4.3 Listing and Sales Contracts and Contingencies
Key Takeaways
- Listing agreements come in three forms: exclusive-right-to-sell (broker paid regardless of who sells), exclusive-agency (no commission if owner sells), and open (commission only to the procuring broker).
- Tennessee Rule 1260-02-.07 prohibits a broker or affiliate broker from accepting or entering a listing based on a net price.
- A purchase agreement becomes binding upon offer and acceptance; an accepted offer creates equitable title in the buyer.
- Contingencies (financing, inspection, appraisal, sale-of-home) let a party cancel without breach if a stated condition is not met by its deadline.
Listing agreements
A listing agreement is an employment contract between a seller and a broker. The three standard types differ in who earns the commission.
| Listing type | Owner sells it themselves | More than one broker may list | Commission certainty for listing broker |
|---|---|---|---|
| Exclusive-right-to-sell | Broker still earns commission | No | Highest |
| Exclusive-agency | No commission to broker | No | Moderate |
| Open | No commission to broker | Yes | Lowest (only if procuring cause) |
Under an exclusive-right-to-sell listing, the listing broker is paid no matter who finds the buyer — even the owner. This is why brokers prefer it. Under an open listing, only the broker who is the procuring cause of the sale is paid, and the owner owes nothing if they sell it directly.
The prohibited net listing
In a net listing, the seller names a net amount they must receive, and the broker keeps anything above it as commission. Tennessee Rule 1260-02-.07 prohibits a broker or affiliate broker from accepting or entering a listing based on a net price. The seller's return would be fixed while the broker retained the entire upside, creating the underlying conflict.
From offer to binding contract
A purchase agreement (sales contract) starts as an offer. The lifecycle:
- Buyer makes a written offer with price and terms.
- Seller may accept, reject, or counteroffer. A counteroffer terminates the original offer.
- Acceptance must be communicated to the offeror to form a contract. Until communicated, either party may withdraw.
- On acceptance, the buyer gains equitable title — an interest in the property — while legal title passes only at closing.
An offer can be revoked any time before acceptance is communicated, even if the buyer promised to keep it open (unless paid for as an option). Death or incapacity of the offeror before acceptance also terminates the offer.
Contingencies
A contingency is a condition that must be satisfied for the contract to proceed. If the condition fails by its deadline, the protected party may cancel without breaching and typically recovers the earnest money. Common contingencies:
- Financing — sale is conditioned on the buyer obtaining a loan at stated terms.
- Inspection — buyer may cancel or renegotiate after a satisfactory inspection.
- Appraisal — property must appraise at or above the agreed price.
- Sale of buyer's current home — sometimes paired with a kick-out clause.
Worked example — financing contingency. A buyer contracts for $250,000 with a financing contingency for a loan of at least 80% LTV at no more than 7% interest. The best rate the lender offers is 7.5%, exceeding the cap. Because the financing condition was not met, the buyer may cancel under the contingency and recover the earnest money — this is not a breach. Had the buyer waived financing, the same failed loan would leave the buyer in default.
Counteroffers, Acceptance Mechanics, and Equitable Conversion
The path from offer to binding contract has precise rules the exam probes.
A counteroffer is simultaneously a rejection of the original offer and a new offer. Once the seller counters at a higher price, the buyer's original offer is dead; the buyer cannot later "accept" it without the seller's renewed agreement. Each counter resets the negotiation.
Acceptance must be (1) unqualified, (2) by the person to whom the offer was made, and (3) communicated to the offeror. Under the common-law mailbox rule, acceptance can be effective when properly dispatched, but most modern real estate contracts require actual communication/delivery of the signed acceptance, so always follow the contract's stated method.
Upon a binding contract, equitable conversion gives the buyer equitable title — an insurable interest in the property — while the seller retains legal title until closing. This is why buyers should obtain insurance and why risk-of-loss clauses matter during the executory period.
Worked example: Buyer offers $300,000 Monday; seller counters at $312,000 Tuesday; buyer counters at $306,000 Wednesday; seller signs and delivers acceptance at $306,000 Thursday. The contract forms Thursday at $306,000. The Monday and Tuesday numbers are extinguished; only the last accepted, communicated terms control. The buyer now holds equitable title and should bind hazard coverage immediately.
Contingency Deadlines, Waivers, and Default Outcomes
Contingencies are conditions precedent: until satisfied or waived, the duty to close does not mature. The exam tests what happens at the deadline.
If a contingency fails by its deadline through no fault of the protected party, that party may cancel without breaching and recover the earnest money. If the protected party waives the contingency (in writing), they give up that escape and must proceed. If the deadline passes with no action, the contract may specify that the contingency is automatically waived or that the contract is void — read the clause.
Worked example: A buyer's contract has a 10-day inspection contingency and a 30-day financing contingency on a $325,000 home with $9,750 earnest money. The inspection reveals a failing roof; within the 10 days the buyer properly notifies the seller and cancels. Because the inspection contingency was timely invoked, the cancellation is not a breach and the buyer recovers the $9,750.
Now change the facts: the buyer waived the inspection contingency to win a bidding war, then tries to cancel over the same roof on day 12. With the contingency waived and no other protection, the buyer is in default, and the seller may retain the earnest money as liquidated damages. The lesson the exam drives home: a contingency protects only if it is in force and timely invoked.
Counteroffers, Acceptance Mechanics, and Equitable Conversion
The path from offer to binding contract has precise rules the exam probes.
A counteroffer is simultaneously a rejection of the original offer and a new offer. Once the seller counters at a higher price, the buyer's original offer is dead; the buyer cannot later "accept" it without the seller's renewed agreement. Each counter resets the negotiation.
Acceptance must be (1) unqualified, (2) by the person to whom the offer was made, and (3) communicated to the offeror. Under the common-law mailbox rule, acceptance can be effective when properly dispatched, but most modern real estate contracts require actual communication/delivery of the signed acceptance, so always follow the contract's stated method.
Upon a binding contract, equitable conversion gives the buyer equitable title — an insurable interest in the property — while the seller retains legal title until closing. This is why buyers should obtain insurance and why risk-of-loss clauses matter during the executory period.
Worked example: Buyer offers $300,000 Monday; seller counters at $312,000 Tuesday; buyer counters at $306,000 Wednesday; seller signs and delivers acceptance at $306,000 Thursday. The contract forms Thursday at $306,000. The Monday and Tuesday numbers are extinguished; only the last accepted, communicated terms control. The buyer now holds equitable title and should bind hazard coverage immediately.
Under which listing type is the listing broker entitled to a commission even if the owner personally finds the buyer and sells the property?
A buyer's contract includes a financing contingency requiring a loan at no more than 7%. The lender will only approve 7.6%. The buyer chooses not to proceed. What is the result?