Crucial Things to Understand About Real Estate Listing Contracts

A real estate listing agreement is crucial for selling your property. You will execute the contract with a Realtor who agrees to sell your house.

Understanding its intricacies can save you time, money, and stress.

I have put considerable effort into explaining everything you should know before signing a listing agreement:

• The types of real estate listing agreements.
• Key terms and conditions in listing agreements.
• Tips for negotiating terms and common mistakes to avoid.

Since I have been a Realtor for the past thirty-eight years, I have encountered numerous sellers unfamiliar with the terms and conditions of listing contacts. I will aim to clear up the confusion. Before hiring a real estate agent, I recommend carefully interviewing and asking the right questions.

The answers you get will help you avoid the home-selling mistakes that happen so often in this business.

Let’s dive into the essential details.

What is a Real Estate Listing Agreement?

A real estate listing agreement is a binding contract between a homeowner and a real estate agent or brokerage.

This contract grants the agent the authority to sell your property.

It outlines the terms and conditions of the relationship, including the agent’s commission, the duration of the agreement, and specific responsibilities. There are also many other essential things to know about listing agreements, which I will cover in detail.

Common Types of Real Estate Listing Agreements

There are three main types of listing agreements:

1. Exclusive Right to Sell

• Definition: An exclusive right-to-sell agreement gives the agent exclusive rights to earn a commission if the property is sold within the contract period. It is the most common contract by far in the real estate industry. It is unlikely you will be offered any other choices without asking.
• I mplications : Even if you, the homeowner, find a buyer yourself, the agent is still entitled to their commission.
• Advantages: The agent is more motivated to market the property aggressively since they have guaranteed commission.
• Disadvantages: You have less flexibility to sell the property independently without incurring commission costs.

2. Exclusive Agency

• Definition: An exclusive agency contract gives the exclusive right to sell the property, but a seller retains the right to find a buyer independently.
• Implications: If you sell the property yourself, you do not have to pay the agent’s commission. Many agents, including myself, will agree to a modified version where only half of a commission is due if the seller procures the buyer.
• Advantages: Provides a balance between professional help and personal selling efforts.
• Disadvantages: Agents might be less motivated since they only earn a commission if they find the buyer.

3. Open Listing

• Definition: Multiple agents can list and sell the property simultaneously, but the agent who finds the buyer is only paid a commission. Open listing agreements are very rare in today’s real estate world.
• Implications: This is a non-exclusive agreement.
• Advantages: You can work with multiple agents and sell the property yourself.
• Disadvantages: Agents are less motivated to invest time and resources since there is no guaranteed commission.

Key Terms and Conditions in Listing Agreements

You can expect to see the following things in a real estate listing contract as a seller.

Understanding these terms is essential:

1. Commission Rate

• Definition: The percentage of the sale price paid to the agent as compensation for their services.
• Standard Rates:The real estate commission typically ranges from 5% to 6% of the sale price, but they can be negotiable.
• Considerations: Higher-value properties might negotiate lower rates; discuss if the commission is split between the listing and buyer’s agents. Due to recent litigation with the Justice Department and the National Association of Realtors, it may become more common for a buyer to pay their agent vs. the seller. Time will tell how this shakes out. It is anybody’s guess at the moment.

2. Duration of the Agreement

• Definition: The period during which the contract is valid.
• Standard Terms: usually range from three to six months but vary based on market conditions and property type. A Realtor usually asks for a more extended contract period in a buyer’s market than in a seller’s.
• Negotiation Tips: Consider a shorter term with an option to renew, ensuring you can switch agents if needed. Sellers often research how to fire a Realtor when they have not done their homework upfront.

3. Listing Price

• Definition: The initial asking price for the property.
• Determination: Set based on market analysis, comparative market studies, and agent recommendations.
• Flexibility: Some agents might ask that the agreement allow price adjustments based on market feedback and conditions.

4. Cancellation Terms

• Definition: The conditions under which you or the agent can terminate the agreement. Understand that some real estate agents may not agree to a cancelation clause in the listing contract.
• Typical Clauses: May include notice periods, cancellation fees, or conditions under which termination is allowed.
• Importance: A clear understanding of these terms can prevent legal and financial disputes. I recommend you carefully read the contract to minimize the chances of unhappiness later.

5. Agent Duties

• Definition: The responsibilities and services the agent will provide.
• Scope: Includes marketing, staging, hosting open houses, showing the property, and negotiating with potential buyers.
• Clarification: Ensure all expected services are detailed to avoid misunderstandings. I recommend you always ask questions when unsure about anything in real estate contracts.

Important Clauses to Look Out For

1. Protection Clause

• Definition: A “tail” or “extension” clause.
• Function: Protects the agent’s commission for buyers introduced during the agreement period, even if the sale occurs after the contract expires.
• Duration: Typically lasts 30-90 days post-agreement.
• Impact: Be aware of potential commission obligations after the listing period ends. Sometimes, this clause becomes null and void if you list with another agent after the contract expiration period. If this is the case, it should be spelled out in the agreement.

2. Dual Agency Clause

• Definition: Allows the agent to represent the buyer and the seller in a transaction.
• Pros and Cons: While it can streamline the process, it can also create conflicts of interest. I do not recommend allowing your real estate agent to practice dual agency. There is nothing beneficial about dual agency for a home seller. When you agree to a dual agency agreement, you no longer have a fiduciary representing your best interests. I do not practice dual agency because of the inherent conflicts of interest that are present. Dual agency is so bad it has been made illegal and banned in several states.
• Transparency: Ensure full disclosure and understand how the agent will manage conflicts.

