Defining a Real Estate Brokerage Contract
A Real Estate Brokerage Contract is an agreement between a real estate brokerage or a sales representative employed by a real estate brokerage and a client for various services to be provided to a person or persons buying, selling or leasing a property.
There are many different types of services that real estate brokerages or sales representatives may provide, such as open houses, staging advice, publication in the local Multiple Listing Service (MLS), etc. but the main services are negotiation of the terms and conditions of the sale, to find the right buyer at the right price, and facilitating the transaction once a sale is negotiated and accepted.
Real estate brokerages contract with either property owners or prospective buyers for the sale or leases of residential or commercial properties.
Contracting with real estate brokerages is generally done in connection with the sale or rental of residential or commercial properties (including leasing), although if a person is considering selling or renting their business or assets for example , they should consider engaging a real estate professional to assist in the sale process.
A Real Estate Brokerage Contract is usually for a six month period, with the basic premise that advisably, a person’s home is being sold and there should be substantial interest in a property in that period. If there is not interest seen in the first period, which can be set out as a fixed term or as a period terminable on notice, it is usually at the discretion of the homeowner whether there will be any extension or renewal of the contract.
As the transaction may be very significant financially, a buyer or seller may wish to review the contract with legal counsel to review the obligations imposed on the parties and to confirm that such obligations are acceptable.
The provisions of such agreements include the services to be provided by the real estate professional, the commission payable on the sale, the maximum commission charged by the real estate professional, termination of contract, duration of the contract and allow for the inclusion of other relevant clauses.
Components of a Real Estate Brokerage Contract
The key elements of a real estate brokerage contract are the description of the services to be provided by the real estate broker, compensation for those services as well as when the compensation is earned, and the duration of the agreement. In this section, we will review the most common terms found in a real estate brokerage contract.
Services Provided by the Broker: The scope of services can vary greatly from one brokerage contract to another. Certain brokers may only provide limited services to their clients while other brokers may offer a full array of comprehensive services. The scope of services provided by various brokers in all areas should be discussed with each broker so that the potential client has an understanding of what is included in the scope of services. Compensation: Compensation, or the terms of how a broker will be compensated for their services, are essential to most brokerage contracts. Some brokers are paid a commission based upon a percentage of the selling price of the property. Other brokers may charge on an hourly basis. It is also important to understand when a broker earns their commission. Generally, a broker earns their commission when a transaction successfully closes. However, even if a transaction does not close, a broker may still be entitled to their commission if and when certain events occur that would entitle the broker to their compensation. For example, a broker may be entitled to their commission if the client enters into a deal with a specific buyer even if the deal does not close. Duration of the Contract: Typically, the duration of a brokerage contract expires upon closing of the real estate or at some other date agreed upon by the client and the broker. However, it is essential to read the specific term of any brokerage contract so that there are no misunderstandings about when the contract will terminate. Conclusion: Reading and understanding the terms of any real estate contract is essential to avoid future problems with that agreement. The same is true for real estate brokerage contracts. It is essential to read the terms and understand the rights and obligations of each party under the agreement. Seek legal assistance with regard to the interpretation of a brokerage contract to fully understand the consequences of entering into such an agreement and, if necessary, negotiate the terms of the contract to ensure that the agreement meets your needs.
Types of Real Estate Brokerage Contracts
The most well-known real estate brokerage contracts are those that provide either the exclusive right to sell real estate or just the right to use reasonable efforts to locate prospective buyers or sellers of the subject property.
An exclusive right to sell real estate contract is a contract where by the client, or principal, agrees to the pay to the real estate broker, or agent, a commission if the property is sold during the term of the contract, regardless of how the buyer is located. There can be a set commission amount, e.g. 6% of the sale price of the property, or a sliding scale, e.g. 5% of the first $500,000 of the sale price of the property and 3% of the sale price above $500,000.
An exclusive agency real estate contract is a contract whereby the client, or principal, agrees to pay the real estate broker, or agent, a commission if the property is sold during the term of the contract. However, there is an exception and the contract provides that the principal will not owe the broker a commission if the principal himself locates the buyer for the property.
An open listing real estate contract is an informal contract whereby the client, or principal, authorizes—on a non-exclusive basis—a number of real estate brokers to sell certain property during a specified period of time. The real estate brokers are not required to work with each other and each is free to enter into other non-exclusive listings with other brokers. The broker who locates a buyer for the property earns the commission.
