With a net listing agreement, a real estate agent gets to keep the difference between the actual sales price and the seller’s desired price
Real estate agents can help people achieve their dreams. Whether it is buying a first home or selling a house to move to a new community to start a new life, everyone wants their real estate transaction to be as smooth and painless as possible. Of course, people also want to get the best price on their real estate purchase or sale. No client wants to overpay for property, nor does any client want their property sold at a discount.
Real estate brokers deserve to be paid for their services. There are several different types of ‘listing agreements’ that establish the relationship and payment structure between the real estate professional and the buyer/seller. One type of agreement is known as a real estate net listing agreement. With a real estate net listing agreement, the broker gets to keep the surplus between the actual sales price (or purchase price) and the client’s pre-specified desired price. Notably, net listing agreements are only legal in some U.S. states.
Understanding Net Listing Agreements Through an Example
To best understand how net listing agreements work in the real world, it is useful to consider a simple example. Imagine that a couple owns a home in North Texas. Due to a new job opportunity, they are planning on relocating to the other side of the state within the next two months. They need to sell their home relatively quickly. The couple decides to enter into a net listing agreement with a local real estate agent. Both sides agree to set a baseline price of $200,000 for the home. In this scenario, the real estate agent gets to keep anything above $200,000. If they sell the home for $235,000, then the commission will be $35,000. However, if they only sell the home for $205,000, then the commission will only be $5,000. Under a net listing agreement, the real estate broker gets the surplus.
The Risks of Using a Net Listing Agreement
As with any other type of fee-structure, there are some benefits and some drawbacks to operating under a net listing agreement. Though, net listing agreements are often considered to be especially risky for real estate professionals.
On one end of the spectrum, a real estate agent may deal with a seller who ends up accepting a relatively low price, perhaps a price that is significantly lower than is actually warranted given market conditions. This could result in a real estate broker putting in a lot of work but receiving little to no financial compensation.
On the other end of the spectrum, a real estate professional who is too successful (gets a price far above what the seller expected) may end up facing litigation from their client. A client may feel taken advantage of if their property sold for far more than they expected. Even in states where they are permitted, regulators often try to discourage real estate brokers from using net listing agreements.
Net Listing Agreements are Only Legal in Some States
It must be made clear that net listing agreements are only legal in some jurisdictions. For example, net listing agreements have been banned in New York, New Jersey, Virginia, Georgia and many other states. That being said, they do remain legal in other states, including in California and in Texas. It is also worth noting that in states where net listing agreements are still permitted, they are subject to certain strict regulations. Real estate professionals must have a comprehensive understanding of the rules and regulations governing listings in their specific state.
Are You Ready to Become a Real Estate Agent?
If you are interested in becoming a real estate broker or real estate salesperson, you will be required to pass your state’s licensure exam. These are notoriously difficult tests. In many states, less than half of all test-takers pass the real estate exam. The good news? You do not have to be intimidated by this test: you can get immediate access to the best real estate prep materials.
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