MODULE 5-A: LISTING AND SALES CONTRACTS

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1 MODULE 5-A: LISTING AND SALES CONTRACTS LEARNING OBJECTIVES The contractual relationships between brokers and clients are established through the use of a series of contracts. The listing contract is the beginning of such a relationship. Obtaining an offer may lead to a sales contract. Sometimes other contracts, such as options, mortgages, and leases, are essential to transactions. The broker must be familiar with all of these. LECTURE OUTLINE I. Listing Contract Defined Definition: The broker s contract for employment as an agent to handle a real estate interest on behalf of a principal. A. Parties to the listing contract: 1. The owner of the real estate interest. 2. The broker. 3. Are not party to the listing contract. B. Authority Granted to the Agent by the Contract: 1. Broker may act for principal. 2. Level of authority is set by the contract. 3. May bind the principal within the level of authority. 4. Usually a special agent with limited authority. a. Show property. b. Quote price and terms. c. Take offers. d. Accept earnest money. 5. Cannot obligate the principal without a power of attorney or other specific authority in the listing contract. 6. The principal will not be bound by the unauthorized acts of the broker. C. A valid listing contract should contain: 1. Date of the contract. Indiana license law requires all listing contracts to have a specific beginning and ending date. 2. Names and addresses of the parties. The principal and broker. 3. A description of the property. 4. Commission agreement stating the amount of commission and how it is earned. 5. Price and terms of the sale that is acceptable to the principal. The principal automatically sets the price. RECP Broker Transition Course Manual Student Module 5-A, Page 93

2 D. Legal form of listing contracts. In Indiana, enforceable listing contracts must be in writing. Listing contracts are express in nature, since the principal and agent have a definite understanding. Listing contracts usually are not assignable. E. Earning the Commission - The broker must perform. 1. Find a purchaser who is ready, willing and able to purchase the property. 2. Effect a sale obtain a contract of sale that is acceptable to the seller. 3. Procuring cause, if more than one broker is involved or a type of listing that allows the seller to market the property themselves. 4. The commission is earned when the terms of the contract are completed, though the payment may not be made until the closing. F. Termination of a Listing Contract 1. Mutual agreement of broker and principal. 2. Performance of the contract. 3. Lapse of time stated in contract. 4. Breach of contract that allows for termination. 5. Failure of the broker to take action. 6. Revocation by principal. a. May be liable to the broker for commission if performance has taken place. b. May be liable for damages to the broker for time and expenses such as advertising or transportation. 7. Destruction of the property. 8. Condemnation. 9. Death or incapacity of the parties. 10. Bankruptcy. G. Types of Listing Contracts 1. Open listing The principal contacts as many brokers as desired to represent the property but is liable for payment of a commission only to the broker who actually sells the property. No restrictions are placed on the seller s right to sell the property him/herself. 2. Exclusive agency Under the terms of an exclusive agency contract, the owner appoints the broker with whom he/she has listed the property as the exclusive agent for procuring a purchaser for the property during the term of the listing. The owner thus becomes obligated to pay a commission to the listing broker if the property is sold during the term of the listing by the broker or any other person. RECP Broker Transition Course Manual Student Module 5-A, Page 94

3 The only exception to such a rule is that an exclusive agency contract does not deprive the owner of his/her right to sell the property to a buyer procured by his/her own efforts and thus would not be liable for a commission to the listing broker. Example: A builder wishes to have a real estate firm represent him in the sale of his newly constructed homes in a subdivision. He also wishes to be able to market the homes himself and not have to pay a commission if he sells them through his efforts. 3. Exclusive right to sell Under this type of listing contract, the owner is obligated to pay the broker the commission if the property is sold, regardless of who procures the purchaser. This contract obviously is the most advantageous to the broker and is used most often by the industry. 4. Net listing A net listing is an employment contract wherein the broker receives as commission all monies over and above the minimum sales price agreed upon in the listing contract. This practice is illegal in Indiana unless the listing agreement provides for a maximum commission to be paid by the seller to the principal/managing broker. 5. Multiple Listings (MLS) or Broker Listing Cooperative (BLC): a. A facility for the orderly correlation and dissemination of listing information so participants may better serve their clients and customers and the public. b. A means by which authorized participants make blanket, unilateral offers of compensation to other participants (acting as buyer agents, or in other agency or non-agency capacities defined by law). c. A means of enhancing cooperation among participants. d. A means by which information is accumulated and disseminated to enable authorized participants to prepare appraisals, analyses, and other valuations of real property for bona fide clients and customers. e. A means by which participants engaging in real estate appraisal contribute to common database. 6. One Time Show Listing The one-show listing allows the broker to show the property to a particular party without having the property formally on the market. A listing agreement is signed and the seller usually agrees to sign an exclusive right to sell listing if an offer is made. H. Other Listing Agreement Considerations: 1. It is a written agreement authorizing the broker to: a. Find a buyer. b. Take offers on behalf of the seller. c. Receive and hold earnest money. d. Advertise the property for sale. 2. It is a personal service contract a. It may not be assigned but may delegate the authority to assign to another sales office or enter it into the MLS/BLC to find buyers. b. It is an authority to act for the seller, not a guarantee. c. The broker promises to use best efforts. RECP Broker Transition Course Manual Student Module 5-A, Page 95

