Buying and selling real estate is among the most rewarding business ventures anyone could get involved in and it always requires attention to detail and as much expert support as possible. An example is with signing a listing agreement.
If you own a property that appears to need some work before you can sell, your best options include; selling to a trusted fast cash buyer if you’re looking for a quick sale, or selling on the market with an expert agent.
Most motivated or distressed sellers would prefer the speed and convenience on offer with fast cash buyers although it often means not getting the market value for the property. But if you assess the pros and cons of hiring an agent and it makes more sense to you, you’ll probably have to sign a listing agreement. You don’t want to place your signature on that dotted line without knowing what it’s all about.
In this article, we’ll break down what a listing agreement means, the purpose of a listing agreement, key terms of a listing agreement, types of listing agreements, what happens when the agreement expires, etc.
WHAT IS A LISTING AGREEMENT?
A listing agreement is a contract between a property owner and a real estate broker giving the broker the right to list, advertise, and manage the sale of the property as the homeowner’s listing agent. This important document outlines the terms of the working relationship and generally includes the duration of the contract, the commission payment to the broker/agent, as well as his/her duties and responsibilities.
If you decide to go down this route, make sure you read the document closely and understand every detail because you’ll be bound by them. The draft is often presented by the agent for you to study and sign. But before signing, you can always propose and negotiate changes to the terms that don’t meet your standards to make sure everything works for you both.
The listing agreement obliges you to work with the agent for a minimum of the contract duration. It also protects the seller by outlining the specific responsibilities of the agent and what happens if he or she fails to meet them.
THE PURPOSE OF A LISTING AGREEMENT
The main purpose of a listing agreement is to give your agent the authority to find a buyer for your property and this includes paying a competing broker to bring a buyer. Brokers hire experienced listing agents to increase their footprints in the marketplace and although you may get the listing agreement from an agent, the contract is actually between you and the owner of the brokerage or the agent’s office manager. The agent simply represents, operates as, or on behalf of the broker.
KEY TERMS OF A LISTING AGREEMENT
Here is a list of some important terms often included in listing agreements;
- Contract Duration;
Listing agreements last for specific periods like 2, 4, or 6 months. From the perspective of a seller, the shorter the agreement the better because if you are not impressed with the services of the agent, you can find a different agent. If you like how it’s going, it’s always easy to renew.
Agents prefer longer listing agreements because they do a lot of work to prepare your house for sale and don’t like the risk of losing the commission as soon as the property starts attracting some real interest.
- The agent’s commission;
This is always around 5% or 6% of the sale proceeds. You can do some research as well to find out the best or common agent commissions in your market.
- Exclusive right to sell;
With this, your agent gets the exclusive right to sell your property during the agreement. Of course, you can make other types of arrangements but this is usually the first choice for most agents.
- Safety or Protection Clause;
Although the contract expires after a specified date, it often includes a clause that protects the broker/agent even after expiration. This clause prevents the scenario where you try to avoid paying the agreed commission of the agent by finding a buyer during the duration of the listing agreement but waiting for the expiration date to pass before conducting the sale.
Make sure there’s an exception if your decision to end the contract is because you are choosing to work with a different listing agent. However, if the new agent makes a quick sale and the safety clause includes a cut to the first agent, you may have to pay two commissions.
Most listing agreements lay out the specific activities the agent will carry out on your behalf. Scrutinize the list and make sure you understand the details of every duty. If there are certain duties you’ll like include, specify them as well. Examples could be posting yard signs, listing on the MLS, etc.
Listing agreements sometimes require homeowners to verify facts like their rights to sell and proof of no knowledge anyone else has an ownership interest in the property.
- Dispute resolution.
The contract most definitely specifies how disputes will be handled if you can’t settle them informally. Solutions often arrive from binding arbitration or mediation.
TYPES OF LISTING AGREEMENTS
The majority of real estate listing agents make use of standard forms developed by local or state Realtor © associations to put together their listing agreements. Once again, remember to read carefully before signing and feel free to request for changes and adjustments.
Most agents don’t like changing the standard agreements they have used for a while without complications. However, small or large changes can always be made to these two main types of listing agreements;
- EXCLUSIVE RIGHT TO SELL
As mentioned in the key terms above, this is the most common type of listing agreement that gives the exclusive marketing rights of your home to the broker/agent. Working on a commission, the broker assumes all the marketing costs and risks for your home in the duration of the contract and gets paid only when the home is sold.
- LIMITED SERVICE
With this much less common type of contract, the broker offers a menu of real estate services for a fixed price without handling any fiduciary duties for the seller. In this case, the seller may be responsible for listing their property on the MLS, showing to potential buyers, etc. unless they accept and pay for additional services.
Limited service fixed fees can be upfront or paid upon the close of the contract. This listing agreement also always includes terms like the contract duration, actions the broker will take, and their compensation.
With all this information, it’s clear to see that a well-drafted listing agreement is as important as your choice of an expert listing agent and doing it right almost guarantees you’d get good results. It’s also important to note that automatically renewed listings don’t exist. When the agreement expires, you can decide to stick with the current agent and have your property listed again or choose to work with another agency with no penalties for the change.