Exclusive listings

An exclusive listing is exactly that — an exclusive authorization giving only one broker the right to find a buyer for your house. As simple as it sounds, an exclusive listing contract can take two different forms.

Exclusive right to sell listings

An exclusive right to sell listing is also referred to as an exclusive authorization and right to sell or just a plain, old exclusive. The exclusive is the most widely used form of listing contract in the United States. It’s popular with sellers and brokers because it provides the following:

• Maximum incentive for brokers: Under this form of exclusive listing, the listing broker gets paid if anyone — even the owner — finds a ready, willing, and able buyer for the property during the life of the contract. Owner and broker are allies, not adversaries, with a mutually beneficial goal of getting the listed property sold as quickly as possible for as much money as possible.

• Maximum effort for seller: An exclusive right to sell listing gives your listing broker a strong monetary incentive to focus her time, energy, and advertising dollars on one priority — a fast, top-dollar sale of your house. To that end, the listing broker should immediately cooperate with any and all other brokers who may have buyers for your property by offering to split the compensation 50/50 (or whatever split is customary in your area) with the broker who generates a ready, willing, and able buyer.

  You know you’re dealing with a bad broker if she wants to keep your listing quiet for several weeks before advertising it and opening it up to cooperating brokers. Greedy brokers sit on listings to give themselves and the agents in their offices time to sell your house to buyers with whom they’re working. They want someone in their office to generate an offer for your property so the listing office can get the entire commission. Brokers call this tactic “getting both ends of a deal.” From your perspective, a more apt description would be “getting the shaft.”

  Chapter 11 reveals that the secret of getting a top-dollar price when you sell is to generate spirited buyer competition for your house by getting broad, immediate market exposure. Nothing is terribly wrong with giving your listing broker a day or two head start on other brokers, if you approve. A broker who wants to keep your listing in-house more than 48 hours, however, is unworthy of being your listing agent.

Exclusive right-to-sell listing contracts vary widely in length, wording, and complexity from one state to another and from city to city within any given state. Under these circumstances, the listing contract you ultimately sign probably won’t look exactly like the California Association of Realtors (C.A.R.) exclusive listing contract shown in Figures 8-1a, 8-1b, and 8-1c. The C.A.R. listing is, nonetheless, a fine example of a well-written, comprehensive listing agreement.

Regardless of the wording in your contract, here are a few fundamental facts to keep in mind about all exclusive listings:

• Listings are intended to be legal contracts. Real estate agents hate the word contract because it scares people and puts them on guard. They prefer to call contracts agreements because agreements sound less threatening. Whatever your listing is called, the intent is to create a legally binding contract between you and the listing broker. Read it carefully. Consult a real estate lawyer if you have questions or concerns about the listing’s fine points. Agents aren’t qualified to answer legal questions.
• An exclusive listing must have a definite termination date. Note that paragraph 1 of the form in Figure 8-1a provides a “Listing Period” commencing on a specific date and expiring at 11:59 p.m. on an equally specific date. Don’t sign any exclusive listing that starts when the contract is prepared and runs “until sold” or “until canceled in writing” or any other type of indefinite duration.

• A broker protection clause keeps everyone honest. Just as a few real estate agents are dishonest, some sellers and buyers also behave unethically. For example, a seller may tell an interested buyer that the listing contract with the broker is about to expire. Without a broker, the seller won’t have to pay a commission. The seller offers to pass on a portion of the savings to the buyer by lowering the asking price, if he signs the deal after the listing contract’s expiration date. Paragraph 3.A. (2) of the sample listing contract shown in Figure 8-1a is known as the broker protection clause. This clause prohibits (for a specified period of time) the homeowner from selling directly to a buyer. If a broker finds a suitable buyer for a property, the clause requires that the seller pay the broker’s commission according to the listing contract.

  Brokers generally ask for at least a 90-day buffer period. The time frame is, however, negotiable. In most cases, 30 to 60 days gives the broker sufficient protection. Regardless of the buffer period you agree to, be sure the broker protection clause in your listing contract includes this statement: This section shall not apply if Seller enters into a valid listing agreement with another licensed real estate broker after the final termination of this agreement.

  This clause protects you from the possibility of paying two commissions if you relist your house with a second broker and a dispute develops after the first broker’s listing expires.

