Contracts Study Guide for the Real Estate License Exam

Buyer Agency and Listing Agreements

Real estate agents can represent a buyer as a buyer’s agent using a buyer-broker agreement, they can represent a seller as a seller’s agent using a listing agreement, or they can do both provided that both buyer and seller agree.

Listing Types

A listing agreement occurs when a seller agrees to allow a real estate agent to sell his or her property. However, there are several different types of listing agreements. Real estate agents need to understand these differences because they describe the duties and obligations that the agent has to the seller. Just as importantly, these agreements describe how—or even if—a real estate agent will earn a sales commission.

Open

An open listing agreement is when a seller lists his or her property with several different real estate agents. The real estate agent that brings a ready, willing, and able buyer to the seller is the only agent who will earn a sales commission.

Exclusive Agency

Exclusive agency is when the seller lists his or her property with a real estate agent and agrees to pay a sales commission to that agent regardless of who brings a buyer, even if it another real estate agent working for a different real estate broker. However, if the seller finds a buyer by himself or herself, then no sales commission is paid.

Exclusive Right to Sell

This type of listing agreement is when the seller lists his or her property with a real estate agent and agrees to pay a sales commission to the agent when the property is sold. The agent can find a buyer directly, or cooperate with another buyer’s agent. If the seller finds a buyer on his or her own, the seller is still obligated to pay the listing agent a sales commission. This type of listing agreement is the one most commonly used.

Net

Net listings are illegal in most states and are a good way for a real estate agent to get sued. Under a net listing agreement, real estate agents promise sellers they will get a certain amount of money for their property, and the agents will keep anything above that amount as a commission. Courts have sided with sellers who claim that the real estate agent understated or misrepresented the fair market value of their property in order to earn an inflated commission.

Multiple Listing Service (MLS)

The MLS is a database of past and current real property listings and sales. Only real estate agents who belong to both the local real estate association and the National Association of Realtors can subscribe to the MLS. The MLS is almost always used in residential real estate; it is usually not used in commercial real estate.

Limited-Service Agreement

With a limited-service agreement, a seller can pick and choose what the listing agent will do, and what the seller will do, as part of the sales process, in exchange for a lower sales commission. For example, the listing agent may put the property on the MLS and negotiate a purchase contract, while the seller is responsible for open houses and showing the home to prospective buyers.

Other Considerations

In addition to knowing the different types of listing agreements, real estate agents also need to understand that there are several common things to consider regardless of the type of listing agreement that is being used. Understanding these considerations can help protect the real estate agent from a claim of being unethical, or from being taken to court and sued.

Choosing a Form

Real estate agents who belong to the MLS have access to state real estate forms via the Zipforms database. These forms have been approved by the state’s department of real estate and have been reviewed by real estate attorneys. Agents who do not use the MLS should consult a real estate attorney for drafting forms, or for real estate form templates.

Agency Law

Agency in real estate is usually created with a written listing agreement or a buyer agency agreement. This is also called express agency. The real estate agent has a fiduciary responsibility to the seller, who is also known as the principal.

Commission Rate

Groups of real estate agents or real estate companies who agree to charge the same commission are guilty of violating antitrust law. Because of this, real estate commission rates are always considered to be negotiable. Commission rates can be based on a percentage of the sales price, a fixed amount, or a combination of both.

Listing Period

The listing period is the specified period of time that a real estate agent acts as a listing agent and is the agent of the seller. There is a starting date and an ending date. Some listing agreements have a provision that allows the real estate agent to be paid if a buyer that the agent showed the property to buys it after the listing period expired.

Buyer Agency Agreements

Working with buyers takes much more time and effort than working with a seller. To avoid having a buyer work with different agents, a real estate agent should have the buyer sign a buyer agency agreement. With this agreement, the buyer agrees to have the real estate agent work as its exclusive agent.

Special Agency Cases

Agency isn’t always black and white. While express agency is always created with a written agreement, implied agency can be created verbally, oftentimes by accident. This happens when an agent verbally says it will do something for a buyer or seller. When this occurs, an implied agency has been created. There are also other different types of written, express agency agreements that we will discuss here.

Dual Agency—Dual agency is when the same real estate agent represents both the seller and the buyer. Dual agency agreements should always be in writing and agreed to by both buyer and seller.

Transaction Brokerage—A transaction brokerage does not represent the buyer or the seller. Instead, it acts as a neutral third party to help both the buyer and the seller complete the transaction or sale. They are not a dual agent because they are not representing either party.

