What is a Listing Agreement?
A listing agreement is a legally binding contract between a real estate agent and a property owner to market the property for sale. It is an agreement delineating the rights and duties of both parties in the context of the sale of the property.
The purpose of a listing agreement is to create a legal relationship in which the agent acts as an agent for the seller, and is an agent for the buyer upon presentation of an acceptable offer. It’s important to have a fair amount of elaboration in a listing agreement so as to address the various issues and concerns that may arise during the duration of this contractual relationship.
In the simplest terms, a listing agreement acts as a representation of the seller to prospective buyers. Listing agreements most often benefit the seller and agent, however, in foreign jurisdictions, a listing agreement may benefit the buyer of a property by including a representation of the buyer .
The legal definition of a listing agreement is:
"An employment contract that establishes the duration, price, and/or other terms of a real estate broker’s employment, and which gives the real estate broker the exclusive right to list the property for sale, rent, leasing, or for investment (whether or not any commission is paid)."
In California, a listing agreement is any document that establishes an employment relationship between an agent and a property owner. Cal. Civ. Code § 1088. Under California law, the listing may not be enforceable unless it contains a description of the property, a listing price, a term of the agreement, a clause concerning any deposit or binder, and the amount of the commission to be paid. This basic agreement, in most circumstances, is the exclusive right to sell agreement, which entitles the seller to a brokerage commission irrespective of the means by which the buyer was acquiring the property.
Broadly speaking, the following are the basic elements of a listing agreement:
Basic content of a residential listing agreement:
Listing Agreement Types in California
There are three main types of listing agreements used with real estate agents in California: exclusive right-to-sell, exclusive agency, and open. Each one has a distinct purpose and set of implications based on the type of relationship you’d like to have with your real estate agent.
Exclusive right-to-sell is the most common form of contract between real estate agents and single-family home sellers in California. The seller agrees to give an agent the exclusive right to sell their property, meaning that whoever sells the home will get the commission. This contract is usually for a specified period of time, which can be as short as a month or as long as six months. Like all types of contracts in California, this one can be terminated if both parties agree to do so.
Exclusive agency comes with a lot of risk for the seller, so it’s less commonly used and not typically recommended. In this scenario, the seller gives their agent the right to sell the home, but they also have the right to sell it themselves within the allocated time frame (hence, the name "exclusive agency"). If they succeed in selling it themselves, no real estate commission will be owed.
In order to mitigate that risk of having to pay a real estate commission, the seller should negotiate a high enough amount to cover for the possibility that they’ll sell the home themselves. However, in that case, they will probably set the asking price lower than the commission rate in order to attract buyers and sell the home quickly.
Having an open listing agreement with your real estate agent is basically the same thing as not having a listing agreement at all. The seller can sell the property themselves, and if someone else is able to sell it, then the fee will be split between the seller’s agent and the agent who sold the house.
If you’ve ever heard the saying "list to last," you know that real estate agents have a great deal of influence over their clients and other agents. In the case of exclusive agencies, this means they can protect themselves from the real estate commission being paid to another agent if the seller sells his or her own home.
By signing an exclusive agency, the seller is saying they trust their agent enough not to try to sell the home themselves in order to avoid paying the commission.
"Open listing agreements are not recommended because they’re the least effective way to market the home or land," Gorr says. "You’re just giving everyone the chance to put their stuff in the MLS and hope that someone’s interested enough to buy."
You can almost always terminate any contract you have with a real estate agent as long as you are doing so with reasonable notice and in good faith, and your real estate agent shouldn’t have a problem doing your bidding, as long as you’re not being unreasonable.
An important caveat to termination by the seller – in most states, you cannot require the agent to keep showing the home to buyers just because you change your mind about the listing. "We can only show the house to the buyer who has already seen it in the first two weeks," says Gorr. "Since the seller’s agent gets paid by the seller, I don’t have to show the house to the same buyers our twice."
California Listing Agreements: Key Provisions
In California, a listing agreement is a binding contract between a real property owner and a real estate agent. The best real estate agents, brokers, and supervisors use listing agreements with all their sellers not only because they’re required but also because the agreements provide consistent clarity on the terms of the property sale. Once a seller signs a listing agreement, it creates a fiduciary relationship between the seller and the agent, which means that the seller must be able to trust that the agent is looking out for the seller’s interests while selling the property.
While there are many clauses in a typical listing agreement, these five are the most important:
- Commencement and Expiration Dates: Clearly lays out the length of the listing period and the dates in which the listing begins and end. While it may be possible to terminate a listing agreement if both parties consent, it’s better to have the dates explicitly placed in the contract.
- Exclusive Right to Sell: An exclusive right to purchase or sell a property mutuality obligates both parties to the agreement to complete the sale, barring any outside contingencies such as offer revocations and unforeseen event releases. In other words, an exclusive right to sell clause clearly lays out each party’s obligation to the other without room for disagreement or exception due to the sale of a property.
- Compensation Amounts: This clause spells out how much compensation a broker will receive upon a successful deal. In most cases, it is a percentage of the sale price achieved but can also be a flat fee, a net figure (which does not include applicable commissions), or a method that uses any number of variables to determine the amount of compensation such as agreed upon by the parties (e.g. $.50 square foot or 80% of the broker’s full commission). If a broker is receiving a commission, the listing agreement should dictate the timing and form (such as cash or a property) of the payment.
