Most sellers don’t know that a listing contract is negotiable to begin with, let alone what to negotiate in a real estate listing agreement. We’ll show you in this article how to negotiate both the total commission rate as well as how it’s split, agreement duration, contract cancellation, upfront costs, expense reimbursement clauses, excluding certain buyers and more.
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All in commission rates across the United States typically range from 5% to 6% of the sale price, even in pricey metropolitan areas like NYC, despite the fact that anti-trust laws prohibit any sort of industry wide price setting.
The typical reason fed to sellers for the necessity of this extravagant rate is two fold:
1. 90% of buyers are represented by agents, and the market rate that buyers’ agents expect to earn on a listing ranges from 2.5% to 3%. Anything less and buyers’ agent might “forget” to show it to their clients.
2. The MLS requires commissions to be split equally between a seller’s agent and a buyer’s agent. As a result, the total commission must be double the market rate buyer’s agent fee, thus 5% to 6%.
In our experience, part 1 is certainly true as our partner brokers have never had push back from buyers’ agents at a 2.5% co-broke, even though a full 3% is more common and preferred. However, our partner brokers’ have received flak from buy side agents whenever they’ve co-broked less than 2.5%. For example, we’ve seen instances of buyers’ agents saying that their firm won’t allow them to work for 2% commission.
Part 2 however is more nuanced, and not always true even though real estate agents will gloss over that fact with sellers. For example, the HGMLS in the Hudson Valley will allow listing agents to offer any amount of compensation to buyers’ agents as long as it’s greater than zero. The REBNY RLS in NYC requires total commissions to be split at least equally in the buyer agent’s favor. That doesn’t mean commissions need to be split exactly equally, only that the buyer’s agent should receive at least half of the total commission.
Be careful however, many seasoned real estate listing agents will try to run you over by showing you the commission language in their listing agreement. This language may only allow a single, total commission rate to be specified:
If the Property is sold pursuant to this agreement, you shall pay NYC Broker Realty a Fee for Service equal to six percent 6% of the total sale price of the Property. This Fee for Service shall be due and payable whether the Property is sold (a) to an independent third party, (b) to the Board of Managers of the building in which the Property is located (exercising its right of first refusal), or its designee, or (c) to a current lessee of the Property.
They’ll say that it’s industry standard for the listing agent to procure a single commission rate from the seller, and that it’s then up to them to split the commission with buyers’ agents per their MLS agreement:
NYC Broker Realty is authorized (1) to solicit the cooperation of other licensed real estate brokers (hereinafter “Cooperating Broker”) who will act as agents for the prospective purchasers, and (2) to work with them on a cooperating basis for the sale of the above Property.
The listing agent typically procures a fixed percentage commission through a contract with the seller, and then splits that equally with buyers’ agents in accordance with local MLS rules. This is what happens in most transactions since 75% (nationally) to 90% (NYC) of all deals are done between a seller’s agent and a buyer’s agent.
However, sellers are slowly learning that different commission structures are possible, and that commissions don’t always need to be split exactly equally. As we discussed in the previous section, many MLS systems and other broker databases like the RLS will allow commission splits that aren’t perfectly equal.
This flexibility can be used to your advantage by saving on the listing broker’s commission, yet still offering a market rate commission to buyer agents. This way, you can still get the full attention of buyers who are represented by agents, but you can also save commission on the listing broker side. There are two main approaches to this that we have pioneered:
1. An Agent Assisted FSBO listing pairs sellers with a traditional partner broker who will list their property in the MLS plus all relevant public websites for an upfront flat fee. The broker is responsible for listing the property and looping the seller in on inquiries, and the seller is responsible for everything else from showing the property to negotiating offers. This method can result in paying zero commission at closing if a direct buyer is found. If the seller chooses to sell to a represented buyer, then he or she will only owe a buyer agent commission.
2. A Full Service for 1% listing pairs sellers with an experienced partner broker who will provide a traditional, full-service listing experience for a discreetly discounted listing fee. The listing broker will only take 1% at closing, while the buyer’s agent will take a more standard buyer agent commission. This can result in approximately 50% in savings vs a comparable full service listing for 6% commission.
