4.3 Listing and Sales Contracts and Contingencies

Listing Agreements: The Employment Contract

A listing agreement is the contract between a seller and a broker; it is a contract of employment, not a sale. The type controls when the broker earns a commission.

Exclusive-right-to-sell - the broker is paid if the property sells during the term no matter who finds the buyer, including the seller. This is the most protective for the broker and the most common.

Exclusive-agency - one broker is appointed, but if the seller finds the buyer with no broker involvement, no commission is owed.

Open listing - non-exclusive; the seller may list with several brokers, and only the broker who actually procures the buyer is paid. The seller may also sell alone and owe nothing.

Net listing - the seller sets a net amount and the broker keeps any excess. It invites conflicts of interest and is regulated differently by jurisdiction.

Table: Listing Types

The Sales Contract (Purchase Agreement)

The purchase agreement is the binding contract between buyer and seller. To be enforceable it must contain the essentials: identified parties, an adequate property description, the price and terms, and signatures of the parties bound. Once both sides sign without changes, the contract is ratified and becomes executory until closing.

Typical additional terms include the earnest money amount, closing date, who pays which costs, items included or excluded, and the contingencies discussed below.

Contingencies: Conditions That Allocate Risk

A contingency is a condition that must be satisfied or the obligated party may cancel, usually recovering the deposit. Contingencies protect the buyer by giving a clean exit if a stated event does not occur. Common ones:

• Financing contingency - the contract is void or cancelable if the buyer cannot obtain the specified loan by a deadline.
• Inspection contingency - the buyer may cancel or renegotiate after a professional inspection reveals problems.
• Appraisal contingency - the buyer may exit if the property appraises below the contract price.
• Sale-of-current-home contingency - the buyer must sell an existing home first.

Worked example: a buyer with a financing contingency is denied the loan by the deadline. The buyer may cancel and recover the full earnest money. Without that contingency, the same buyer who cannot close is in breach and likely forfeits the deposit.

Options and Land Contracts

Option contract - the seller (optionor) gives the buyer (optionee) the right, but not the obligation, to buy at a fixed price within a set time. It is a unilateral contract: only the seller is bound while the option is open. The buyer pays separate option consideration for that right, and it is typically not refundable if the buyer walks.

Land contract (contract for deed / installment contract) - the buyer takes possession and pays the seller over time, but the seller retains legal title until the final payment. The buyer holds equitable title meanwhile. This shifts default risk and title timing away from a normal cash-at-closing sale.

Commission and the Ready, Willing, and Able Buyer

Under a typical listing, a broker earns the commission by producing a ready, willing, and able buyer who meets the seller's terms, even if the seller then refuses to close. The agreement, not the closing, triggers the earned commission in many states.

Exam Traps

• Forgetting that Wisconsin REEB 24.10 prohibits licensees from obtaining or negotiating a net listing.
• Thinking an option binds the buyer; it binds only the seller.
• Treating a buyer who fails a financing contingency as a defaulter; with the contingency, the buyer exits cleanly.
• Forgetting that under a land contract the seller keeps legal title until payoff.

Amendments, Addenda, and Counteroffers

A ratified contract is often modified before closing. Distinguish the tools:

• Addendum - added at the time of the offer to attach extra terms (for example, a financing addendum) that become part of the original contract.
• Amendment - a change to an already-ratified contract, signed by both parties, such as moving the closing date.
• Counteroffer - a response that changes a term before ratification; it terminates the prior offer (see 4.1).

Each requires the signatures of all parties to be effective. A single party cannot unilaterally rewrite a ratified contract.

Earnest Money and the Trust Account

The buyer's earnest money is held in the broker's trust (escrow) account, never commingled with the broker's operating funds. At a successful closing it is credited toward the buyer's costs. If a contingency fails, it is generally returned; if the buyer defaults without a contingency, it may be forfeited as liquidated damages.

Worked example: a buyer deposits $5,000 earnest money on a $250,000 home. At closing that $5,000 is applied to the purchase price and closing costs, reducing the cash the buyer must bring.

Procuring Cause

When more than one broker is involved, the commission generally goes to the procuring cause, the broker whose efforts set in motion the unbroken chain of events leading to the sale. Disputes over procuring cause are common with open listings, where only the broker who actually produced the buyer is paid.