4.3 Listing and Sales Contracts and Contingencies

Listing and Sales Contracts and Contingencies

A listing agreement is an employment contract between an owner and a broker. The national exam expects you to distinguish the three types by who must pay the commission when the property sells.

The three listing types

The exclusive right to sell gives the broker the strongest protection: the broker is paid even if the owner finds the buyer. Under an exclusive agency listing, the owner may sell to a buyer they found themselves and owe no commission. An open listing is non-exclusive and unilateral — only the procuring broker is paid, and the owner may list with several brokers at once.

A net listing (broker keeps everything above a set net to the seller) is illegal or strongly discouraged in most states because it creates a conflict of interest; treat it as a trap answer.

How a purchase agreement becomes binding

An offer is a proposal; it becomes a contract only when the offeree accepts and that acceptance is communicated back to the offeror. Key rules:

• A counteroffer rejects and terminates the original offer; the original offeror is now the offeree.
• An offer may be revoked any time before acceptance is communicated.
• Death or incapacity of either party before acceptance terminates the offer.
• Earnest money is evidence of good faith; it is not a required element of a valid contract.

Worked sequence: Buyer offers $300,000. Seller counters at $315,000. Buyer counters at $308,000. Seller accepts and notifies the buyer. The binding contract price is $308,000 — the seller's $315,000 counter was terminated the moment the buyer countered at $308,000.

Earnest money — worked example

A buyer offers $250,000 with 1% earnest money. The earnest deposit is $2,500 (250,000 x 0.01), held in the broker's trust account, and credited to the buyer at closing. It is not the broker's money and must not be commingled.

Contingencies

A contingency is a condition that must be satisfied or waived before the parties are obligated to close. If a contingency fails and is not waived, the protected party may cancel and typically recover the earnest money.

• Financing contingency. The contract is void if the buyer cannot obtain a loan on stated terms by a deadline.
• Inspection contingency. The buyer may cancel or renegotiate based on inspection findings within a stated period.
• Appraisal contingency. Protects the buyer if the property appraises below the contract price.
• Sale-of-current-home contingency. The buyer's obligation depends on selling an existing property.

Worked example: A home is under contract at $400,000 with an appraisal contingency. The appraisal comes in at $385,000 and the lender will lend only against the lower value. The buyer may invoke the contingency to cancel, renegotiate the price, or pay the $15,000 shortfall in cash. The contingency shifts the appraisal-gap risk to the seller unless the buyer waived it.

Options

An option is a unilateral contract: the optionor (seller) is bound to keep the offer open, but the optionee (buyer) has the right, not the obligation, to buy within the option period. Option consideration is generally non-refundable and may or may not apply to the purchase price depending on the terms.

Right of first refusal vs. option

Do not confuse an option with a right of first refusal. An option lets the holder force a sale on agreed terms at any time during the period. A right of first refusal only lets the holder match a third-party offer if and when the owner decides to sell; it does not let the holder force a sale. Lease agreements often grant tenants a right of first refusal rather than a true option.

Procuring cause and the protection period

A broker earns a commission by being the procuring cause — the broker whose efforts set in motion the chain of events leading to the sale. Many listings add a protection (safety) period: if the property sells shortly after the listing expires to a buyer the broker introduced, the commission is still owed. Worked example: a 90-day listing expires, and 20 days later the seller sells directly to a buyer the broker showed the home to during the term. With a 90-day protection period naming that buyer, the broker is still entitled to the agreed commission.

Termination of listings, ready-willing-and-able buyers, and amendments

A listing agreement, like any agency, can end several ways the exam tests: expiration of its stated term, performance (the property sells), mutual agreement to cancel, revocation by the seller (possibly with liability for the broker's expenses), abandonment by the broker, or operation of law (death or incapacity of either party, destruction of the property, or the broker's loss of license). A listing with no expiration date is prohibited in most states — listing agreements must state a definite end date.

A broker generally earns the commission upon producing a ready, willing, and able buyer who makes an offer meeting the listing's price and terms, even if the seller then refuses to sell. Worked example: under an exclusive-right-to-sell listing at $350,000, a broker presents a full-price, all-cash offer from a qualified buyer. The seller changes their mind and declines. The broker has performed and is typically owed the commission, because the seller — not the broker — caused the deal to fail. This is a frequent exam scenario; the trap answer is "no commission because no closing occurred."

Once under contract, changes are handled two ways. An amendment alters the terms of the existing contract (price, closing date) and requires the agreement of all parties. An addendum adds provisions or attaches documents at signing. Both must be in writing and signed to be enforceable. A unilateral attempt by one party to change the closing date is not binding; the other party must agree. The exam rewards distinguishing an amendment (modifies) from an addendum (adds) and from a contingency (a condition that, if unmet, allows cancellation).