• A Multiple Listing Service (MLS) option offers benefits. Paragraph 5 of the form in Figure 8-1b gives sellers the option of having information about their listing put into the local MLS. Chapter 12 provides reasons why listing information about your property in the MLS is a good idea.

  In some areas, brokers use the MLS contract to sign up their listings. If that’s the case in your area, signing your contract automatically places your property in the MLS database. In all other respects, a multiple-listing contract operates the same way as any other exclusive right-to-sell listing contract.

• Alternative dispute resolution options can save you time and money. Lawsuits are time consuming and darned expensive, to boot. Most real estate contracts — listing contracts and purchase contracts — now have provisions for alternative dispute resolution, a phrase that describes using either mediation or arbitration (see paragraph 19 of Figure 8-1d) to resolve contract disputes faster and generally in less-expensive ways than litigation in a court of law. This provision makes sense. No one, including a good lawyer, wants you to needlessly waste time and money in court.

• Title verification is critically important. Paragraph 21 of the sample listing contract in Figure 8-1e asks who has title to the property, because anyone who signs a listing contract obligates himself to pay a commission, even if that person ultimately can only convey a partial interest in the property.

  Unless all the parties who hold title in a property join in the sale, a full interest in the property can’t be sold. To avoid future problems, the listing broker wants to be sure that all property owners sign the listing contract.

  Just as death is nature’s way of warning you to slow down, a co-owner’s refusal to sign a listing is real estate’s way of warning you about a potential deal killer. If your spouse (or a co-owner in a tenancy-in-common partnership) won’t sign the listing, that person probably will also refuse to sign a sale contract. Don’t sign a listing until you resolve the co-owner’s problem, and all owners are willing to sign it.

Open listings

An open listing is a nonexclusive authorization for brokers to find a buyer for your property. You can give as many brokers as you want an open listing on your house. It’s the real estate version of a winner-take-all horse race.

You’re obligated to pay a commission to the first broker who fulfills either of the following conditions:

• Finds a buyer ready, willing, and able to enter into a contract that meets the exact terms of your listing
• Procures the buyer whose offer you ultimately accept

If you find the buyer by yourself, you don’t have to pay any of the brokers. And you can cancel an open listing any time you want without penalty.

If this arrangement sounds wonderful, think again. Smart sellers won’t give brokers an open listing, and good brokers won’t accept them. Here’s why:

• Limited advertising and marketing of your property: In many places, depending on the local rules, brokers can’t put open listings into the MLS. This restriction is a big disadvantage. As we note in Chapter 12, the MLS is a highly effective tool that brokers use to internally advertise listings to other MLS members who may have buyers for their listings. Nor do brokers produce fancy brochures or put big classified ads in the newspaper to tell the world about an open listing. Why should they? Potential buyers may end up going to another broker or directly to the seller to write up an offer. The seller may also suddenly decide to cancel the listing.

  Brokers only advertise or market open listings as a last resort if they have nothing more promising to do. They disdainfully refer to open listings as pocket listings because brokers tuck them away “in their pocket” passively waiting for a buyer to come along. If you want a quick sale or a top price, an open listing isn’t the way to get either.

• No control: If you give ten brokers an open listing on your house, you end up doing work that a listing agent normally handles. All the agents call you to coordinate showings of your property. You must prepare the house for showings. You also have to debrief agents after showings to find out whether you’re getting an offer and, if not, find out why not. You have no neck to wring if you come home after work and find that someone left the front door unlocked and let the cat out after a showing. If you like chaos, you’ll like an open listing.

• Your broker is your competitor: Because you don’t have to pay any broker if you sell the house yourself, brokers see you as a competitor. This adversarial relationship encourages brokers to work for buyers, not you. Brokers know that if they take care of their buyers, they’ll get a commission sooner or later. No such loyalty exists in their relationship with you.

  An open listing is barely better than no listing at all. Unless you have an extremely compelling reason that you absolutely, positively must list your house with a bevy of brokers, you’ll be better served with an exclusive listing.

