4.3 Listing and Sales Contracts and Contingencies
Key Takeaways
- Exclusive-right-to-sell listings pay the broker regardless of who finds the buyer.
- Exclusive-agency listings let the seller sell directly without owing commission.
- Open listings allow many brokers, with commission only to the procuring cause.
- A net listing is prohibited or discouraged because it invites conflicts of interest.
- Contingencies must be satisfied or waived in writing or the contract may be voided by the protected party.
Listing and Sales Contracts and Contingencies
There are two contract families a salesperson works with daily: the listing agreement (employment contract between seller and broker) and the sales contract (between buyer and seller). The exam tests the differences among listing types and the mechanics of contingencies.
Listing-agreement types
| Type | Who can sell | Commission rule |
|---|---|---|
| Exclusive right to sell | Listing broker controls; one broker | Broker paid no matter who finds buyer |
| Exclusive agency | One broker, but owner may sell direct | No commission if owner sells it themselves |
| Open (non-exclusive) | Any number of brokers | Only the procuring-cause broker is paid |
| Net listing | Varies | Disfavored/regulated differently by jurisdiction; conflict risk |
The exclusive right to sell gives the broker the strongest protection: the broker earns the commission even if the seller personally finds the buyer. Under an exclusive agency, that same direct sale by the owner owes no commission. A net listing lets the broker keep any amount above the seller's fixed net, so the seller does not share in the upside and may not appreciate the size of the resulting fee.
Procuring cause and commission
Under an open listing, only the broker who is the procuring cause — the one whose continuous efforts directly produced a ready, willing, and able buyer — earns the commission. A broker generally earns commission when a buyer who is ready, willing, and able to meet the seller's terms is produced, even if the seller later refuses to close. The commission is then due because the broker performed.
Worked example: A home lists at $350,000 with a 6% commission. The buyer offers full price and qualifies. The seller then backs out for personal reasons. Commission earned = 0.06 x $350,000 = $21,000, owed to the broker because performance was complete.
Sales contract and contingencies
The sales contract identifies parties, legal description, price, financing terms, closing date, and any contingencies — conditions that must be met before the buyer is obligated to close. Common contingencies:
- Financing contingency — buyer must obtain a loan at stated terms; if denied, buyer exits and recovers the deposit.
- Inspection contingency — buyer may cancel or renegotiate based on the home inspection.
- Appraisal contingency — the property must appraise at or above the contract price.
- Sale-of-current-home contingency — buyer must first sell an existing home.
Contingencies must be satisfied or waived, typically in writing by a deadline. An unmet contingency lets the protected party void the contract and reclaim earnest money.
Appraisal-gap worked example
A buyer contracts at $420,000 with an appraisal contingency, putting 20% down. The lender's appraisal comes in at $400,000, and the lender will lend only against the appraised value.
- Loan at 80% of $400,000 = $320,000.
- Cash needed to reach $420,000 = $420,000 - $320,000 = $100,000 instead of the planned $84,000 (20% of $420,000).
- The buyer faces a $16,000 gap. With the appraisal contingency, the buyer may renegotiate to $400,000, cover the gap, or cancel and recover the deposit.
Without the contingency, the buyer would be obligated to close or risk forfeiting the earnest money.
Listing-type comparison
| Listing type | Who earns the commission | Key exam point |
|---|---|---|
| Exclusive right to sell | Listing broker, no matter who sells | Most protective for the broker |
| Exclusive agency | Listing broker, unless the owner sells alone | Owner can avoid commission by selling personally |
| Open | Only the broker who procures the buyer | Non-exclusive; seller may list with many |
| Net | Broker keeps the excess over a set net | Conflict-prone; jurisdiction-specific rules |
Most exam scenarios test the difference between exclusive right to sell (commission owed regardless of who finds the buyer) and exclusive agency (no commission if the seller produces the buyer without any broker). A net listing invites a conflict of interest and is regulated differently by jurisdiction.
Contingency mechanics and a worked appraisal gap
Contingencies are conditions that must be satisfied or the obligated party may cancel and recover the earnest money. The most-tested are financing, appraisal, inspection, and sale-of-buyer's-home.
Worked appraisal gap: contract price $420,000, buyer making a 20% down payment and financing the rest, but the appraisal returns $405,000. The lender funds 80% of the lower figure: 0.80 x $405,000 = $324,000. To close at $420,000 the buyer must now cover the $15,000 gap plus the original $84,000 down — total cash $99,000 — or invoke the appraisal contingency to renegotiate or cancel. Item writers reward candidates who remember the loan follows the lesser of price or appraised value.
Earnest money, escrow, and contingency timelines
Earnest money shows the buyer's good faith and is held in a neutral escrow/trust account, never in the agent's personal funds. If the buyer performs, it applies to the purchase price; if the buyer defaults without a valid contingency, the seller may retain it as liquidated damages when the contract so provides.
Each contingency carries a deadline. Miss the inspection deadline and the buyer typically waives the right to object; satisfy or formally remove a contingency and that exit closes. Exam scenarios hinge on the calendar: a buyer who lets the financing-contingency date pass and is then denied a loan may forfeit the earnest money, because the protection lapsed before the lender's denial.
A seller signs an exclusive-agency listing. During the listing period, the seller personally finds a buyer with no help from any broker and sells the home. What commission is owed to the listing broker?
A buyer's contract for $420,000 includes an appraisal contingency, but the property appraises at only $400,000 and the lender lends solely on appraised value. Which is NOT an option the contingency gives the buyer?