4.3 Listing and Sales Contracts and Contingencies

Listing and Sales Contracts and Contingencies

Real estate practice runs on two contract families: the listing agreement (broker employment) and the purchase/sale agreement (buyer-seller). Plus leases for rentals. Exams test which listing pays a commission and when, and how contingencies control the purchase contract's life.

Listing agreements

A listing is an employment contract in which a seller hires a broker to market and sell property for compensation. The three main types differ in who can earn the commission.

The exclusive right to sell gives the broker the most protection and is most common. Under it, even if the owner finds the buyer, the listing broker is still owed the commission.

Net listings and the procuring cause

A net listing lets the broker keep everything above a net price the seller specifies. It is illegal or strongly discouraged in many states because it creates a conflict of interest — the broker is tempted to underprice or hide value. Treat net listings as a red-flag answer.

Procuring cause decides who earns the commission on an open listing: the broker whose efforts produced a ready, willing, and able buyer in an unbroken chain of events. A broker who merely showed the home once, then disappeared, is usually not the procuring cause.

The purchase (sales) agreement

The purchase agreement is the central bilateral contract. It becomes binding when the buyer's offer is accepted in writing by the seller (mutual assent) and communicated. It identifies the parties, the property, the price, financing terms, the deposit, the closing date, the items included, and the contingencies.

Until acceptance, the buyer can revoke the offer. After acceptance, both parties are bound subject to the contingencies. Earnest money is held in the broker's or escrow's trust account, never commingled with operating funds.

Contingencies

A contingency is a condition that must be satisfied or waived before a party is obligated to close. If a contingency fails and is not waived, the protected party can usually cancel and recover the deposit — this is excused non-performance, not breach.

• Financing contingency: Buyer must obtain a loan by a deadline; if denied, the buyer can cancel.
• Inspection contingency: Buyer may inspect and cancel or renegotiate based on defects.
• Appraisal contingency: Property must appraise at or above the price for the loan amount.
• Sale-of-home contingency: Buyer's obligation depends on selling their current home.

Worked appraisal-gap example

A buyer agrees to pay $500,000 with 20% down and an 80% loan. The appraisal comes in at $480,000.

• Lender lends 80% of the lower of price or appraised value = 80% × $480,000 = $384,000.
• Original planned loan = 80% × $500,000 = $400,000.
• Financing shortfall (appraisal gap) = $400,000 − $384,000 = $16,000.
• The buyer must either bring an extra $16,000 in cash, renegotiate the price, or, under an appraisal contingency, cancel and recover the deposit.

Deadlines matter: if the buyer does not act within the contingency period, the contingency is often deemed waived, and the buyer must perform or risk default.

Leases as contracts

A lease is both a contract and a conveyance of the right to possess. The four common leasehold estates are the estate for years (fixed term with a definite end), the periodic estate (month-to-month, auto-renewing until notice), the estate at will (no fixed term, terminable by either party), and the estate at sufferance (a holdover tenant staying without permission). On the exam, match the fact pattern to the estate by asking whether there is a fixed end date and whether the landlord still consents.

Counteroffers and multiple offers

In an active market the listing may attract several offers at once. Each is a separate offer the seller may accept, reject, or counter. A seller can issue a multiple counteroffer to several buyers, but a contract forms only when one buyer accepts and the seller confirms — and the seller cannot bind two buyers to the same property. Once the seller accepts one offer, the others should be promptly declined to avoid the trap of two binding contracts on one parcel.

California Listing Rules and a Commission Math Walk-Through

California adds enforceable requirements to the national listing framework, and the DRE tests both the rules and the arithmetic.

Required Terms and the Definite-Termination Rule

Under DRE regulation (and Business and Professions Code 10176), an exclusive listing must contain a definite termination date. A listing that says "this agreement continues until the property sells" with no end date is a violation that can cost the salesperson's license. Likewise, the commission rate is always negotiable and must never be presented as fixed or set by law or board rule — implying a standard rate invites an antitrust price-fixing charge.

Net Listings

A net listing (broker keeps all proceeds above a stated net to the seller) is not outright illegal in California, but it is heavily disfavored and the broker must disclose the exact selling price and resulting commission before the seller is committed. Because of the conflict of interest, treat a net listing as the wrong/risky answer unless the facts show full disclosure.

A Worked Commission Split

A home sells for $750,000 at a 5% total commission, split 50/50 between the listing and selling brokerages; the listing salesperson keeps 60% of her brokerage's share.

• Total commission = 5% x $750,000 = $37,500.
• Listing brokerage share = 50% x $37,500 = $18,750.
• Listing salesperson share = 60% x $18,750 = $11,250.

Note the salesperson is paid by her broker, never directly by the seller or escrow — a frequent exam point tied to the rule that a salesperson works only under and is compensated by the responsible broker.

A Second Appraisal-Gap Variation

A buyer offers $420,000 with a 90% loan; the appraisal returns $405,000. The lender funds 90% of the lower figure: 90% x $405,000 = $364,500, versus a planned 90% x $420,000 = $378,000. The $13,500 gap must be covered with cash, renegotiated, or, under an appraisal contingency, used to cancel and recover the deposit before the contingency deadline.

Trap: Under an exclusive-agency listing the seller can sell it himself commission-free, but under an exclusive-right-to-sell listing the broker is owed the commission even if the seller finds the buyer. Candidates routinely swap these two.