Everything is negotiable, starting with the broker’s listing agreement
By Harvey S. Jacobs,
With most real estate purchase contracts, everything is negotiable. This is also true of listing agreements you may enter into if you decide to use a real estate agent to list, market and sell your home. Be careful! The listing agreement is legally binding and will govern your relationship with a real estate agent for several months.
All listing agreements contain important legal clauses, including the following: the initial list price, the term of the listing agreement, the fee you agree to pay your broker for selling your home, the length of time during which your broker will be able to collect his fee after the listing agreement expires, and the amount your broker agrees to pay to any sub-agents or buyer brokers for showing and selling your home.
Although the initial list price seems like a relatively simple term, it needs to be arrived at after careful analysis. All real estate professionals worth hiring will volunteer to prepare a comparative market analysis (CMA) for you at no cost. A CMA will provide you with an estimated fair-market value of your home. Home sellers would be wise to interview at least three local real estate agents and ask them each to provide a CMA. That way you will be far more likely to arrive at an accurate estimated fair-market value for your home.
Once you determine this value, the initial list price and pricing strategy can be discussed and implemented. Do not assume that your estimated fair-market value will be your initial list price. Depending on the market activity and price trends, you may want to make your initial list price higher or even lower than your estimated fair-market value. Some real estate professionals advocate an initial list price above your estimated fair-market value under the theory that you can always come down in price. Another school of thought is to start with a list price below the estimated fair-market value and hope that multiple offers create a bidding war that ultimately results in a selling price equal to, or in excess of, your estimated fair-market value. List prices can always be adjusted up or down to take into account current market forces. Just because you may receive a full-price offer does not mean you have to accept that offer. Be aware that in Virginia, if an agent produces a ready, willing and able buyer, you may owe that agent a broker’s fee. In Maryland and the District, you will not owe a commission until you enter into a sales contract with a buyer and go to settlement.
The length of the listing agreement is also negotiable. Real estate professionals will often ask for at least six months to effectively list, market, sell and go to settlement on your home. There is no hard-and-fast rule as to the proper number of months. The term should reflect the average number of days that houses comparable to yours have been on the market before going to closing. In a brisk market, a three-month listing term may be plenty of time. In a sluggish market — or if your home is going to be subject to a short sale — nine months or even a year may not be enough.
You can always renew a listing agreement, but you may not be able to terminate one if you decide that your agent is not working out. Some agents will allow you to terminate your listing agreement before its expiration date, says Lisa Abrams, a Realtor for Re/Max licensed in the District, Maryland and Virginia. “I always let my clients know the listing agreement can be terminated with mutual consent, which I always honor,” she says. When in doubt, get it in writing and err on the side of a shorter agreement.
Broker fees, despite pressure to the contrary, are always negotiable. But you may be surprised to learn that a smaller fee is not always in your best interest. When I am a seller, I routinely offer — and I advise my clients to offer — an above-market broker fee or bonus for obtaining a full-price, non-contingent offer within a short period. That short period can be the first 30 days of the listing agreement.
I also recommend requiring the listing agent to offer the buyer’s agent more than 50 percent of the overall commission. Real estate agents often have many properties that they can show to qualified buyers. Multiple listing services disclose the listing agents’ split of the overall listing commission. Thus, human nature being what it is, if an agent is spending his hard-earned gas money driving buyers around town, and he can get a 3.5 percent or even 4 percent commission, you better bet he will make sure your home is on that day’s tour, assuming it otherwise meets his buyer’s criteria.
If your home is in poor shape, in a less-than-stellar location or has some other factor that makes it difficult to sell, you may consider offering a bonus, such as cash, use of your vacation home or a year’s worth of gas, to the agent who brings you a ready, willing and able buyer. These strategies may attract more visits to your home than your home would otherwise attract on its own.
Many real estate companies have also implemented administrative fees as part of their overall broker compensation. These fees, often ranging from $175 to more than $400, typically go to the real estate company, not your agent, and often the company will not waive them. To avoid unpleasant surprises at settlement, you may want to discuss, before signing a listing agreement, whether there is a fee and whether it can be waived.
The commission protection period, frequently called the “tail,” is often misunderstood. That clause says that for a period after the listing agreement expires, the real estate broker will still be entitled to a fee if you sell your home to someone who originally saw it during the term of the listing agreement. To protect yourself against having to pay a commission unnecessarily, it is critical that your real estate agent provide you a weekly written report of all the people who view your home during the term of the listing agreement. Negotiate to get this reporting clause added to your listing agreement.
The tail period should be as short as possible, such as 30 days. Some real estate agents will agree to limit this tail to a number of named potential buyers, or they will agree to waive this clause. They’re operating under the theory that they are professionals, and if they were unable to close the deal during their listing agreement, but you are able to do so yourself, they will wish you well. Also, if you sell your home, you may be in the market to buy another — and agents know that if they treat you well, you will be highly likely to engage them as a buyer’s broker to find your next home or to refer them to your friends and neighbors.
The listing agreement is just one of several forms a seller will be asked to sign. Read them all before signing, and if you do not understand them, ask your real estate broker to explain them to you. If you still do not understand, feel free to consult a local real estate lawyer to explain the meaning and significance of those terms. Remember, everything is negotiable.
Harvey S. Jacobs is a real estate lawyer in the Rockville office of Joseph, Greenwald & Laake. He is an active real estate investor, developer, landlord, settlement attorney and lender. This column is not legal advice and should not be acted upon without obtaining your own legal counsel.