Commissions

In the following list, we try to answer questions you’ve had about commissions but may have been too embarrassed to ask. Don’t worry. Questions are good. If you didn’t have any questions, we wouldn’t get to write a book! Check out the following important questions:

• Who pays the commission? Usually sellers pay the commission, although in rare cases, buyers pay their agents directly. After all, sellers get money when property sells. Buyers generally don’t have funds left for anything more expensive than a Big Mac after making a cash down payment to buy the house, plus paying loan charges, property inspections fees, homeowners insurance premiums, moving costs, and other miscellaneous expenses of purchase.
• Are commissions set by law? There’s no such thing as a legal minimum commission or a mandatory percentage. Commissions vary from one area to the next. The price and type of property being sold also affect the percentage. Commissions on houses, for example, usually range from 4 to 7 percent of the sale price, and commissions on vacant land can go as high as 10 percent.

• Are commissions negotiable? Absolutely! If a real estate broker or agent tells you otherwise, dump ’em. In fact, most listing contracts contain language similar to the following notice contained in paragraph 3 of the C.A.R. listing: “Notice: The amount or rate of real estate commissions is not fixed by law. They are set by each Broker individually and may be negotiable between Seller and Broker (real estate commissions include all compensation and fees to Broker).”

  The vast majority of people who use the services of real estate agents erroneously believe that commissions aren’t negotiable. In an Opinion Research Corporation survey for AARP, only 26 percent of respondents correctly chose the answer that commissions can be negotiated.

Net listings

Unlike an open listing or an exclusive listing, a net listing isn’t a type of listing. Rather, a net listing is a way to pay brokers. Under the terms of a net listing, the seller and broker make this agreement: When property sells, the broker is paid all money received over and above a predetermined net amount that goes to the seller. Because the net listing is a payment method, it can be used with either open or exclusive listing contracts.

For example, you tell the listing broker that you want to net $200,000 from the sale of your house after paying off the existing $70,000 mortgage and all other expenses of sale except, of course, the brokerage fee. According to the broker, your house is worth around $300,000, and expenses of sale in your area typically run about $10,000.

If everything goes according to plan and your house actually sells for $300,000, the broker earns $20,000 — $300,000 less $70,000 to pay off the loan, $10,000 for expenses of sale, and $200,000 to you. As far as you’re concerned, you’re happy to pay a $20,000 brokerage fee if you can clear $200,000 for yourself.

Unfortunately, sales rarely go according to plan in the real world. For example, consider the following possibilities:

• The broker overestimated your house’s value. What if no one will pay more than $280,000 for your property? That’s fine with you. You can pay off the loan, pay the $10,000 for expenses of sale, and still walk away with $200,000. Because no money is left, however, all your broker gets is a pat on the back.

  Under the circumstances, a bad listing broker may discourage prospective buyers from offering $280,000 by falsely telling them that you absolutely won’t accept a penny less than $300,000. If a cooperating broker brings in a $280,000 offer, a bad listing agent may advise you not to accept the lowball offer and tell you to hold out for more money. Or worse yet, the broker may not even tell you about the offer in the first place. In either case, the broker is putting the commission (or lack thereof) ahead of your best interests as a seller.

• The broker underestimated your house’s value. What if your house sells for $320,000? As Chapter 10 explains, pricing property is an imprecise art. If the listing broker says your house is “worth around $300,000,” a $20,000 variation in its value one way or the other is an acceptable margin of error. Even so, how will you feel paying the broker $40,000 (a whopping 12.5 percent commission!) because your house sold at the high end of its fair market value? Worse yet, what if the listing broker purposely understated your house’s value to get a bigger fee? That’s fraud.

Net listings are illegal in some states because of their high level of risk for broker fraud or misrepresentation. Even if using a net listing is perfectly legal in your area, that still doesn’t make it a good way to compensate brokers. Don’t use a net listing.

Discount brokers

So-called full-service real estate brokers, as their title indicates, handle many tasks and details related to your property’s sale and charge a full commission for their services. Here is a small sample of what a good listing broker does to sell your home:

• Determines your house’s fair market value
• Helps you prepare the property for marketing
• Handles all its advertising
• Holds Sunday open houses as well as open houses for cooperating brokers
• Schedules private showings for buyers
• Negotiates with buyers or their agents to get you the best possible price and terms of sale
• Makes sure that all the contract details are handled properly right up to the close of escrow

Your job is to serve as supervisor and decision maker.

