the listing broker is entitled to the commission. This is often called an “exclusive listing.”
An open listing describes an arrangement where a seller attempts to sell his own property, but promises a broker to pay a commission if the broker brings a buyer. This is a unilateral contract, because the broker does not promise to do anything in the way of marketing or advertising. The seller may give an open listing to many brokers, and only the broker who sells the property is paid.
Normally the seller agrees to pay the broker either a percentage of the sale price or a fixed dollar amount. A net listing does not do either. A net listing is created when a seller specifies an acceptable net amount of money from the sale after paying the commission. The net listing can be used with any of the above listing types.
Brokers who take a net listing are in danger of getting much less than their customary commission because of the requirement to present all offers.
|Example: A seller of a commercial property agrees to give a broker an open listing. The seller says, “I want $100,000 net to me. You can put your commission on top of that. If the broker customarily asks for a 10% commission on the sale price of commercial property, the broker would add $11,111 to the $100,000 to receive a 10% commission. |
Solution: The owner’s net price represents 90% of the sale price (broker gets 10%). $100,000 net ÷ .9 = $111,111. If the commission is $11,111, that gives the seller the required $100,000.
Using the example, if a buyer made an offer of $102,000, the seller would accept it. The broker would make a $2,000 commission. Brokers should avoid this type of compensation agreement.
The Multiple Listing Service (MLS) facilitates the dissemination of information about listed property and gives an offer of compensation to the selling broker. Only exclusive right of sale and exclusive agency listings may be entered into the MLS.