Listing Agreements: Definition & Types

Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

People seeking to sell real estate through a real estate agent need to understand their listing agreement. In this lesson, you'll learn what a listing agreement is and the different types that may be used. A short quiz follows the lesson.

Listing Agreement Defined

Shane wants to place his house on the market and has interviewed several different real estate agents to help him market the property and negotiate the sale. Each real estate agent Shane interviews presents him a listing agreement to review.

A listing agreement is a contract between the seller and a real estate broker authorizing the broker to market and try to sell the property. The agreement will outline the rights and responsibilities of each party. Of course, it will also explain how the broker will be compensated for the services rendered, which is usually a sales commission amounting to a percentage of the sale price.

You should note that the agreement is legally between the seller and the broker, not the real estate agent. A broker is a person who is not only licensed to sell real estate, but is also licensed to supervise other licensed salespeople (i.e., your typical 'real estate agent') who are required by law to be supervised. Of course, some real estate agents are also brokers, but most are not.

Exclusive Right to Sell Agreement

Nearly every agent will try to get Shane to ink an exclusive right to sell listing agreement, which gives the broker the exclusive right to sell the property. Here, the broker will earn a sales commission if Shane's house is sold during the duration of the agreement even if the broker wasn't the one that sold the house. For example, if Shane's friend bypasses the broker and makes an offer directly to Shane, the broker gets a commission even though they didn't really do anything.

Exclusive Agency Listing Agreement

If Shane wants a bit more flexibility, he can try to convince a real estate broker to enter into an exclusive agency listing agreement. Under this type of listing agreement, Shane only has to pay the broker a commission if the broker sells the real estate. If Shane's friend comes to him directly and offers to buy the house, Shane can sell it and not pay a commission because the sale wasn't facilitated through the broker.

Open Listing Agreement

Unless Shane's property is really special, or the broker is desperate for business, an open listing agreement is unlikely to be acceptable to most brokers. Under an open listing, Shane can contract with as many brokers as he wants, and whichever broker is able to facilitate a sale gets the commission. The other brokers get nothing (except for the buyer's broker, who probably will split the commission with the seller's broker). Moreover, if Shane is able to sell the property himself, he pays no commission.

Net Listing Agreement

Sometimes a broker may try to obtain a net listing agreement. Under this agreement, the broker and seller will agree to a minimum price the seller will accept and the broker gets to keep all the money in excess of this minimum price. For example, if Shane agrees to set the minimum price at $200,000 and the broker sells the house for $225,000, the broker earns $25,000.

Shane really should avoid this type of agreement in almost all circumstances. An unethical broker may intentionally undervalue the house. In our example, the fair market value of Shane's house may actually have been $225,000 and a standard six percent commission on it would be $13,500. Also, an unscrupulous broker may fail to present an offer at or below the minimum price. Likewise, a broker may negligently undervalue the property or an unanticipated uptick in market demand may create a spike in price resulting in an unjust result. In fact, this type of agreement is not legal in every state.

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