At the opposite end of the service spectrum is the For Sale By Owner (FSBO) option. As Chapter 6 discusses, FSBO sellers don’t have a listing broker. If you choose the FSBO option, you handle all the listing broker’s chores yourself and thus avoid paying the listing agent’s portion of a brokerage fee when your house sells. (As we note in Chapter 6, you may have to pay the buyer’s agent a brokerage fee to put your deal together.)

Discount brokers occupy the middle range of the real estate brokerage service spectrum. If you use a discount broker, you pick and choose the tasks you want to do yourself to market your house. The more work you’re willing to handle yourself, the less you typically pay the broker.

Your savings, although not as great as those offered by the FSBO option, may be better than simply cutting the commission on your house’s sale price from 6 to 5.5 percent. Discount brokers use different pricing programs:

• Flat fee: With some discount brokers, you pay a flat fee for services rendered. For example, services can include providing a For Sale sign to put in your front yard, putting a write-up about your house in sales brochures published by the firm and distributed in free newsstands located around town, and training you in fundamentals (such as how to write a classified ad, how to hold an open house, and how to negotiate). For an extra fee, discount brokers may put a house’s listing in the local MLS. (You’re obligated to pay an additional commission if an MLS cooperating broker procures the buyer.)
• Percentage commission: Instead of charging 5 or 6 percent, which traditional real estate firms charge, some discount brokers charge 3 or 4 percent. Redfin, which is a discount broker, boasts a full menu of services for house sellers and promotes that its commission is just 1.5 percent. Of course, you would also have to pay a commission (typically 2 to 3 percent) to an agent who brought you a buyer.
• Hourly: If you prefer, some discount brokers also provide assistance on an hourly fee basis. For example, you want a firm to handle all your Sunday open houses, negotiate contract terms whenever you receive written offers, and help you fill out sale-related paperwork. The drawback to this approach is that if you don’t end up selling, you’re out all the fees you’ve already paid.

Some full-service/full-commission brokers aren’t keen about working on discount broker listings. For one thing, their listings often offer lower fees for cooperating brokers. Even if the fee is equal to the prevailing local rate, however, full-service agents know they’ll probably have to do extra work because you don’t have a full-service broker handling your end of the deal. For these reasons, discount broker listings get less than enthusiastic showings by most full-service brokers.

Using discount brokers makes the most sense if your local real estate market is strong, pricing your house is relatively simple, and you’re willing to handle some of the work. However, if your property will be difficult to sell (because of the amount of corrective work it needs or its unusual floor plan, for example), you may be better off using a full-service broker to make a sale.

Flat fees, hourly charges, and reduced commission rates vary from one discount broker to the next. If you decide to use a discount broker, do some comparison shopping. Look for a discount broker who’ll give you a bundle of services that best meets your needs for the lowest total fee. Larger discount real estate brokerage firms include

• Assist-2-Sell: www.assist2sell.com
• Help-U-Sell: www.helpusell.com
• Redfin: www.redfin.com

What information should you disclose?

Disclosure statements aren’t identical throughout the United States. Like other real estate contracts and forms, disclosure statements vary enormously in scope and intricacy because the disclosures themselves differ widely from state to state and from one area to another within any given state.

The documents you give prospective buyers probably won’t look like the California Association of Realtors’ Real Estate Transfer Disclosure Statement, shown in Figure 8-2. The C.A.R. form, however, gives you an idea of the kind of disclosures you may have to make.

Generally speaking, the law requires that you disclose to prospective buyers any information you have that materially affects your property’s value or desirability. A material fact is anything that reasonably affects either a buyer’s decision to purchase your house or the price he’d pay. This disclosure must cover facts that you, as an owner, are expected to know about your property and the neighborhood that couldn’t be known by (or wouldn’t be apparent to) the buyer. For example:

• Physical condition: Are your built-in appliances in good working order? Do you know about any hidden defects or malfunctions in your house’s major components (roof, foundation, electrical system, plumbing, sewer, insulation, windows, doors, walls, and so on)?

  Although you certainly ought to know whether your air conditioner works properly, no one expects you to be a professional property inspector. Disclosure laws are just one more reason why, as we note in Chapter 7, getting a premarketing inspection of your house is wise. You (and your agent, if you’re using one) should also encourage buyers to conduct their own investigations and obtain inspections from their own experts instead of relying solely on your inspections or the information you provide about the property’s physical condition.

