Beyond Bending Tell You How
When selling a property, a homeowner would want to receive the highest possible price for it. To achieve this goal, some sellers opt for a net listing agreement with their real estate agent. A net listing is an arrangement where the seller sets a minimum price they want for their property, and the agent’s commission is the amount above that price. This type of listing can be beneficial for both parties involved, but it also carries several risks. In this article, we will delve deeper into the concept of net listing in real estate and provide you with everything you need to know before considering this option.
How Does Net Listing Work?
In a standard listing agreement, the seller and the real estate agent agree on a commission rate, usually a percentage of the sale price. In contrast, a net listing agreement sets the commission as the difference between the sale price and the minimum price set by the seller. For example, if the seller sets a minimum price of $500,000, and the property sells for $600,000, the agent’s commission would be $100,000.Net listing agreements are legal in some states, but not all. Some states prohibit them altogether, while others have restrictions on how they can be used. In states where net listings are legal, they must be disclosed to all parties involved in the transaction, including the buyer.
The Pros and Cons of Net Listing
Net listing agreements can be advantageous for both the seller and the agent, but they also carry several risks.
Pros of Net Listing
Higher Commission for the Agent
The primary benefit of net listing agreements for agents is the potential for a higher commission. Because the commission is based on the difference between the sale price and the minimum price set by the seller, the agent has an incentive to sell the property for as much as possible.
Potential for Higher Profit for the Seller
The seller also stands to benefit from a net listing agreement. If the property sells for more than the minimum price set by the seller, they receive more money than they would have in a standard listing agreement.
Cons of Net Listing
Conflict of Interest
Net listing agreements can create a conflict of interest between the agent and the seller. The agent has an incentive to sell the property for as much as possible to increase their commission, while the seller may be inclined to accept a lower offer to receive a higher profit.
Risk of Undervaluing the Property
In a net listing agreement, the seller sets the minimum price for their property. If the seller undervalues the property, they may receive less money than they would have in a standard listing agreement. Additionally, if the property sells for less than the minimum price, the seller may be obligated to pay the commission out of their own pocket.
Net Listing vs. Standard Listing
When deciding between a net listing and a standard listing, it’s essential to weigh the pros and cons of each option.
Net Listing
Net listing agreements can be beneficial for sellers who have a clear idea of what their property is worth and want to receive the highest possible profit. However, they carry significant risks, such as a conflict of interest and the potential for undervaluing the property.
Standard Listing
Standard listing agreements are the most common type of listing in real estate. They provide a commission rate based on a percentage of the sale price, which can be negotiated between the seller and the agent. Standard listings are generally considered less risky than net listings, as there is no incentive for the agent to undervalue the property.
States That Allow Net Listing
As mentioned earlier, not all states allow net listing agreements. The states that permit them have varying degrees of restrictions and disclosure requirements. The following is a list of states that allow net listing agreements:
| State | Restrictions |
|---|---|
| Alabama | None |
| Alaska | None |
| Arizona | None |
| Florida | Must be in writing and signed by all parties involved |
| Georgia | Must be in writing and signed by all parties involved |
| Illinois | Must be in writing and signed by all parties involved |
| Indiana | Must be in writing and signed by all parties involved |
| Iowa | None |
| Mississippi | Must be in writing and signed by all parties involved |
| Oklahoma | Must be in writing and signed by all parties involved |
| Tennessee | Must be in writing and signed by all parties involved |
| Texas | Must be in writing and signed by all parties involved |
| Virginia | Must be in writing and signed by all parties involved |
| Washington | Must be in writing and signed by all parties involved |
The Risks of Net Listing
Net listing agreements can be risky for both the seller and the agent. If not carefully executed, they can lead to legal disputes and financial losses.
Legal Risks
Net listing agreements can be viewed as unethical or even illegal in some states. In states where they are legal, they must be disclosed to all parties involved. Failure to do so can result in legal action against the agent and the seller.
Financial Risks
Net listing agreements can be lucrative for agents, but they can also be financially risky. If the property sells for less than the minimum price set by the seller, the agent may not receive any commission at all. Additionally, if the property sells for more than the minimum price, the agent may be entitled to a larger commission than what is considered reasonable.
Conclusion
Net listing agreements can be an attractive option for sellers who want to receive the highest possible profit for their property. However, they come with significant risks, such as a conflict of interest and the potential for undervaluing the property. Before entering into a net listing agreement, it’s essential to weigh the pros and cons and consult with a real estate attorney.
People Also Ask
What is a net listing?
A net listing is a real estate agreement where the agent’s commission is based on the difference between the sale price and the minimum price set by the seller.
Are net listings legal?
Net listings are legal in some states, but not all. In states where they are legal, they must be disclosed to all parties involved in the transaction.
What are the risks of net listing?
The risks of net listing include a conflict of interest between the agent and the seller, the potential for undervaluing the property, legal disputes, and financial losses.
