Before Signing the Listing Agreement

Not all listing agreements are the same. There are exclusive right to sell listing agreements, exclusive agency listing agreements, open listing agreements and one party listing agreements. Under an exclusive agency agreement, the owner reserves the right to market the property and if the owner finds the buyer, the broker is not entitled to a commission. With an open listing, the broker is in competition with other brokers and the owner to procure a buyer. Most brokers, however, will not agree to anything other than an exclusive right to sell agreement. The C.A.R. Residential Listing Agreement (Exclusive Authorization and Right to Sell) is the most commonly used listing agreement form on residential transactions.

Before signing on the dotted line, it is critical for the property owner to understand the key terms of the listing agreement and the owner's rights and obligations thereunder.

Commission. A real estate broker's commission is fully negotiable. The commission amount can be a flat fee but is usually a percentage of the sales price. What is customary differs from market to market. In Los Angeles County, the typical commission on a residential listing is 5% to 6% of the sales price.

Term. Since the broker will be putting time, effort and money into marketing the property, it is generally reasonable for the term of the listing agreement to be at least 3 to 6 months in order to give the broker a fair opportunity to sell the property and recover his or her marketing costs. The property owner should, however, be careful not to commit to too long a period especially if the owner has not previously worked with the broker. Once the owner signs the listing agreement, the owner is generally stuck with that broker until the listing agreement expires unless there is some material breach by the broker which would entitle the owner to terminate the agreement.

When the Commission Is Earned. The standard C.A.R. Residential Listing Agreement (Exclusive Authorization and Right to Sell) provides that the broker's commission is earned upon the happening of any of the following:

1. Offer Satisfying Listing Terms Is Procured or Seller Breaches Sale Agreement after Acceptance of a Buyer's Offer. If the broker, another agent, the owner or any other person procures a buyer who offers to purchase the property at the listed price and terms or any price or terms acceptable to the seller, the broker is entitled to a commission. There is an arguable ambiguity as to whether the owner would be liable for the commission in the event that the buyer backs out after having removed all contingencies. Whether a broker claim for compensation under these circumstances is meritorious or would prevail is questionable but it is best to avoid the ambiguity by clarifying the parties' intent in the listing agreement that the broker is entitled to a commission only if the transaction actually closes unless the closing was prevented by the seller's breach of the sale agreement.
2. Sale After Listing Expires. If the listing agreement has expired but the seller, within a certain stated period of time thereafter, enters into a sale agreement with anyone who was shown the property by the broker or another agent during the listing period or made an offer to purchase the property during the listing period, the broker is entitled to a commission. The owner should consider how long after the listing has expired will the owner have a continuing obligation to pay commission to the broker if the owner later enters into a sale agreement with any buyer that was shown or made an offer on the property. The broker is entitled to some protection from buyers and sellers intentionally striking a deal after the listing period expires for the sole purpose of avoiding payment of the broker's commission. However, such protection cannot be for an unlimited period of time. For instance, if the seller, after 1 year, relists the property with another broker and that broker is able to procure an offer from a buyer who had previously been shown the property but passed, the seller should not have to pay double commission.
3. Early Withdrawal or Voluntary Unmarketability. If the owner, without the broker's consent, withdraws the property from sale or voluntarily makes the property unmarketable, the broker is entitled to a commission. Once an owner signs the listing agreement, he or she cannot withdraw at will without then becoming obligated to pay the broker his or her commission. If the owner knows that there are circumstances under which the owner wants to reserve the right to withdraw the property from sale, then those circumstances should be spelled out in the listing agreement. For example, the owner may be selling the home in order to relocate to a new city where the owner received a job offer. If for whatever reason, the job offer is rescinded, then the owner would want to preserve the right to withdraw the property from sale without then becoming liable to pay the broker a commission.

Cooperation with Other Brokers. The owner should specify how the listing broker must share the commission with the selling agent. The higher the selling agent's share of the commission, the more incentivized he or she will be to get the deal done. This is an important term that should not to be overlooked or left to the listing broker's discretion.

Listing Price and Terms. While the owner is not obligated to sell to a buyer at the price and terms set forth in the listing agreement, the owner should be cognizant that the broker may have earned a commission when he or she procures an offer that meets the specified price and terms in the listing agreement but the owner refuses to sell. The owner should, therefore, think carefully about what price and terms he or she would be willing to sell at.

This article is for general informational purposes only. It does not constitute legal advice and is not intended as such. Do not act or refrain from acting on the basis of any information on this website. Always seek professional advice from the appropriate legal or other professional licensed in the relevant jurisdiction.