4.3 Listing and Sales Contracts and Contingencies
Key Takeaways
- Listing types differ by who owes commission: open, exclusive agency (seller can sell free), exclusive right to sell (broker always paid), and conflict-prone net listings
- A purchase agreement is bilateral; earnest money is consideration and good-faith money held in trust, not a legal requirement to form the contract
- Common contingencies — financing, inspection, appraisal, home-sale, and title — let a party void the contract without penalty if a condition is not met
- Lenders finance the lower of contract price or appraised value, creating an appraisal gap the buyer must cover, renegotiate, or use to exit
- Missing a contingency deadline generally waives the contingency and binds the party
Listing and Sales Contracts and Contingencies
Listing agreements and purchase contracts are the two contracts a salesperson handles most. The exam tests the types of listings (who earns the commission), the parts of a purchase agreement, and how contingencies protect the parties. Get the listing-type definitions exact — the difference between exclusive-agency and exclusive-right-to-sell is a perennial question.
Listing Agreement Types
A listing is an employment contract between a seller and a broker. The type controls when the broker is owed a commission.
| Listing type | Who can earn commission | Key feature |
|---|---|---|
| Open listing | Whoever produces the buyer; seller may sell alone with no fee | Non-exclusive; seller can list with many brokers |
| Exclusive agency | One broker, but seller pays nothing if seller finds the buyer | Seller retains the right to sell for free |
| Exclusive right to sell | The listing broker, no matter who sells | Broker is paid even if the seller finds the buyer |
| Net listing | Broker keeps anything above a set net to seller | Regulated differently by jurisdiction — conflict of interest |
Trap: under an exclusive right to sell, the broker earns the commission even if the seller personally finds the buyer; under exclusive agency, the seller owes nothing in that case.
Earnest Money, Equitable Title, and the AS-IS Sale
The moment a purchase contract is signed and accepted, the buyer gains equitable title — an ownership interest the courts will protect — while the seller keeps legal title until closing. This is why the doctrine of equitable conversion can place risk of loss on the buyer in some states once the contract is signed; many contracts shift that risk back to the seller until closing by express clause.
Earnest money is held in the broker's trust account, never the broker's operating account, and is applied to the buyer's costs at closing or refunded/forfeited per the contract. It is not legally required to form a binding contract, but it strengthens the seller's remedy.
| Title stage | Who holds it | When |
|---|---|---|
| Equitable title | Buyer | After contract signed |
| Legal title | Seller | Until closing/delivery of deed |
An "as-is" clause means the seller will make no repairs, but it does not waive the seller's duty to disclose known material defects — the exam tests that as-is never licenses active concealment or fraud.
Under which listing type does the seller owe NO commission if the seller personally finds the buyer?
Anatomy of a Purchase Agreement
A purchase (sales) contract identifies the parties, describes the property (legal description), states the price and financing terms, sets the earnest money, fixes the closing date, allocates costs, and lists contingencies. It is bilateral — both sides promise performance. Earnest money is consideration that also signals good faith; it is held in the broker's trust/escrow account, not commingled with operating funds.
Watch for the rule that earnest money is not legally required to form a valid contract — consideration can be a mutual promise — but it is customary and strengthens the seller's remedy on default.
Contingencies
A contingency is a condition that must be met or the contract can be voided without penalty. The most tested are:
- Financing contingency: buyer must obtain a loan by a stated date and terms; if not, the buyer cancels and recovers the deposit.
- Inspection contingency: buyer may inspect and cancel or renegotiate if defects appear.
- Appraisal contingency: if the appraisal comes in below the contract price, the buyer may renegotiate or exit.
- Sale-of-buyer's-home contingency: purchase depends on the buyer selling their current home.
- Title contingency: seller must deliver marketable title.
Trap: if a contingency deadline passes and the buyer does nothing, the contingency is usually deemed waived, and the buyer is then bound.
Worked Example: Appraisal Gap
A buyer agrees to pay $420,000 with a 20% down payment and an appraisal contingency. The appraisal returns at $400,000. The lender will finance 80% of the appraised value, not the contract price.
- Loan available: 80% of $400,000 = $320,000.
- To close at $420,000, the buyer needs $420,000 − $320,000 = $100,000 cash, versus the planned $84,000 down.
- The $16,000 shortfall is the "appraisal gap."
Under the appraisal contingency the buyer may (a) pay the extra $16,000, (b) renegotiate the price toward $400,000, or (c) cancel and recover the earnest money. Examiners test that the lender lends on the lower of price or appraised value.
Options and the Right of First Refusal
Two specialized purchase arrangements appear on the exam. An option contract gives a buyer (optionee) the right, but not the obligation, to buy at a set price within a set time, in exchange for option consideration. It is unilateral until exercised — the seller is bound, but the buyer may walk away, losing only the option fee.
A right of first refusal is weaker: it lets the holder match a bona fide offer the owner is willing to accept, but it does not fix a price or compel the owner to sell at all. Examiners contrast the binding option price against the contingent first-refusal right.
A buyer's contract has a financing contingency with a deadline that has now passed, and the buyer took no action. The buyer then cannot get a loan. What is the likely result?