4 3. The time limit on listings may be extended by implication. This will occur if negotiations to sell (a written offer has been made) are in progress at the time of expiration. 4. The buyer should not be allowed to see the listing contract. The broker could be subject to a suit for misrepresentation or omission or the seller sued if the buyer relies upon the information and suffers damages. Also the seller or limited agency relationship could be compromised by giving the buyer an advantage over the seller. 5. Buyer-brokerage is a contract of agency not a listing contract. In the sample listing contract, answer the following questions: 1. Which line in the listing contract states whether the seller is or is not delinquent on any loans? 2. Which line in the listing contract states the seller acknowledges receipt of a copy of the written office policy relating to agency? 3. Which line in the listing contract states the seller acknowledges receipt of an estimate of selling expenses? 4. Which line in the listing contract states the seller authorizes the broker to disclose multiple offers to buyers? RECP Broker Transition Course Manual Student Module 5-A, Page 96

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9 II. Offer to Purchase Contract of Sale The offer to purchase becomes the contract of sale. The proposition, or offer to purchase real estate, is the instrument whereby a prospective purchaser offers in writing to purchase real estate upon certain specific terms. Since it is the foundation of the particular real estate transaction, it must be carefully drawn so that there may be a complete meeting of the minds between the purchaser and seller. It must be definite, specific, and certain. It must clearly establish the rights, obligations, and duties of both parties with reference to the sale and purchase. A proposition containing ambiguities may jeopardize the transaction. It should be pointed out that the proposition is simply an offer until such time as it is accepted without condition by the seller. It may be withdrawn at any time by the purchaser prior to its acceptance by the seller. When the offer has been accepted unconditionally by the seller, the contract ripens into existence. The legal consideration is found in the mutual promises of the parties: the promise of the purchaser to purchase upon specific terms and the promise of the seller upon those terms. These mutual promises support each other and provide the legal consideration for the contract. If the seller attaches any conditions to the acceptance, such acceptance immediately terminates the offer. The conditional acceptance becomes in effect a counteroffer by the seller. The counteroffer may be made by an addendum to the purchase agreement or by marking out conditions on the original purchase agreement, changing and initialing. If his counteroffer is unqualifiedly accepted by the purchaser, then the contract ripens into existence, and there is a meeting of the minds. Many times a change in a contract may be initiated on the offer form itself which causes the counteroffer rule to go into effect. Any such changes must be initialed by both the buyer and seller. Any contract can be changed utilizing this method. A. Legal requirements 1. Legal description. 2. The terms of the sale: a. The cash sale. b. Sale subject to existing mortgages. c. Sale subject to assumption of mortgage. d. Sale on conditional sales contract. Purchase money mortgage. 3. Contingencies in the offer. a. Subject to purchaser s ability to obtain a particular type of mortgage loan. b. Subject to purchaser s ability to sell his/her existing property. c. Subject to zoning for intended use. d. Subject to inspections. 4. Proration of rents and insurance. 5. Proration of taxes. 6. Payment or proration of special assessments. RECP Broker Transition Course Manual Student Module 5-A, Page 101

10 7. Abstract of title and title insurance. 8. Deeds of conveyance. 9. Time for acceptance and closing. 10. Default clause. 11. Signature of purchaser. 12. Acceptance by seller. B. Parties to the Offer (Sales contract) 1. Vendor Seller of the real estate. 2. Vendee Purchaser of the real estate. 3. Are not a party to the sales contract. C. Elements of the Sales Contract 1. Under the Statute of Frauds To be valid and enforceable, the offer must be in writing; under Indiana real estate license laws it must be in quadruplicate. 2. Consideration for the Contract The mutual promises of the buyer and seller make the contract binding. 3. Earnest Money Is often given as additional consideration for the contract, but is not a technical requirement to make the contract valid and enforceable. Forfeiture of the earnest money for nonperformance is usually stated as liquidated damages in the sales contract. 4. Equitable Title Established As a result of the sales contract, the buyer will gain equitable title to the property. Legal title will transfer at the time of closing the transaction and the delivery of the deed. 5. Sales Contracts are Bilateral The parties have made mutual promises. 6. Sales contracts are not binding until the offer and acceptance have been communicated by each party to the other. D. Breach of the Sales contract 1. Buyer s Breach a. Deposit is usually forfeited. b. Seller may cancel the contract through rescission. c. Seller may sue for damages or specific performance. 2. Seller s Default a. Buyer may rescind the contract. b. Buyer may sue for damages. c. Buyer may sue for specific performance. d. Buyer may sue seller for damages. 3. Broker s claim in case of default a. Forfeited deposit may be divided with the seller. b. May sue for specific commission. E. Sales contracts may be assigned unless prohibited in the agreement. RECP Broker Transition Course Manual Student Module 5-A, Page 102