3. Lockbox Authorization

• Definition: Permits the agent to place a lockbox on your property for secure access by other agents and potential buyers.
• Benefits: Facilitates more showings, increasing the likelihood of a sale.
• Security: Confirm the lockbox system’s security features and access controls. The most common type, a Supra lockbox, offers the best protection and modern features.

Tips for Negotiating Terms

Negotiating can improve your agreement:

1. Commission Rate

• Negotiation: Discuss the commission structure upfront.
• Alternatives: Consider a tiered commission rate, where the agent earns more for a quicker sale or higher price.
• Comparisons: Check local norms and compare with other agents. Don’t sell yourself short if all the competition offers a higher commission rate. It could make your home more challenging to sell.

2. Duration

• Optimal Period: Choose a duration that reflects the local market’s average selling time.
• Flexibility: Request a trial period with an option to extend based on performance and the agent fulfilling their stated services.

3. Exclusivity

• Options: Assess whether an exclusive right to sell, exclusive agency, or open listing suits your needs.
• Agent Selection: If opting for an open listing, choose agents with a good track record and marketing strategies.

Paul Sian, a Realtor with United Real Estate Home Connections, provided excellent advice.

The listing length, commission, and services can be negotiated when negotiating a listing contract. Some brokers do not allow their agents to negotiate those items, which the broker must do. If the agent or the broker does not want to negotiate those areas, which is their right, the seller can talk to other agents who will. Sellers should not just stick with one agent if the negotiations are not happening. At the same time, the adage that you get what you pay for also applies. By going with the cheapest options for listing a home, the seller could be saving on the short term but giving up gains on the sale by listing with an agent who isn’t being paid to do what it takes to sell their home.

Common Mistakes to Avoid

Avoid these pitfalls:

1. Not Reading the Agreement Thoroughly

• Importance: Skimming can lead to missing critical details and clauses. I have met numerous sellers who fired their agents and hired me. One of the most egregious errors is agreeing to an abnormally long contract period.
• Action: Read every clause carefully or have a legal professional review it.

2. Ignoring Cancellation Terms

• Consequences: Overlooking cancellation terms can result in unexpected fees or legal disputes.
• Understanding: Ensure you know the notice period and any associated costs.

3. Failing to Negotiate

• Cost: Accepting terms without negotiation can lead to higher commissions and unfavorable conditions.
• Strategy: Approach negotiations with research and clear expectations.

Legal and Financial Implications

A Realtor contract with a seller has significant impacts:

1. Commission Obligations

• Binding Nature: Once signed, you are legally bound to pay the agreed commission if the property sells within the terms.
• Disputes: Be prepared for legal recourse if you fail to honor commission obligations. A real estate brokerage will likely sue for their commission when not paid.

2. Contractual Duties

• Compliance: You must adhere to the terms outlined, including cooperation with the agent’s efforts.
• Breach Consequences: Violating terms can lead to penalties or termination.

3. Legal Recourse

• Agent’s Rights: Agents may pursue legal action if commissions are withheld or terms are breached.
• Preparedness: Understanding your legal obligations helps prevent disputes.

Peter Boutros of the Stunning NJ Homes Team adds this:

“When selling a home, conducting a careful interview with Realtors is crucial. Asking the right questions ensures you make the best choice, as not all agents employ the same strategies to sell a house. Each Realtor brings unique skills, experiences, and approaches to the table, and finding the right match can significantly impact the speed and success of your sale. Don’t assume all agents will provide the same services; a thorough interview process will reveal who is best equipped to meet your specific needs and goals.”

Checklist of Questions to Ask a Real Estate Agent

Ensure clarity by asking these questions:

1. What is your commission rate?
   • Understand the total cost and compare it with industry standards.
2. What services do you provide?
   • Clarify all included marketing and support services.
3. How will you market my property?
   • Discuss specific strategies like online listings, open houses, and print advertising.
4. What is the duration of the agreement?
   • Know the exact period and terms for renewal or extension.
5. Can I cancel the agreement, and what are the conditions?
   • Understand your rights and any penalties involved.
6. Do you work with buyers as well as sellers (dual agency)?
   • Be aware of potential conflicts of interest.
7. What are your recent sales figures for my area?
   • Evaluate the agent’s experience and success in your neighborhood.
8. How often will you communicate updates?
   • Set expectations for regular updates and feedback.
9. Are there any additional fees?
   • Clarify all possible costs beyond the commission.
10. What happens if my property doesn’t sell within the agreement period?
    • Discuss options like extending the agreement or adjusting the listing price.

Conclusion

Understanding listing agreements is crucial for a smooth real estate transaction.

You should now have a much better understanding of a Realtor contract with a seller and precisely the following:

• The types of listing agreements.
• Key terms and conditions.
• Tips for negotiating terms and avoiding mistakes.

Next, consider researching the home selling process to prepare for your real estate journey.

About the Author: Bill Gassett, a nationally recognized leader in his field, provided the above real estate information on what to know before signing a listing agreement with a real estate agent. Bill has expertise in mortgages, financing, moving, home improvement, and general real estate.

Learn more about Bill Gassett and the publications in which he has been featured. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. For the past 38+ years, Bill has helped people move in and out of Metrowest towns.

Are you thinking of selling your home? I am passionate about real estate and love sharing my marketing expertise!

I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge Massachusetts.

Learn what you should know before signing a listing agreement with a Realtor to sell your home. Get insightful tips on what to look for.