- Listing Contingencies: In most states, the listing agreement should indicate what will happen if a buyer or seller pulls out of the sale (such as mortgages not being approved or casualty losses). If a particular contingency does not appear on the listing agreement, it cannot be claimed afterwards.
- Non-Agency Disclosure: Non-agency disclosures are to be made by agents working for a seller or a buyer who does not represent either party in the transaction. A non-agent disclosure can be a separate form or attached to the listing agreement.
Selling Agents and Seller Legal Duties
Listing agreements in California represent the cornerstone of the contractual relationship that legally binds a seller and an agent. While the particulars of a listing agreement may differ from one case to another, California real estate agents and sellers alike must comply with a number of obligations under state and federal laws with the completion of a fair and full disclosure.
The most all-encompassing obligation of agents and sellers is the duty of full disclosure. Unless an exemption applies, Section 1102.3 of the Civil Code of California requires sellers to disclose any material defects relating to the property. A "material defect" means one that may mar or negatively affect the value of the property.
To cite one example, a seller who knows that a home has flooded at least once in the previous five years is required to disclose the event in an offer. A buyer may then choose to withdraw or modify the bid based on the knowledge they’ve acquired as a result of the disclosure. For the sake of clarity, it should be noted that Section 1102.3 applies to a defect or issue that has no easy solution, or "one whose correction would require costly repairs over a lengthy period of time."
Another section of California law that applies to seller disclosure concerns the zone in which a property resides. In California, within certain zones and close to protected areas, a landowner may be obligated to disclose that their property is subject to certain risks mediated by a public agency.
In addition , listing agents are obliged by the National Association of Realtors® (NAR) Code of Ethics to follow due process in communicating offers on behalf of clients. According to Article 1 of the NAR Code of Ethics, "realtors, in attempting to secure a listing, must not intentionally mislead the property owner about the service that will be rendered, the level of services to be provided as compared to the services to be provided by other realtors or the compensation that will be offered to other realtors."
Every listing agent therefore has a duty to ensure that any communications taken on behalf of their client are both accurate and reflect the interests of the client.
Despite these strict obligations, not all sellers disclose material defects during a sale. A majority of problems relating to disclosure in California stem from the increased propensity for sellers either to hide or exaggerate the extent of the issues. What may start off as a broken window or a leaky sink in a residential lease may evolve into serious health risks, such as mold concerns, if the problem or defect is left unaddressed.
The bottom line, no matter what type of problem or defect hiding in a property, is that it can cause the biggest blow to a buyer’s financial investment. Disclosure obligations are not a formality, but rather a necessary practice that protects buyers from haggling over future problems that could have easily been addressed prior to the sale.
Releasing a California Listing Agreement
The process of canceling a property listing agreement in California may seem straightforward, but it comes with its own challenges. Whether the seller is unhappy with the property’s time on the market, the price, or simply wishes to move on, cancelling a listing agreement can be done through verbal or written communication.
In many cases, a seller may not be aware that they have to sign a cancellation before they can take their property off the market. This can create a complicated situation where the seller and the broker are at odds, or where the seller believes that they own the house without regard to issuing a termination of the relationship. Brokers have no obligation to pursue a sale for clients who do not have a current listing agreement. Legally, they have to obtain permission from the seller, either verbally or in writing, before placing the property back on the market.
There is a time frame involved with a cancellation of a listing agreement. While it is within the seller’s rights to terminate the listing, they cannot delay the termination for longer than 90 days, after which time the listing agreement becomes automatically cancelled.
While sellers can cancel the agreement whenever they wish, that doesn’t mean that they won’t have consequences to consider. If the listing agreement contains a release clause that the broker has to satisfy, or if the seller violates a stipulation made in the listing agreement, there may be monetary costs. Additionally, if the seller terminated the contract within the first 90 days, and the agreement includes an automatic cancellation clause, the seller loses the option to claim a ready, willing and able buyer during that timeframe.
To best avoid issues regarding the cancellation of a listing agreement, sellers should be as communicative as possible with their real estate professionals while getting out of a contract.
Negotiating the Terms of a Listing Agreement
When considering a listing agreement, sellers should be aware that the terms of such an agreement are negotiable. From our experience, we have found that the following tips may provide sellers with the best opportunity to negotiate beneficial terms:
- Lowering commission rates can be pivotal. You can start by eliminating fees/commissions for services you will not use (e.g., advertising). Try to negotiate a rate that reflects the rate of sales in your area.
- The length of the agreement is critical. Make the listing for no more than 3 months initially, and if you are unhappy with the performance of the listing agent, you can terminate. If you are satisfied with their performance or you want to give them a chance to improve , you can then negotiate for an initial extension of 6 months, or longer.
- Do not consent to any term that gives you limited ability to terminate the listing. If you are unhappy with your agent’s performance, do not allow any clause to require advance notice or preparation or administrative hurdles before allowing you to terminate.
- Watch for clauses that obligate you to sell at a price that represents a potential loss. Allow yourself the ability to sell for a set time (e.g., 30 days) at a lower price before the listing terminates.
- Be honest about agents you would not want to work with.
- Make clear to all parties the agents you are meeting with (e.g., USC® or other trademarked names) are not authorized to act as an agent for you and will not have any liability to you.