4.3 Listing and Sales Contracts and Contingencies

Listing Agreements

A listing agreement is an employment contract between a seller and a broker. The type controls when commission is earned.

Commission is typically earned when the broker produces a ready, willing, and able buyer who meets the listing terms, even if the seller later refuses to close. Commission is always negotiable and never set by law or board rule.

The purchase (sales) contract

A valid purchase contract must:

• Identify the parties (competent buyer and seller),
• Adequately describe the property (legal description preferred),
• State the price and terms,
• Show mutual assent and consideration, and
• Be in writing and signed by the parties to be charged.

Earnest money is a good-faith deposit. The broker holds it in a trust (escrow) account—never in the broker's operating account. Mixing client funds with business funds is commingling; spending them is conversion, a serious license-law violation. Earnest money is evidence of the buyer's seriousness but is not legally required to form the contract.

Equitable title: Once both parties sign, the buyer holds equitable title—a right to obtain legal title at closing—while the seller retains legal title until the deed is delivered.

Contingencies

A contingency is a condition that must be satisfied or waived before the parties are obligated to close. If a contingency fails, the protected party can usually terminate and recover earnest money without breaching.

• Financing contingency: buyer must obtain a loan on stated terms by a deadline.
• Inspection contingency: buyer may inspect and request repairs, renegotiate, or cancel.
• Appraisal contingency: the property must appraise at or above the contract price for the lender to fund.
• Sale-of-current-home contingency: buyer must sell an existing home first.
• Title contingency: seller must deliver marketable title.

Worked example—appraisal gap: Contract price $400,000; buyer puts 20% down ($80,000) and finances $320,000 (80% LTV). The appraisal comes in at $380,000. The lender lends 80% of the lower of price or value = 80% × $380,000 = $304,000. The buyer now faces a $16,000 gap ($320,000 needed − $304,000 available). With an appraisal contingency, the buyer can renegotiate to $380,000, pay the extra $16,000 in cash, or cancel and recover earnest money. Without it, the buyer risks losing the deposit if he cannot close.

Option contracts and right of first refusal

Two agreements often confused with a sale contract appear on the national exam.

• An option gives the optionee the unilateral right, but not the obligation, to buy at a set price within a set time. The optionor (owner) is bound; the optionee is free. Consideration paid for the option is generally non-refundable even if the buyer never exercises.
• A right of first refusal is weaker: the holder may match a bona fide third-party offer only if and when the owner decides to sell. There is no fixed price and no power to force a sale.

Trap: An option fixes price now; a right of first refusal only reacts to a future offer. PSI tests the difference by describing a tenant who "can buy if the landlord ever decides to sell" — that is a right of first refusal, not an option.

Equitable conversion and risk of loss

Once a purchase contract is signed, the buyer holds equitable title and the seller holds legal title until closing. Under the doctrine of equitable conversion, many states place the risk of loss on the buyer the moment the contract is signed, even before possession. Most modern contracts override this by contract clause or by the Uniform Vendor and Purchaser Risk Act, which keeps risk on the seller until title or possession transfers.

Worked example — earnest money math: A buyer offers $350,000 with 1% earnest money. The deposit is $350,000 × 0.01 = $3,500, held in the broker's trust account. If the buyer later defaults with no protective contingency and the contract names the deposit as liquidated damages, the seller keeps the $3,500 and the broker disburses it per the contract — never to the broker's own account.

Contingency deadlines, waivers, and the contract timeline

Contingencies run on deadlines. Each one names a date by which the protected party must act — order the inspection, deliver a loan-approval letter, or object to title. Miss the deadline and the contingency is generally treated as waived, which can lock a buyer into closing or forfeiting earnest money.

• Active waiver — the buyer signs a form removing the contingency, signaling intent to proceed.
• Passive waiver — the deadline simply passes; many contracts deem silence a waiver, so a buyer who does nothing may lose the protection.

Worked timeline: A contract signed June 1 sets a 10-day inspection contingency and a 30-day financing contingency. The buyer must inspect by June 11 and deliver loan approval by July 1. If the appraisal-and-financing falls through on June 28, the buyer is still within the financing window and may cancel with earnest money returned. But if the buyer let the June 11 inspection date pass without objecting and a defect later surfaces, that contingency is waived and the buyer cannot use it to escape.

Trap: Contingencies protect only the party named, and only until the deadline. Read whether waiver is active or passive — a passive-waiver contract punishes a buyer who simply forgets to act.