4.3 Listing and Sales Contracts and Contingencies

This section applies contract law to the documents brokers handle daily: listing agreements that create the brokerage relationship and earn commission, purchase agreements that bind buyer and seller, options, and the contingencies that let parties exit cleanly when conditions fail.

Types of Listing Agreements

Three listing types appear repeatedly on the exam, each defining when the broker earns a commission:

• Exclusive right to sell — broker is paid no matter who finds the buyer, even the seller.
• Exclusive agency — broker is paid unless the seller alone finds the buyer.
• Open listing — non-exclusive; only the broker who procures the buyer is paid, and the seller may use many brokers.

Listing Commission Outcomes

Net Listings and the Ready, Willing, and Able Buyer

A net listing pays the broker everything above a set net to the seller; it is regulated differently by jurisdiction because it invites conflicts of interest. A commission is generally earned when the broker produces a ready, willing, and able buyer who meets the listing terms, even if the seller then refuses to close.

Purchase Agreement Essentials

The purchase (sales) agreement is a bilateral, express, executory contract. Key terms include the parties, a legal description, the price, financing details, the closing date, prorations, and how earnest money is handled. Until closing, the buyer holds equitable title while the seller retains legal title.

Contingencies

A contingency is a condition that must be satisfied or waived before the parties are obligated to close. If a contingency fails and the buyer follows the contract's procedure and deadlines, the buyer may cancel and recover earnest money. Common contingencies include:

1. Financing — buyer must secure a loan.
2. Inspection — property must pass review.
3. Appraisal — value must support the price.
4. Sale of buyer's current home.

Worked Example: Appraisal Gap

A home is under contract at $400,000 but appraises at $385,000 with 20% down. The lender finances 80% of the lower value: 0.80 x $385,000 = $308,000. The buyer needs $400,000 - $308,000 = $92,000 in cash, a $12,000 gap above the planned $80,000 down. An appraisal contingency lets the buyer renegotiate or cancel.

Options and Right of First Refusal

An option gives a buyer the right, but not the obligation, to purchase within a set time for a set price; the option money is usually non-refundable. A right of first refusal is weaker: the holder may match a bona fide offer only after the owner decides to sell, with no power to force a sale.

Earnest Money Handling

Earnest money is typically deposited in the broker's trust (escrow) account, never commingled with operating funds. If the deal closes, it credits the buyer; if a contingency fails properly, it returns to the buyer; if the buyer defaults, it may be released to the seller under the contract's terms.

The Three Listing Agreement Types

Listing agreements differ by who earns the commission, and the exam tests the edge cases:

The exclusive right to sell is the most protective for the broker and the most common. Under an open listing, multiple brokers may compete and the owner owes nothing if the owner sells. A net listing (broker keeps everything above a set net to the seller) is regulated differently by jurisdiction because of the conflict of interest it creates.

Standard Purchase Contingencies

A contingency is a condition that must be satisfied before a party is obligated to close; if it fails, the protected party may cancel and recover earnest money. The most tested are the financing contingency (buyer must obtain a loan on stated terms), the inspection contingency (buyer may inspect and request repairs or cancel), the appraisal contingency (the property must appraise at or above the contract price), and the sale-of-current-home contingency (buyer must first sell an existing home).

A buyer who waives a contingency assumes that risk: waiving the appraisal contingency means the buyer must cover any shortfall in cash. Contingencies have deadlines; missing a deadline can waive the protection.

Earnest Money and the Procuring-Cause Commission Rule

Earnest money is a buyer's good-faith deposit showing serious intent; it is not required for contract validity but is customary. It must be deposited into the broker's trust (escrow) account within the state-mandated window and never commingled with the broker's operating funds. If the buyer defaults, the deposit may be forfeited (often under a liquidated-damages clause); if a contingency fails through no fault of the buyer, the buyer is entitled to its return.

On the commission side, a listing broker earns the fee once a ready, willing, and able buyer is produced at the seller's stated terms — even if the seller then refuses to close — because the broker has completed the contracted task. When two brokers claim one commission, the dispute turns on procuring cause, the unbroken chain of events that actually produced the buyer.

Common Exam Traps

• Saying an open listing pays the listing broker when the owner sells; it does not.
• Confusing an option (can force a sale) with a right of first refusal (only matches an offer).
• Forgetting that commission is earned once a ready, willing, and able buyer is produced.
• Assuming the buyer loses earnest money when a contingency fails through no fault of the buyer.

Key Takeaways