Types of Listing Contracts
December 9, 2019
There are three main types of listing contracts that real estate agents can use in listing property for sale. The first one is called an open listing, which means it's basically open to everyone. The person who finds the buyer, or is the procuring cause, is the person who gets paid the commission money. So, for example, the owner could sell the property themselves and not have to pay a commission. Or lots of brokers in town can all have open listings, and the only broker who gets paid is the one broker or brokerage company who actually procures the buyer for the property. When we say broker, we mean broker or licensee brokerage company because the commission is always paid to the brokerage company. So, with an open listing we might have several yard signs out front, such as a for sale by owner sign, a Realty A sign and a Realty B sign. Both Realty A and Realty B could have an open listing, which means they can try to find a buyer for the property. You typically see this in rural areas.
Exclusive Agency Agreement
A second type of listing contract is an exclusive agency agreement, which is where we have two people authorized to sell. We have the for sale by owner sign because the owner can still sell himself or herself and not pay a commission, and one brokerage company. We’ll use Realty A in our example here. That doesn’t mean other brokers can't try to find buyers, but everyone must work through the exclusive listing brokerage company and that would be Realty A.
Exclusive Right to Sell Agreement
The third type is an exclusive right to sell agreement, which is by far the most common. The exclusive right to sell is where there would be one yard sign and that is Realty A. The brokerage company is the sole entity authorized to sell the property and receive commission money. So, with an exclusive right to sell, even if the seller finds the buyer themselves, the brokerage company still gets paid a real estate commission because the brokerage company is still the sole person or sole entity authorized to sell the property.
A different type of listing that is illegal is called a net listing. A net listing is where the commission money your brokerage company receives is the difference between what the sale price of the property is versus what the seller wants to net out. So if a seller wants to net $100,000 and says to the brokerage company anything about that and price, you get us commission and the brokerage company sells it for $150,000 that $50,000 difference would be the commission amount that is called a net listing and that is illegal.
Termination of a Listing
Listings must have an expiration date. Listing contracts can be anywhere from three months to nine months. Whatever the parties agree on is just fine. As far as termination of a listing, several things might terminate a listing agreement: the property sells, time expiration, condemnation of the property through eminent domain, or destruction of the property. Those are all things that might terminate a listing agreement. One other item would be death of either the seller or the managing broker of the brokerage company. Remember, the agreement is between the seller and the brokerage company or managing broker and death of either one of those parties would terminate the listing agreement.
Protective Period Clause
Finally, a brokerage company wants to make sure that the company is protected in case the company produces a buyer for the property, but the seller and buyer wait until after the listing expires to consummate the deal. What we have to protect the brokerage company in this case is called a protective period clause. This clause in the listing agreement basically says that if a brokerage company produces the buyer during the term of the listing, then the listing expires and that same buyer comes back and buys from the seller directly within a certain time-frame, maybe three to six months, then the brokerage company would still be paid and owed a real estate commission.
Right to Sue
What happens when a seller refuses to pay the brokerage company a real estate commission? In order to sue for a commission, the lawsuit must be brought by the managing broker or the brokerage company. Also, the managing broker or brokerage company must be licensed at the time of the sale. And finally, to sue for commission, the managing broker or brokerage company must be employed by the client, typically a seller client. That would be the actual listing agreement.
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