A multiple listing real estate contract is usually an exclusive right-to-sell contract entered into by the owner of the property with an association of real estate brokers. The contract provides that the owner’s property will be listed in a public multiple listing real estate service. This arrangement will generally give any of the listing brokers’ salespersons quotas of sales in relation to their respective commission splits and participation in the costs of the multiple listing real estate service.
There can be implied, or verbal, brokerage contracts when one party is able to show that the other party has acted to participate in a transaction with knowledge of the facts and has accepted the benefits flowing from its actions. Because of the inherent risk of a dispute for the existence of an implied contract, it is recommended—but not required—that real estate contracts be in writing.
The absence of a well-drafted real estate brokerage contract can result in the unwitting appearance of the issue of which party is entitled to the broker’s commission. Therefore, it is very important for any party to a potential brokerage contract to enter into a written contract with the appropriate terms and conditions. Also, it is very important for a real estate broker to make sure that his client enters into a written brokerage contract to protect the real estate broker’s commission.
Broker and Client Responsibilities
The Code of Ethics established by the National Association of Realtors governs the relationship and responsibilities between brokers and clients or customers. A residential brokerage contract is essentially a contract between a broker and their client that details specific obligations, rights and obligations of each party. Brokers are required to communicate those obligations and rights to its client so that they can make informed decisions. Many brokers are now providing extensive disclosures to their clients to provide opportunities for their clients to ask about items they do not understand or need clarification on about their legal rights and obligations under the contract.
What is the Duty of Loyalty? The duty of loyalty obligates a Broker to use his or her best efforts on behalf of the Client in their contractual dealings with third parties. In other words, a Broker can represent only one Client in a particular transaction. To do more than that would be a conflict of interest. If a Broker were to represent a client (the Seller) in the sale of a Burger King, and another client in a transaction to purchase a McDonald’s restaurant, a conflict arises if the Burger King needs to sell the Burger King at a price lower than the Target Price agreed to by the Buyer as the value for the McDonald’s it wants to buy. In that event, the Seller and the Buyer will have an "irreconcilable conflict" because the Seller wants the price to be lower than the Target Price and the Buyer will not pay more than the Target Price. A Broker facing that situation should notify all parties and then withdraw from its representation from each of them to avoid incurring fiduciary liability.
The fiduciary relationship between a Broker and their client becomes even more complex when there is no monetary compensation due to the Broker upon the successful sale of a property. Under a Contract, that occurs when a Broker is hired to find a house as the Buyer’s agent. In that scenario, the Broker is not being paid by a seller when the transaction closes, even though the Broker has competently performed its contractual obligations for their client to find the house it wants to buy.
What is the Duty of Disclosure? In addition to the duty of loyalty, a Broker also licensed to disclose matters materially affecting the value or desirability of in which the Broker is engaged to act as agent. So, for example, while a Broker will not be responsible for knowing all aspects of a property in listing a property for sale or finding one to buy, the Broker must disclose information otherwise available to it that may materially affect the Client’s choice to sell its house or buy someone else’s house. One of the Broker’s foremost fiduciary duties is to keep the Client advised of the current status of the Transaction, especially when material changes in those circumstances that may adversely affect the Client’s ability to complete the Transaction arise. For example, a Broker must disclose and explain a potential title defect. The Broker’s duty of disclosure to the Client may require the Broker to stop representation of the Client and refer the Client to an attorney.
Negotiating the Terms of a Real Estate Brokerage Contract
As with any contract, real estate broker agreements are negotiable. The real estate agent or broker is really a subcontractor to the contract of the ultimate brokerage firm. The contract you have with your REL comes between you and the brokerage firm. The contract can contain all sorts of provisions from pay, to who is licensed, to agency disclosures, and more. The most important provision is the one that discusses compensation. If it does not dispute that you owe the commission, and if properly paid , it will let you work out the compensation yourself. When it comes time for a renewal, all of the terms of the contract should be reviewed for changes necessary to reflect the parties’ current understandings. Please ensure that, if necessary, the agreement has a "Termination" provision as well as a timeframe for notice so that the relationship can be ended without grading in the relationship. A contract can be amended and generally, to be enforceable, a signed writing may be required.
Common Mistakes and Avoiding Them
As with almost every contract, it is easy to make mistakes. And with a real estate brokerage contract, there are some mistakes that brokers and clients should try to avoid if at all possible.