• Health, safety, and environmental hazards: You must comply with federal, state, and local disclosure laws regarding property problems related to asbestos, formaldehyde, lead-based paints, underground fuel or chemical storage tanks, radon gas, contaminated soil or water, and other health hazards. Is your property in harm’s way from earthquakes, floods, hurricanes, or other natural disasters? Does your property comply with local energy or water conservation ordinances?

  Don’t worry about running all over town to stock up on the various booklets, pamphlets, and forms the law requires you to give to prospective buyers. Your listing agent or real estate lawyer (if you’re selling without an agent) should provide all necessary disclosure information prior to marketing your property.

• Legal condition: Are any lawsuits pending that affect your property? Did you make any modifications or alterations to your property without getting the necessary building permits? Do these modifications or alterations comply with state and local building codes? If you’re selling a condominium, you must give the buyer copies of the Covenants, Conditions, and Restrictions (CC&Rs), the Homeowners Association bylaws, and the budget.

  If you have any legal problems related to the property, clear them up before marketing your property if possible. Nobody wants to buy a lawsuit. Legal problems are deal killers. Buyers generally don’t want to inherit legal problems, which tend to take a long time to resolve and are expensive, to boot.

• Subjective areas: Up to this point, you can provide objective answers to the various disclosure questions. Your roof either leaks or it doesn’t. You either have lead-based paint in your house or you don’t. Either you’re being sued or you aren’t. Now things get fuzzy. Is your neighborhood quiet? Can you find parking spaces easily near your house? Is car traffic excessive in the neighborhood? Would you call the morning commute horrendous? Are schools in the area overcrowded?

  Subjective questions can’t be answered with a simple yes or no. The environment that you think is extremely quiet, the buyer may consider a boiler factory. Parking a block from your house may be close in your opinion, but a long walk to your buyer. How much traffic is excessive? And so it goes. Answer all subjective questions to the best of your ability, and then encourage buyers to familiarize themselves with the area so they can draw their own subjective conclusions about these issues.

  Some state courts have ruled that certain unpleasant facts materially affect the desirability and value of property and insist that sellers disclose these facts. One such fact is a death on the property within several years of the sale — especially if the death was gruesome or violent. For example, the difference between an elderly man dying peacefully in his sleep and a homicide is obvious. Other examples of unpleasant material facts are high crime rates in the immediate area or the presence of known child molesters or rapists who’ve been released from prison and now live in the neighborhood.

  If you’re not sure whether you have to make this type of disclosure about your property, consult your listing agent or a real estate lawyer.

An ounce of prevention is worth a pound of cure

Sometimes, lawsuits are unavoidable. Certain litigious lads and lasses will take you to court at the drop of a summons whether they have a case or not. Other than identifying them in advance as troublemakers and refusing to accept an offer from them, you can’t protect yourself from people who believe that a lawsuit is their only solution for real or imagined problems. If you have the misfortune of selling your house to one of these misguided souls, your best recourse is to get a good lawyer to defend you.

The best defense is a good offense. Here are four suggestions you can enact to reduce the possibility of a legitimate lawsuit:

• If in doubt, disclose. If you have to ask whether to disclose something about your property or the neighborhood, you’ve answered your own question. Overdisclosure is better than running the risk of being sued for damages or having the sale rescinded because you failed to reveal a fact that materially affects your property’s desirability or value. Remember the golden rule. “Do unto others as you would have them do unto you” may sound hokey, but it’s mighty fine real estate advice.
• Don’t guess. Not sure about the square footage of your house, the roof’s age, the life expectancy of your water heater, or any other material fact? It’s better by far to answer “unknown” than to guess. If prospective buyers are concerned about any of your “unknowns,” they can hire their own experts to render opinions.

• Put your disclosure in writing. Have the buyers affirm receipt of your disclosure statement by signing and dating it. Be sure to keep a copy for your file.

• Hire a professional to inspect your house prior to putting it on the market. After seeing the results, you have the option of fixing defects you want to repair and disclosing the others.

Don’t fight the problem. Like it or not, disclosure statements are a fact of real estate life. They’re here to stay. Handled properly, mandatory disclosures speed up the sale of your house and ensure that, when your house sells, it stays sold.