When a homeowner chooses to sell their property through a real estate brokerage, they have several choices regarding the contract type: an open listing contract, an exclusive listing contract, and an exclusive right-to-sell contract. Let's unpack what those terms mean, the pros and cons of each, and why, as a real estate investor, you should care about this.
Please note: All real estate contracts you enter into are between you and the real estate brokerage, not the real estate agent. The agent works on behalf of the brokerage.
With an open listing, anyone can try to sell the property: any real estate brokerage or the actual seller. The seller pays commission only to the brokerage that sells the home. And if the seller finds the buyer, the seller doesn't owe commission to anyone.
At first glance, an open listing might appear to be the best option if you're selling your primary home or investment property: You'd have an unlimited number of real estate brokerages working for you, and you can try to find buyers, too. It would be a race to see who can sell first. The problem is, there might not be too many entrants in this race.
In reality, not many (if any) real estate brokerages would be motivated to work hard to sell your home if they know they're competing with everyone else in town -- including you.
Also called exclusive agency listing, an exclusive listing is one where the seller chooses a single real estate brokerage to handle the sale. The seller would then pay the brokerage a commission if the property sells from the efforts of the brokerage. But if the seller finds the buyer, in an exclusive agency listing, the seller does not need to pay commission.
After learning how open listings work (see above), you might think an exclusive listing must be the best arrangement for you as a seller. And it might be. But you could find yourself in a sticky situation if there's a disagreement as to whether you or the brokerage actually found the buyer.
To make it easier to determine who found the buyer, put together a list of buyers you think might be interested in buying your home and present this list to the brokerage when you sign the listing agreement. If a buyer on your list does buy the home, you wouldn't need to pay commission in an exclusive listing agreement. Make sure you see this clause in the contract. Otherwise, you could have a difficult time if you try to not pay commission.
Most brokerages don't prefer an exclusive agency listing. As with an open listing, they won't be too motivated to work hard for you if they think you have a chance of finding a buyer and not paying commission. An exclusive agency listing is a better deal for a brokerage than an open listing, but it's not a broker's favorite way of doing business. If you want a brokerage to do the lion's share of the work, ensure the broker gets a commission no matter what.
Exclusive right to sell
An exclusive right to sell is the most common contract used between a seller and brokerage. It's similar to an exclusive agency listing in that there's only one brokerage involved; the difference is that with an exclusive right-to-sell agreement, the brokerage earns a commission from a sale, no matter if the brokerage lands it or if you do. Either way, you pay commission.
As you can imagine, this is the most popular option for real estate brokerages, and they'll likely assume this will be the deal unless you negotiate one of the other two options. Because most of a brokerage's listings will be of the exclusive right-to-sell variety, those customers will likely take top billing over, say, a client who has an exclusive agency listing.
Reason for choosing an exclusive agency listing
Ultimately, going with an exclusive agency listing means you could potentially save thousands of dollars in commission money you won't have to pay.
If you're the go-getter type or know lots of potential buyers for the property you're selling, it might pay to bring up with the brokerage you select that you want the deal structured as an exclusive listing, also called an exclusive agency listing. Think of this as a BYOB listing, and not because you can celebrate after selling (which you can) -- in this case, BYOB stands for "bring your own buyers."
Your listing broker has most likely heard of this arrangement, but brokerages usually don't bring this option up with sellers, particularly inexperienced ones.
Reason not to choose an exclusive agency listing
An exclusive agency listing is risky. Assuming you want to sell your property as quickly as possible, choosing an exclusive agency agreement might not get you that result. Let's say you think one of your contacts will buy your home, which is why you want the exclusive agency listing. But what if the deal falls through? If you don't have backups, you're now stuck with a broker who probably isn't working as hard to get your property sold.
You'll now need to work to find buyers for your property, and that might be in addition to your day job. Unless you agree to pay commission to your broker no matter who finds the buyer, as what happens with an exclusive right-to-sell agreement, your house might take longer to sell.
An exclusive right-to-sell agreement can also be risky
Agents are usually motivated to sell your property if they know they'll earn a sizable commission as soon as the home sells. But sometimes, your property isn't selling. It might be that the listing agent isn't doing all they can to sell your property. And the problem with that is when you have an exclusive right-to-sell agreement, you're typically tied into the deal between three and six months.
There may be another reason your home isn't selling besides the agent not doing their job: You might have a hard-to-sell house on your hands. But whatever the reason, once you sign a contract with a specific time frame, you're usually stuck with the brokerage until that time is up. You may be able to get out of the contract early in some cases, though. It's possible to terminate the relationship if you can demonstrate the agent is not trying hard enough to sell your property.
How to find a good agent for your needs
If you're an investor, it's probably best to use an agent who typically works with investors. You want a selling agent who understands the investor business -- namely, deals need to happen fast -- and with connections that will likely be interested in buying your property. Ask what types of homes an agent typically sells to ensure they know your real estate market.
You should also choose a real estate professional who is confident and can be a tough negotiator. Ideally you should be able to view your agent as a partner, someone who can do multiple deals with you.
The Millionacres bottom line
Whether you choose an exclusive agency listing or an exclusive right-to-sell listing, make sure you and your broker both feel good about the deal and that you, the brokerage, and the agent all are of the mindset of being in business together.