Designated Agency—A designated agency is a real estate broker that represents both the buyer and the seller. It is different from dual agency, in that one real estate agent from the agency represents the seller, and a different real estate agent from the same agency represents the buyer.

Listing Termination

Real estate listing contracts can be terminated—or ended—in many different ways. The best way, of course, is for the property to be sold, for title to transfer from seller to buyer, and for the real estate agents to get their commission. In this section, we’ll look at the ways that listings can be terminated by the parties involved, and by actions beyond the control of the parties.

Termination by the Parties

Real estate contracts can be terminated by one or both of the parties to a contract. Bilateral termination is when both parties perform or agree to termination. Unilateral termination is when only one of the parties terminates the contract.

Performance—Performance means that the obligations that the parties had in the contract have been met. Performance is the best way for a contract to be terminated or ended. In real estate, this means the property has been sold or leased, and a commission has been earned.

Mutual consent—Sometimes, things just don’t work out despite the best efforts of both parties in the contract. When this happens, the parties can give their mutual consent—also called mutual agreement—and terminate the contract. Both parties go their separate way, and there are no hard feelings or legal ramifications to mutually agreeing to terminate the contract.

Time Expiration—Listing contracts have specific beginning and ending dates, also known as the listing period. During the listing period, real estate agents do their best to get the property sold or leased. If they have not been able to perform by the ending date, the contract will terminate due to time expiration.

Principal Revocation—Revocation means “taking back”. In the same way that an offer can be revoked before it is accepted, listing contracts can also be revoked or terminated. Remember that under agency law, the client is the principal and the real estate agent is the agent. When a principal revokes a listing agreement, it is taking the listing back from the real estate agent before the termination date.

Broker Revocation—Brokers can also revoke listing agreements. Sometimes the seller—or the principal—is uncooperative, or he or she misrepresents material facts about the property to the real estate agent. When this happens, it is better to end the contract early through broker revocation of the listing agreement.

Termination by Law

Real estate contracts can also be terminated by law. This occurs when the performance of a contract will be legally impossible. Termination by law of a contract is not the same thing as one party suing the other party.

Death—If the buyer or seller dies between the contract being signed and the sale closing, the contract is automatically terminated. However, if the real estate agent dies, the agent’s broker can appoint another agent to handle the listing.

Bankruptcy—Contracts can also be terminated if the seller or buyer files for bankruptcy after the contract was signed but before the sale closes. A bankrupt buyer would be unable to obtain a mortgage and perform financially. A seller declaring bankruptcy doesn’t automatically terminate the contract, but it does mean that the seller will likely be unable to meet the contract deadlines and closing date. If that happens, the buyer could terminate the contract.

Insanity—Remember that competency and capacity are two of the elements that make a contract valid and legally binding. If the buyer or seller becomes insane, the contract is automatically terminated. However, if the real estate agent becomes insane, the broker can appoint another agent to handle the contract.

Property Destruction—Buyers want to purchase the property they saw when they made the offer and their contract was accepted. If the property is completely, or partially, destroyed between the contract acceptance and closing date, the contract can be terminated. Sometimes, the parties can mutually agree to extend the closing date while repairs are being made to the property.

Other Real Estate Contracts

Not all real estate contracts are listing agreements to sell or lease a property, buyer broker agreements to exclusively represent a buyer, or leases between a landlord and a tenant. Here are some other common contracts used in the real estate business.

Contract for Exchange

A contract for exchange is when no money passes from one party to another. Instead, one good or service is exchanged for another good or service between the parties. For example, a landowner might give a developer a parcel of land in exchange for a lot with a new house on it in the newly developed subdivision.

Contract for Deed

A contract for deed is also known as an installment sale. When a property is sold using a contract for deed, the seller keeps the legal title to the property until the buyer has made all payments. After the final payment has been made, the buyer gets the legal title to the property.

Options

If one party gives another party the opportunity to do something in the future, they have an “option”. In real estate, a seller can give a buyer the option to purchase his or her property by a certain date for a certain price. During the option period, the seller cannot sell to another buyer, unless the option contract is terminated. A buyer usually pays the seller an option fee in exchange for the seller giving the buyer the option.

Assignments

Assignments are when one party in a contract gives its rights and obligations in a contract to another party. At the time the contract is offered and accepted, if one party to the contract is identified as Buyer and/or Assignee or Seller and/or Assignee, then the parties do not have to agree on the assignment of the contract if and when it occurs.

Novations

Novation is similar to an assignment, except that with a novation the parties have not agreed in advance to the contract being assigned. Because of this, the consent of all parties is needed with novation. Novation can mean replacing one contract obligation or provision for another, adding an obligation, or substituting one party for another.