The two main types of listing agreements in the United States are the Exclusive Right to Sell Listing Agreement and the Exclusive Agency Listing Agreement. The former is much more common to see, and is greatly preferred by real estate agents. Furthermore, many MLS systems and even some public search websites will only allow exclusive right to sell listings to be included.
See below for explanatory language regarding both of these agreements from the New York State Department of State. This language is actually required to be included in all sales listings agreements in New York State:
An “exclusive right to sell” listing means that if you the owner of the property, find a buyer for your house, or if another broker finds a buyer, you must pay the agreed commission to the present broker.
An “exclusive agency” listing means that if you, the owner of the property finds a buyer, you will not have to pay a commission to the broker. However, if another broker finds a buyer, you will owe a commission to both the selling broker and your present broker.
So what does all of this mean? Essentially an Exclusive Right to Sell agreement means that only your listing broker will be advertising the property, and he or she will be paid regardless of how the buyer is found. This means you won’t have to waste your time trying to find a buyer by yourself, because even if you do, you’ll still owe the same commission. This arrangement is preferred as it allows your listing agent to focus on selling your property without being distracted by competition from you (their client) on finding a buyer.
An Exclusive Agency agreement is similar in that only your listing broker will be allowed to advertise the property. However, if you manage to find a direct buyer (i.e. your neighbor next door), you won’t have to pay any commission. As you can imagine, this might cause some conflict with your listing broker, as well as potential disputes as to who a buyer was found by. This type of arrangement can cause your listing broker to not work as hard because he or she could earn nothing if you find a buyer months into the process.
The typical length for a listing agreement is 180 days, or 6 months. This may seem long, but the reason that listing agents ask for this kind of term is because the average time from a property being listed to having a signed contract is typically over 3 months. In fact, in a slow real estate market, the average time on market to signed contracts can easily creep up to 4 months or more.
As a result, real estate agents are rightly so to be hesitant to sign a listing agreement for anything less than 180 days. Doing so would have a high statistical probability that their many months of work would be invalidated just before they got an accepted offer or signed contract.
Check out what a typical clause regarding the tenor of a listing agreement looks like:
This agreement shall be effective as of date signed and it shall continue in full force and effect for 180 days from the day the property first goes to market. If this agreement expires while the Property is in contract for sale, the Seller agrees to extend the agreement until the day the Property closes.
Note that even though this language protects the broker from expiration if there’s a signed contract, there’s technically no protect for the broker even if he or she has procured an accepted offer.
Most listing agreements will not allow changes or cancellation unless agreed upon in writing by both parties. This is actually fairly standard for contracts of all types. Here is a sample clause you might see in your typical real estate listing agreement:
This agreement may not be changed, rescinded, or modified, except by written notice signed by both of us.
So what happens if you desperately need to cancel your contract? What if your listing agent does something horribly wrong like accidentally set fire to your living room?
In our experience, most managers at real estate brokerages are reasonable business people. If something goes terribly wrong, they will let sellers out of the contract as they’d rather not deal with potential litigation or bad reviews.
Furthermore, if a seller becomes very upset with cause, he or she could easily restrict access and the ability of anyone to view the apartment. This can make it pointless for the listing agent to not agree to cancel the agreement.
Listing a property for sale involves some actual costs upfront, such as the cost of professional photography and a floorplan drawing. These costs are typically incurred as soon as a listing agreement is signed and a photoshoot and floorplan drawing is scheduled.
Who will be responsible for paying these costs? Will the owner already have professional quality photographs available (that they have verified ownership rights to)? Please note that you can’t simply use another broker’s photographs of the property, even if the photographs are previous listing photographs of a place that you now own. Doing so is copyright infringement!
If new professional photographs must be taken, make sure that the estimated cost is reasonable, especially if you will be responsible for paying for them. Professional photography in an expensive city like NYC can cost anywhere from $300 to $1,000 or more. If you find professional photographs on the lower end of that range, you’ve definitely found a good deal.
If you are responsible for paying for the photos, make sure that you will have ownership rights to them. The last thing you’ll want to do is to pay for professional photographs, yet not have the right to re-use them.