A common mistake that continues to be made by brokerages is the use of outdated state forms. Readers know that all states have governing statutes, with some states, such as Ohio, having non-residential real estate specific statutes. And even if a state does not have such specific statutes or regulations regarding non-residential real estate, most states have general real estate agency laws, which still apply.
Using an outdated form can be problematic because a state may have changed its regulations since the form was created. If the outdated form is reviewed by the state’s governing body, this could potentially cause a problem for both the broker and its client.
So, how to avoid this? This is a pretty simple solution in that you should always make sure that the form you are using is the most up-to-date version. Each state should have on its website access to the state’s current real estate forms, so it should be pretty easy to verify.
Continuing on this theme, another pitfall that occurs is the use of a form that applies to the wrong type of property. While it may seem like obvious advice, you don’t want to use a residential form for a commercial transaction, or vice versa. And just like it is important to ensure you have the most up-to-date version of your state’s real estate forms, it is also important to ensure you have the correct form. So, once again, go to your state’s website and download the appropriate form.
So we’ve addressed a couple of pitfalls for using the wrong forms. But what if there is a specialty area that you and your commercial client are entering into? For example, if you and your client are looking to develop a parcel of land, you probably are going to want to use a broker developer agreement. And no matter what somebody may have told you, you do not have to use the state-issued agreement for developer agreements or leasing agreements — you and your client can write your own form, and since these are not residential forms, you will not have to worry about the form not being up to date or for the wrong type of property. But here again is where it is imperative that you and your client ensure that you are both comfortable with the form that you are using.
The third pitfall to avoid is to not fill out required form fields. All too often nor you nor your client want to complete the information on a form. And while I understand that it can be cumbersome, if you don’t complete a required field, such as your social security number (as a broker) or your name and date of birth, then you could create your own pitfall. One way to prevent this is for both you and your client to review all sections of the form to ensure that the required information is filled out.
The fourth pitfall to avoid is to not have the form signed by you and your client in the proper places. This may seem both obvious and redundant to what has been said above, but really it is imperative. And most importantly – yes both of you do need to sign it – not just the client.
The fifth pitfall that I am going to address is to not update your brokerage agreement with your client at the end of the contract term, or at least take a look at it to confirm that it is up to date. I know that many brokers don’t want to use the time to have the discussion, but I think it is very important to discuss at the conclusion of every contract if anything within the brokerage contract should be updated. This process helps ensure that there are no issues with an existing contract, and can help in future dealings between the broker and its client.
Governing Laws and How to Deal with Disputes
When entering into a real estate brokerage agreement, parties must ensure that the contract is in compliance with local, state, and federal laws and regulations. For instance, the contract should stipulate the services to be provided in compliance with laws regarding anti-discrimination and fair housing. Other regulations, such as those regarding dual agency, expiration of the agreement, and dispute resolution provisions, must also be clearly spelled out in the agreement.
When disagreements arise from the transaction of business, as they inevitably do, the real estate brokerage contract should specifically address how disputes are to be resolved. Mediation is one way of resolving a conflict in a less confrontational way; arbitration allows the arbitrator to render a binding determination that resolves the issue(s) between the parties. In arbitration, the parties agree up front to submit their grievance(s) to an arbitrator to render a final decision.
Future Developments in Real Estate Brokerage Contracts
As we look to the future, it is clear that technology will continue to shape the real estate industry and the way brokerage contracts are structured. The growing trend towards digital contracts, as well as the rise of automated transactions and blockchain technology, will all have significant implications for future real estate brokerage contracts. One major trend is the use of digital contracts. With the advent of electronic signatures, it has become much easier to create, sign, and store contracts online. This has streamlined the closing process, reduced costs, and increased accessibility for both buyers and sellers. As the use of technology continues to expand, it is likely that digital contracts will become the norm in the real estate industry . In addition to digital contracts, the rise of technology-driven real estate companies is likely to lead to more standardized contracts across the industry. Innovative players in the market, such as open-door and Zillow Offers, have introduced new home buying and selling concepts that could influence how traditional brokerage firms structure their contracts. As we enter into a new era of real estate transactions, it is important that all parties stay apprised of upcoming trends in the industry. By keeping up with evolving technology, and how it influences real estate brokerage contracts, buyers and sellers will be better equipped to negotiate favorable terms, protect their rights, and move forward with their transactions with confidence.