11 In the sample purchase contract, answer the following questions: 1. Which line in the purchase contract states that funds of $10,000 or more must be wired to the closing agent s escrow account? 2. Which line in the purchase contract states the buyer must make written objections to any problems revealed in an inspection report? 3. Which line in the purchase contract states the buyer s purchase offer is rejected? 4. Which line in the purchase contract states the buyer holds a real estate license? RECP Broker Transition Course Manual Student Module 5-A, Page 103

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19 III. Options A. Definition: A contract to hold an offer open for a specified period of time. 1. Must have all elements of a contract: Offer, acceptance, and consideration, etc. 2. The offer made through the option must meet all the requirements of a valid offer. a. Must be reasonably certain. b. Must contain all essential terms. 3. Not binding without legal consideration. 4. Must be in writing to satisfy Statute of Frauds. B. Exercise of the Option 1. Must be exercised as specified by the option agreement. 2. May be exercised even after making lower offer, if the exercise is timely. a. Normally any offer may be withdrawn any time prior to its acceptance. b. A lower offer usually rejects the first offer by implication and terminates it. Note: Neither of the above is true of a binding offer agreement. 3. The exercise of an option is legally an acceptance of an offer. a. The exercise of the option cannot add new terms. b. If new terms are added, it is a counter offer, not an acceptance. c. Must be unequivocally accepted. 4. Option - An option is a combination of an offer and a binding contract to hold an offer open for a stated period of time. The offer is irrevocable for that period. The offer must be exercised within the stated period according to the terms of the offer by proper notice. After the time has lapsed, then it is just an offer and may be rejected. 5. Lease-Option to Buy A form of lease that contains an option for the lessee to purchase the property under specified terms. A major characteristic is that a portion of the rent is applied to the sales price over the period if the option is exercised. If the lessee does not exercise the option then none of the money going toward the sales price is refunded. 6. Broker s Commission under Options The broker will not collect a commission until the option is exercised. The broker may collect a fee based on the option money. The listing contract should speak to this point. 7. Option Money Money given by the optionee to the optionor for the option. The funds may be applied to the purchase price if the option is executed or kept separately depending on what the option agreement says. If the option is not exercised the option money is usually forfeited by the optionee. RECP Broker Transition Course Manual Student Module 5-A, Page 111

20 8. Types of Options a. Standard or fixed price option the option price is set or fixed by the contract. b. Step-up option the exercise price increases periodically with the lapse of time during the option period. c. Full credit option The entire amount of the option money is credited to the purchase price if the option is exercised. d. Declining credit option The amount of option money credited to the exercise price declines with time over the option period. 9. Recording of Options a. Options should be recorded for protection against third parties. b. A release of options should be recorded if the option is not exercised to prevent a cloud on the title. c. A defeasance clause should be included in the option agreement if it is not exercised by the option date. 10. The death of either party does not affect the rights under the option. 11. The optionee has no right to compensation if a condemnation takes place, nor can the optionee seek zoning changes until the option is exercised. RECP Broker Transition Course Manual Student Module 5-A, Page 112