Listing agents incur both actual as well as opportunity costs when they market a property for sale. A seller’s agent must spend money on professional photographs, floor plan drawings, brochures, online marketing, property tour videos and more. Furthermore, a listing agent incurs opportunity costs by spending vast amounts of time scheduling, responding to inquiries, showing the property and negotiating offers on the seller’s behalf.
A listing agent is not compensated for any of his or her efforts and expenses until and if a property is sold. If a property doesn’t sell, the listing agent will have incurred a very serious loss in both time and money.
As a result, many listing agents will include a marketing expense reimbursement clause like the below to make sure they earn at least something in case the property does not sell:
In the event the property does not sell during the term of this agreement or any extension hereof or during the protection period set forth above, owner shall nonetheless be obligated to reimburse broker for expenses in the amount of $2,000.
Sometimes sellers will want to exclude a direct buyer they have already been speaking with from the listing agreement, meaning that if this buyer buys the property, the seller will not owe any commission. While this seems fair because the buyer is someone the seller has found before ever engaging the broker, most serious brokers will not agree to exclusionary language such as the below:
If a contract is signed within three weeks of the execution of this agreement with the following Excluded Buyer, no commission will be due assuming that the Excluded Buyer is not represented by a Cooperating Broker. If a sale is consummated at any time after three weeks of the execution of this agreement, you will owe New York Realty LLC 1% of the total sale price of the property, assuming that the Excluded Buyer is not represented by a Cooperating Broker.
Think about it from the broker’s perspective. He or she has no visibility on how serious this excluded buyer is, or what the seller will share with the excluded buyer. This means the broker could work hard to procure several offers, only for the seller to shop these offers to the excluded buyer. This way, even if the seller gets the excluded buyer to just match the top offer, the seller will still win by not having to pay any commission. This kind of conflict of interest as you can imagine will be unacceptable to the vast majority of brokers.
If you are really bent on excluding a certain direct buyer you’ve already been speaking with, we recommend trying to get a deal done directly first before engaging a broker. However, by going direct you’ll never know what you could have gotten for your place on the open market.
What happens if a condo board exercises its right of first refusal and buys the seller’s property instead? Will the broker still get paid a commission?
Let’s first understand that this right is almost never exercised by condo boards, primarily because it’s virtually impossible for a condo board to cobble together enough funds to buy your typical multi-million dollar condo in NYC.
However, if this does happen, most listing agreements will have commission language that this will result in commission being paid to the listing broker as if the listing broker has procured a regular buyer. This is actually quite reasonable as the broker did the work to procure a bona fide buyer, and has no control over whether the condo board will exercise its right of first refusal.
In the rare event that a buyer defaults on a purchase contract, the seller will be able to enforce its contract rights and keep the buyer’s earnest money check. This is no joke, as the contract deposit is typically 10% of the purchase price.
While this may be nice for the seller, assuming that the seller decides to try to keep the deposit (because this will likely result in litigation by the buyer), the broker will be out of luck because the deal didn’t close and they won’t get any commission. As a result, many listing agreements will have language like to below to protect the broker in such an event:
In the event that you receive any settlement monies in connection with a buyer’s default on a fully executed contract with all contingencies fulfilled, Manhattan Broker Realty LLC will be entitled to 30% of said monies in addition to any amounts otherwise due under this agreement.
This is actually quite fair as 30% of a 10% contract deposit is 3% of the purchase price, which is why the listing broker most likely would have earned if they split the commission with a buyer’s agent. Remember, the listing broker did all the work that is typically required to get a deal done.
However, they won’t get anything if the buyer unexpectedly defaults on the contract, yet the seller will benefit from being able to seize the buyer’s deposit. This isn’t fair to the broker, and this is why this clause is in most listing agreements to protect the broker from such an occurrence.
Disclosure: Hauseit and its affiliates do not provide tax, legal, financial or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, financial or accounting advice. You should consult your own tax, legal, financial and accounting advisors before engaging in any transaction. The services marketed on Hauseit.com are provided by licensed real estate brokers and other third party professional service providers. Hauseit LLC is not a licensed real estate broker nor a member of any multiple listing service (MLS).