Real estate listing agreements explained: a complete guide

Selling property is a major undertaking. For realtors, it requires significant time and effort in a competitive industry. For property owners, the process can be full of unknowns, with concerns about getting a fair price. A listing agreement can provide security for both parties.

In this guide, we’ll explore what a listing agreement is, its key elements, and the types of agreements commonly used in real estate.

What is a listing agreement?

In real estate, a listing agreement is a contract between homeowners and brokers that legally establishes how a realtor will find a property buyer on the seller’s behalf.

Listing agreements serve as a hiring contract with the agent for the sale of a property, and are only valid for a set amount of time. Like any other employment contract, it outlines details of the relationship between the person doing the hiring and the person doing the work.

Key elements of a real estate listing agreement

The elements of a real estate listing agreement vary depending on the situation. Overall, contract templates require details including involved parties, information about the property and the listing, the duration of the agreement, and the agency’s payment terms. We’ll explore each of these elements below.

Involved parties

A listing agreement is between the parties that own a property and the agents or brokers who will find a buyer for it.

Typically, a real estate listing agreement involves the property owner and a real estate agent. The property owner, or seller, grants the agent the right to market and sell the property. When the property is sold, the seller is required to pay the agent a commission based on the sale price. In return, the agent agrees to use their resources and expertise to find a buyer, handle negotiations, and manage the transaction process through closing.

Property details

A listing agreement should include all the information related to a property’s value and unique characteristics. Required details may include:

• The property's legal description and address
• Listing price
• Property features (i.e., number of bedrooms, bathrooms, square footage)
• Any known defects or issues
• Details of any liens or encumbrances
• Zoning information
• Disclosures mandated by local laws, such as lead paint or flood zone status

Listing price and terms

The listing price for a property is determined based on a number of factors:

• A comparative market analysis (CMA) of similar properties
• Current market conditions
• The property's condition and features
• The seller's desired timeline

If the demand for a property is high, it’s in good condition, and the property owner isn’t in a hurry to sell, the listing price will be higher. However, if demand is lower, the property is in poor condition, or the owner is eager to sell quickly, these factors contribute to a lower listing price.

A listing agreement will define the real estate agent’s commission rate based on the property’s listing price. Other terms defined by an agreement include:

• The duration of the listing
• An agent’s advertising and marketing strategies
• Terms for canceling the agreement
• Any special conditions related to the sale

Duration of the agreement

Typical time frames for agreements range from three to six months, though they can be shorter or longer. Many include a renewal clause, which provides an option to extend the listing period if both parties agree.

A listing agreement should include a termination clause to outline conditions under which the property owner or real estate agent can end the contract early. Reasons for termination might include an agent’s unsatisfactory performance, the seller changing their mind about selling the property or a mutual decision to otherwise end the contract.

Commission structure

Agreements commonly include a commission structure where the agent earns a percentage of the sale price, typically ranging from five to six percent. The payment is usually made at closing from the proceeds of the sale.

What should not be included in a listing agreement?

A listing agreement is intended to be a fair contract that both the property owner and the realtor agree on. Any clauses that put one or both parties at a disadvantage must be avoided. Here are some things that should never be included in an agreement:

Unfair commissions

When commission rates are set to high or low compared to industry standards, it negatively affects property owners and listing agents.

If the commission rate is too high, it significantly reduces the property owner's profit from the sale, limiting the owner's return on their property's value. While real estate agents provide valuable services to find a buyer, setting the commission rate too low may not adequately compensate them for their efforts, potentially leading to less effective marketing of the property.

Opting out of the multiple listing service (MLS)

The MLS is a database that allows real estate agents to work together to find buyers for properties. It lists property information in an extensive online network, increasing the pool of potential property buyers. Opting out of this service can significantly reduce a property’s exposure, leading to more time on the market and a lower sale price. While it’s not illegal to opt out of the MLS, it isn’t an ethical choice if it limits competition and avoids transparency.

Setting the listing price too low or too high

It’s important to set a listing price that reflects the property’s objective value and the seller’s timeline.

Setting the listing price too low may speed up a sale, but it could lead to a damaging financial loss for the property owner. It could also impact the property’s perceived value, skewing market comparability rates.

Setting the listing price too high can make it impossible to find a buyer within a reasonable timeframe. If one is found, it will result in a sale at an unfair price. Both realtors and property owners have an obligation to set a fair, accurate listing price.

Types of listing agreements

Choosing the right type of listing agreements is crucial for a successful real estate transaction. Each type offers distinct advantages regarding how the property is marketed and sold. Here are a four to be aware of:

Open listing

An open listing lets a property owner enlist multiple real estate agents to help them make a sale. Only the agent who finds a buyer earns the commission, but agents may also work together and divide the commission between them.

If the property was first listed exclusively with one agent and failed to sell — or if the owner wants to sell the property as quickly as possible — an open listing is often the best option. This type of listing agreement is also used with properties that are difficult to market, because having multiple agents using different strategies to attract buyers improves the chances of making a sale.

Some property owners may lean toward an open listing because it can sell a property faster. However, it’s typically not favored by listing agents because it increases competition and can lead to shared commission costs. Some brokerages may not allow this type of listing agreement.

Exclusive right to sell listing

An exclusive right to sell grants a single real estate agency exclusive authority to market and sell a property, ensuring the listing agent earns a commission regardless of who finds the buyer. While this agreement is active, the property owner cannot use another agent.

This arrangement allows an agent to focus all efforts on a property and use comprehensive marketing strategies. It’s ideal for property owners who want a committed agent and prefer not to manage any part of a sale themselves. Agents favor it because it guarantees a commission, but property owners might dislike the lack of flexibility and the obligation to pay a commission even if they find a buyer independently.

Exclusive agency listing

With an exclusive agency listing, a property owner grants selling rights to a specific real estate agency, but if the seller finds a buyer independently, no commission is owed.

This agreement is ideal for sellers who want agent expertise, but hope to avoid commission fees by finding a buyer independently. It may lead to reduced incentive for agents, potentially resulting in less marketing effort. Some agencies might not accept the arrangement.

Net listing

With a net listing, a property owner sets a minimum price they’re willing to accept, and the realtor receives any amount over that price as their commission.

This type of agreement is uncommon due to ethical concerns. For example, if a realtor knows a house is worth $700,000 but sets the net listing price at $650,000, they could make a $50,000 commission, which is much higher than the standard 5-6% commission rate ($35,000-$42,000 for a $700,000 sale).

Due to these concerns, net listings are illegal in all states except California, Florida, and Texas. In rare cases where one is used, the advantage for sellers is that it guarantees a minimum profit.

Take on your next listing agreement with confidence

A well-crafted listing agreement benefits both property owners and realtors. Before signing, both parties should carefully assess their goals and agree on terms.

These agreements are some of the most important documents in real estate. Using this guide, you can prepare a comprehensive, fair contract to enter into your next property-selling partnership with confidence.