21 REVIEW QUESTIONS 1. Which of the following is not an essential element of valid contracts? a. Lawful subject matter. b. A home warranty. c. Two or more parties. d. Offer and acceptance. 2. Oral exclusive right to sell listings are: a. Invalid. b. Illegal. c. Unenforceable. d. Sometimes difficult to enforce. 3. Which of the following is correct? a. Promises of good faith between the parties are sufficient consideration for an option contract. b. An owner always has the power to revoke a listing without any consequences. c. All listing contracts must state a definite date of expiration. d. Offers to purchase must be accompanied by earnest money to be enforceable. 4. An acknowledgement: a. Attests that the signature is that of the one signing. b. Is the seal. c. Is legally required on all documents. d. Must be witnessed by the buyer. 5. A contract with promises by both parties is called: a. Unilateral. b. Bilateral. c. Express. d. Implied. 6. Brokers A, B and C all have an open listing on Smith s property. Broker C obtained an offer that was accepted by Smith. To whom is the commission due? a. Since all three brokers had a listing, the seller owes a full commission to each. b. Since all three brokers had a listing, the commission shall be equally divided among them. c. C receives all of the commission, since he is the procuring cause. d. The brokers had an open listing; therefore, the prospect customarily pays the commission to the broker who sold him the property. 7. Which of the following does not result in termination of a contract: a. Renunciation. b. Assignment. c. Lapse of time. d. Abandonment. 8. Contracts can be enforced against which of the following: a. Persons known to be incompetent. b. Minors. c. Minors who misrepresent their age. d. Persons who appear competent and have not been judicially declared incompetent. 9. A listing contract that allows the owner to list with more than one real estate firm is: a. An open listing. b. An exclusive right of sale listing. c. A net listing. d. An exclusive listing. RECP Broker Transition Course Manual Student Module 5-A, Page 113

22 10. What is the most common remedy for the seller for breach of a real estate sales contract by the buyer? a. Seek specific performance and punitive damages. b. Keep the earnest money deposit. c. Suit for punitive damages. d. Cancellation and sue for the commission for the broker. 11. If legal rights under a contract are transferred to another person, that person is referred to as an: a. Assignor. b. Assignee. c. Attorney-in-fact. d. Attorney-at-law. 12. If the parties to a contract desire that provisions concerning time be strictly enforced, the contract should provide that: a. A reasonable time will be allowed. b. Time shall not lapse. c. Time is of the essence. d. The rule caveat emptor applies. 13. An option for the purchase of a property for $40,000 is open for 90 days. The property is appraised at $65,000 during the option period. Which of the following statements is true concerning the option? a. The option is assignable to the optionee but not the optionor. b. The optionee must exercise the option within the period to preserve the price. c. The optionor may raise the option price after the appraisal was made. d. The optionor may revoke the option after receiving the appraisal. 14. An option contract is a: a. Special contract. b. Performance contract. c. Sales contract. d. Unilateral contract. 15. A contract that provides that the broker will receive a commission regardless of who sells the property is called an: a. Exclusive listing. b. Open listing. c. Exclusive agency listing. d. Exclusive right of sale listing. 16. Valuable consideration in a real estate contract of sale includes all of the following forms except: a. Cash or the equivalent. b. Foregoing of rights to something. c. The broker is being paid. d. Promises to pay cash. 17. A Parol contract is: a. Oral. b. Acknowledged. c. Written. d. Implied. 18. An oral real estate sales contract is: a. Unenforceable under the Statute of Frauds. b. Enforceable under the Uniform Commercial Code. c. Unlawful. d. Only a listing. 19. The maximum amount a broker will normally receive as damages as a result of a defaulted real estate sales contract is: a. Equal to ¼ of the deposit. b. The total deposit. c. Equal to ½ of the deposit. d. Equal to the amount of his agreed commission. RECP Broker Transition Course Manual Student Module 5-A, Page 114

23 20. A buyer makes a written offer to the seller. The seller wishes to change one condition on a repair to be made to a broken door. Which of the following statements is correct? a. The change constitutes a counter offer. b. Since the change does not affect the price it has no effect on the offer. c. The change makes for an acceptance of the offer by the seller. d. The seller can accept the original terms of the offer if the buyer does not accept the change for the repair. 21. The type of contract where its formation is predicated upon the performance of one of the parties is which type of contract? a. Bilateral. b. Unilateral. c. Executory. d. Executed. 22. If the parties to a contract are of legal age and of sound mind, they are said to have: a. Consideration. b. Reality of consent. c. Legal objectivity. d. Legal capacity. 24. The type of listing arrangement that retains the seller the right to sell the property without obligation to pay the broker: a. MLS listing. b. Exclusive right to sell listing. c. Exclusive- agency listing. d. One time show listing. 25. The buyer was told by the broker that the property was connected to the city sewer. It was later found that it was not and the buyer refused to close. Which of the following statements is correct concerning the situation? a. The seller can sue the buyer to close under compensatory damages. b. The seller is entitled to keep the earnest money. c. The buyer may withdraw from the transaction for misrepresentation. d. The buyer may sue the broker and seller for punitive damages. 26. Mutual assent to a real estate contract is indicated by: a. Attestation and acknowledgement. b. Offer and acceptance. c. Sealing and recording. d. Delivery and timeliness. 23. The process of rescinding a contract can be accomplished by: a. Mutual consent of the parties. b. One of the parties transfers the rights to a third party. c. One party refusing to complete the performance. d. Forfeiture of the earnest money. RECP Broker Transition Course Manual Student Module 5-A, Page 115

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