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The single most important contract that you sign throughout the entire process of selling your house is the one between you and the person who ultimately buys your property. Without that contract, you'd never be anything more than a property owner who wants to be a seller.
What's the second most important contract? If you guessed the listing contract that you sign with the agent you hire to help sell your house, you win an all-expenses-paid trip to the next paragraph.
You've probably heard of listings, but most folks don't really understand what listings are or how they operate. We're not talking about a listing of names in a phone book. Nor does this listing have anything to do with transferring ownership of your property to buyers. This chapter spells out everything you need to know about listing contracts and tips on how you can negotiate commissions with agents.
In the context of selling property, a listing contract is a personal service contract between you and a licensed real estate broker. This contract authorizes the broker to act as your agent by finding someone to buy your house. The listing contract contains two basic promises: The broker promises to do his or her best to find a buyer for your property, and you promise to pay the broker a commission.
Sounds simple, doesn't it? Legally speaking (because listings are meant to be legally binding agreements), the definition of a listing contract is a bit more complex:
- An employment contract: A listing contract specifies the exact terms and conditions of your employment contract with a licensed real estate broker. It also authorizes the broker to represent you during the sale of your property. If the real estate agent you select to work with doesn't have a broker's license or isn't the broker of record for the office, a licensed broker must supervise the agent and be responsible for everything he does or fails to do.
- A compensation agreement: Although the listing broker's pay is almost always a commission based on a specified percentage of the sale price, compensation doesn't have to be a commission. Other possible options include paying your broker a set fee for selling the property or compensating the broker on an hourly fee basis.
Regardless of how the broker is paid, compensation is a negotiable item decided by mutual agreement between you and the broker.
Although the listing contract doesn't obligate you to sell your house, it may obligate you to pay the broker a commission even if you don't sell. The key is whether the broker gets you an 'acceptable' offer.
You may think that an acceptable offer is any offer a buyer makes to purchase your house that you'd be willing to sign. If an offer isn't acceptable to you, you won't sign it. But suppose that your broker brings you a valid, written offer made by a ready, willing, and able buyer who wants to purchase your house for the exact price and terms specified in your listing contract. You reject the offer solely because you don't like the buyer's red tennis shoes.
In this example, you probably owe the broker a commission, even though you didn't accept the offer. Technically speaking, whether you ultimately sell the house to the buyer who submitted the offer doesn't matter if the buyer met your price and terms.
'That's not fair,' you say. 'If I decide not to sell, why should I pay a commission?' The answer: Because you agreed to those terms when you signed the listing. The broker found a buyer who was ready to accept your terms, willing to enter into a contract of sale with you, and financially able to buy your property. The listing agreement doesn't specify that you actually have to sell your property. If your broker fulfills his end of the contract by procuring an acceptable buyer, you must honor your promise and pay the broker.
Buyers and agents almost always cooperate with sellers who are forced to cancel a transaction because of the sudden occurrence of some dire unforeseen situation beyond their control, such as job loss or a death in the family. They may get upset, though, if a seller suddenly decides not to go through with a deal for no good reason.
Breaking any contract may have serious legal consequences. A listing contract is a legal contract. Don't list your property on a lark just to test the water - the water could get boiling hot quickly.
