4.3 Listing and Sales Contracts and Contingencies

Listing agreements: who gets paid

A listing agreement is an employment contract between a seller and a broker, creating an agency. The exam tests the commission outcome under each type.

The exclusive right to sell is the strongest for the broker: the broker earns the commission regardless of who finds the buyer. Under exclusive agency, the seller keeps the right to sell without owing a commission. An open listing is non-exclusive and unilateral; only the broker who is the procuring cause is paid.

Procuring cause and net listings

Procuring cause is the broker whose efforts set in motion an unbroken chain of events leading to the sale. In an open-listing dispute, the procuring-cause broker collects, not whoever happened to write the offer.

A net listing lets the broker keep everything above a net price the seller wants. Vermont Real Estate Commission Rule 4.5(b) prohibits net listings. The underlying conflict is that the seller does not share in the upside and may not appreciate the resulting fee.

The purchase and sale agreement

The purchase agreement (sales contract) is a bilateral, executory contract until closing. Essential terms include the parties, a legal description, the price, financing terms, the closing date, and the allocation of expenses. On the buyer's signed offer, nothing is binding until the seller accepts. Until acceptance is communicated, the buyer may revoke the offer and the seller may accept other offers.

Earnest money accompanies the offer as evidence of good faith. It is held by an escrow agent or broker in a trust account, never commingled with the broker's own funds.

Contingencies: built-in exit ramps

A contingency is a condition that must be met before a party is obligated to perform. Until the contingency is satisfied or waived, the buyer can usually walk away and recover earnest money. Master the common four:

• Financing contingency: buyer must secure a loan on stated terms by a deadline.
• Inspection contingency: buyer may cancel or renegotiate based on inspection results.
• Appraisal contingency: the property must appraise at or above the price.
• Sale-of-home contingency: closing depends on the buyer selling a current home.

Missing a contingency deadline can waive the protection, especially when time is of the essence.

Worked example: appraisal contingency

A buyer contracts to purchase at $320,000 with a 20 percent down payment and an appraisal contingency. The appraisal comes back at $300,000.

• The lender will lend only against the lower appraised value: 80 percent of $300,000 = $240,000, not 80 percent of $320,000 = $256,000.
• The buyer faces a $20,000 gap between price and appraised value plus the planned down payment.
• Under the appraisal contingency the buyer may cancel and recover earnest money, renegotiate to $300,000, or pay the extra $20,000 in cash to close at the original price.

Without the contingency, the buyer would be in breach if they could not cover the gap.

The Listing-Type Spectrum

The exam wants you to rank listing agreements by how much protection they give the broker:

The exclusive right to sell is the most common and the most broker-favorable. A net listing (broker keeps everything above a set net to the seller) is prohibited in Vermont by Real Estate Commission Rule 4.5(b).

Worked Example: Commission Splits

Commission math appears on nearly every exam. Start with the gross commission, then split it.

• Sale price: $425,000. Total commission rate: 6%.
• Gross commission = $425,000 × 0.06 = $25,500.
• Listing and selling brokerages split 50/50: each brokerage receives $25,500 × 0.50 = $12,750.
• The selling salesperson is on a 60/40 split with her broker (60% to salesperson): $12,750 × 0.60 = $7,650 to the salesperson, $5,100 to the broker.

Reverse the math when the exam gives the agent's check: if a salesperson nets $7,650 on a 60% split of a 50% brokerage share of a 6% commission, divide back up, $7,650 ÷ 0.60 = $12,750 brokerage share; ÷ 0.50 = $25,500 total; ÷ 0.06 = $425,000 sale price. The commission always flows through the broker, never directly to the salesperson.

Common Contingencies and Their Deadlines

Most purchase contracts contain several contingencies, each a built-in exit ramp tied to a deadline. The big ones are the financing contingency (the buyer can cancel if a loan is denied), the inspection contingency (cancel or renegotiate based on the home inspection), the appraisal contingency (protection if the appraisal comes in below price), and the sale-of-buyer's-home contingency. A contingency must be satisfied or waived in writing by its deadline; missing the deadline without action generally waives the contingency and binds the buyer.

When a contingency fails through no fault of the buyer, say the lender denies financing, the buyer may cancel and recover the earnest money. The exam tests timing: a buyer who lets the inspection deadline pass and then tries to back out over a defect has usually lost the right to do so.