Structuring Listing Agreements

Ask any real estate attorney about disputes between sellers and listing agents and you are likely to hear a lament about the lack of specificity in residential real property listing agreements. The forms widely used in Silicon Valley are generally written in a way that provides a lot of protection to real estate agents and may contain terms inconsistent with what many sellers desire. However, through detailed discussions with a reputable real estate agent and a relatively simple addendum to the agreement, most of these issues can be resolved in a way that is fair to both the seller and the agent.

There are many different approaches to marketing and selling homes in Silicon Valley, yet the two most common listing agreements used by local real estate agents do not place many specific requirements on our agents’ services. Often, sellers and agents have divergent points of view when it comes to the quality and quantity of marketing that the agents will provide in exchange for their hefty commissions. Similarly, some listing agreements are signed without a clear understanding of who will pay for the staging costs, the property inspection, the pest inspection, and the home preparation.

Although sellers and agents may not see eye-to-eye on the scope of the agents’ services—most notably with regard to the level of marketing—these issues often remain hidden until after the contract is signed and the parties are bound.

The two most popular listing agreements in Silicon Valley are published by the California Association of Realtors® (CAR) and the Peninsula Regional Data Services (PRDS). They are quite vague with regard to the marketing that agents will provide. In fact, they both include language whereby the sellers authorize the broker to advertise and market the property in any medium selected by the broker, but neither agreement includes specific requirements.

In addition to the lack of detail with regard to the scope of services, there are two other significant issues that should be considered before signing a “standard” listing agreement. First, the forms are drafted in a way that provides a great deal of protection to the agents, which may be more one-sided than appropriate. Second, sellers may be liable for commission even if they do not sell the property.

Inadvertently triggering a commission obligation can come up in a few circumstances, such as when the seller makes the property “unsaleable” (e.g., cancelling the listing or renting the property), or when the seller turns down a non-contingent offer at or above the asking price. The latter situation is particularly problematic in this market because many properties are priced at a level lower than the sellers hope to obtain. While agents are quick to point out that the “sellers never have to sell,” which is generally an accurate recitation of current case law, that is not the same as saying that the clients will not owe commission unless a certain price target is hit. If the agents mean the latter, then that should be specifically agreed upon and included in the addendum.

Many of these problems can be eliminated if addressed before the parties sign the listing contract, and if the agreed-upon terms are reduced to writing in the form of an addendum.

Six Tips to Crafting an Addendum to the Listing Agreement: 

1. Address the expectations throughout the entire listing period, not just the first week.

2. Vague or general statements, such as the agent will “advertise the property aggressively” or “act diligently,” should be replaced by more specific commitments, such as the agent will “run a full-page ad in [a particular publication] every week until the property is sold,” or “produce and distribute 300 20-page flyers specific to the particular property.”

3. The agent should provide a minimum commitment in marketing expenditure (e.g., the agent will invest at least $20,000 in home preparation and marketing and provide the seller with receipts if requested).

4. If the sellers want to retain the right to turn down any offers below a certain price point, then that price should be agreed upon and included in the addendum.

5. If applicable, make sure to specifically address who is responsible for the cost of: inspections, staging, videos (reference a sample provided by the agent), brochures (reference a sample), virtual tours, photography (name particular photographer), cable TV ads (length and number), radio ads (length and number), newspaper and magazine ads (size, frequency, and publications), and online marketing.

6. Consider including clauses that reduce the commission if a particular price is not achieved or that increases the commission if the price exceeds a certain target.

Following these steps will ensure clear expectations and mutual understanding between the sellers and their agent.