Net listings are an essential concept to understand for real estate professionals and real estate exam test takers. In this article, you will learn the definition of net listings, the risk of using net listings, and the regulations around net listings.
What Is a Net Listing?
A net listing is an agreement that allows the real estate agent to keep any amount over the seller’s asking price. In net listing agreements, a seller sets the minimum price they are willing to accept for selling a property. No matter how high a broker sells the home, the seller will only receive the set price.
The broker then has to sell the property above the sellers asking price to earn a commission. Unlike other listings, the commission is not a set price but the difference between the asking price and the selling price. This difference or commission received is known as the net.
Net Listing Example
Pam got an exciting job opportunity in Atlanta, Georgia. She has to sell her Dallas home before she can move to Georgia. Pam evaluates her options and decides to enter into a net listing.
Pam thinks her house is worth roughly $350,000 and sets the amount as her asking price. Pam tells her real estate agent that if he can sell the house for anything above the asking price, he can keep the difference. The agent finds a buyer willing to pay $400,000 for the house. The house sells for $400,000, Pam gets $350,000, and her real estate agent earns a commission or net of $50,000.
Dangers of Net Listings
Net listings present a conflict of interest. Selling a property as quickly as possible is usually in the seller’s interest. With a net listing, however, a real estate agent is trying to maximize their commission. This means, sometimes, an agent may feel motivated to wait for better offers to maximize their earnings vs just selling the property and meeting the needs of the client.
Let’s go back to our example. Let’s say Pam’s broker gets an offer for $360,000. Even though the offer is good enough for Pam, the agent may pass it up because he thinks he can get a better offer and earn more commission. In the meantime, Pam may run the risk of failing to report to her new job on time or possibly paying two mortgages. This is why generally speaking, and net listings are avoided.
Net listings are frowned upon because they incentivize real estate agents to sell real property at unreasonably high prices. Net listings tempt real estate agents to put their interests above the client’s interest.
A real estate agent’s fiduciary obligation is to keep the principal’s (client) interest above their own.
Net listings are particularly prone to claims of broker misrepresentation and involvement in unfair dealings. Such claims could be based on an improper property valuation.
Net listings are also viewed negatively by many consumer protection organizations. In fact, the National Association of Realtors does not allow its members to participate in net listings. The NAR hopes to protect its members from lawsuits with such prohibitions.
Protections Against Net listings
The National Association of Realtors forbids net listings to protect its members. The Multiple Listing Service (MLS), a property database and a staple among real estate professionals, does not allow net listings either.
Are Net Listings Illegal?
Net listings are illegal in most states around the country. Net listings are legal in Texas, California, and Florida. While net listing agreements are legal in these states, they all have rules to protect buyers and sellers.
Net Listings in California
California’s official position is that net listings can easily lead to the breach of an agent’s fiduciary obligations. California limits net listings with full disclosure of all parties involved.
Net Listings in Texas
In Texas, the state stipulates that net listing agreements place the broker’s interest above the seller’s. An agent can’t enter a net listing agreement unless the seller requires a net listing. The seller must also be familiar with the property’s current market value.
The broker needs to disclose the total price paid by the buyer and the amount of the broker’s residual fee before the seller accepts an offer on a net listing. This way, there are no surprise closing costs.
The broker also needs to disclose all offers received. For instance, had a buyer submits an offer for $375,000, the broker must present it to Pam. Failure to disclose the benefits received by the broker will lead to the loss of the entire fee.
Why Use a Net Listing?
If net listings are so bad, why would a client want to list their home as a net listing? Clients opt for net listings to sell their homes quickly. As for Pam, she got a new job in New York. She needs to sell her house fast so she can move.
A net listing agreement is very attractive if a seller is in some financial distress. Divorces, for example, are particularly expensive. Money from a quick sale of a property can help settle legal costs.
Sellers who know the true value of their property are also attracted to net listings. With a net listing agreement, they can set the bar on how much money they can get from the sale. Traditional listings take time to sell, and the seller may never get the offer they want.
Some sellers use net listings for pieces of property that need extensive repair. With a net listing, they can sell the property in its dilapidated condition and get what they believe is a fair price.
What to Know for the Real Estate Exam
In a net listing, the seller sets a minimum amount they would accept from selling a property. The broker keeps any amount over the seller’s asking price.
A net listing is distinguishable from other listings due to how compensation is calculated. In this agreement, the broker’s fee is not based on the percentage of the selling price. The broker’s fee is whatever amount the buyer pays more than the seller’s set figure and closing costs.
Net listings are risky because they incentivize real estate agents to put their interests above their clients. Net listings could also motivate brokers to misrepresent their clients by issuing improper property valuations.
Most states around the country have banned net listings to protect both buyers and sellers. The states that allow net listings, like Florida, California, and Texas, have strict rules to protect all parties involved.
The National Association of Realtors prohibits net listings among its members. The Multiple Listing Service does not support net listings due to their risky nature. There you have it, everything you need to know about net listings. For more definitions, try our real estate vocabulary flashcards today.