A common question for homeowners is whether they must pay a real estate agent's commission if they find a buyer for their property on their own. The answer almost always depends on the specific type of contract signed with the brokerage, a detail that can lead to significant financial consequences if overlooked.
This issue recently came to light for a Fountain Hills homeowner who, after listing their house, secured their son as a buyer. Despite the agent not showing the home to any potential buyers, the seller was informed they still owed the full 5% commission stipulated in their agreement. This scenario highlights the importance of understanding the terms of a listing agreement before signing.
Key Takeaways
- The type of listing agreement you sign determines if you owe a commission when you find your own buyer.
- Most residential real estate contracts are "Exclusive Right to Sell" agreements, which typically require a commission payment regardless of who finds the buyer.
- Other contract types, like "Exclusive Agency" and "Open Listing," offer more flexibility but are less common in residential sales.
- Homeowners should carefully review their contract to understand their obligations before listing their property.
- Even when a commission is legally owed, some agents may be willing to negotiate a reduced fee in these circumstances.
A Common Home Seller's Dilemma
Imagine this situation: You sign a standard six-month contract with a real estate broker to sell your home. Shortly after, a family member, like your son, decides they want to purchase the property. They secure their own financing and, trusting you completely, waive the need for a formal inspection.
You contact your real estate agent to share the good news, assuming their services are no longer needed and the commission is off the table. However, the agent informs you that under the terms of your agreement, you are still required to pay the full commission, which could be 5% or 6% of the sale price.
This is precisely the situation a homeowner in Fountain Hills faced. They questioned how a commission could be due when the agent had not conducted a single showing. The answer lies within the fine print of the listing agreement they signed.
What is a Listing Agreement?
A listing agreement is a legally binding contract between a property owner and a real estate brokerage. It authorizes the brokerage to represent the seller and find a buyer for the property. The agreement details the terms of the arrangement, including the duration, the list price, and the commission rate the seller agrees to pay.
The Contract Dictates Commission Obligations
The obligation to pay a commission is not based on the amount of work an agent performs but on the legal terms agreed upon in the contract. There are three primary types of listing agreements, each with different rules regarding commission payments.
1. Exclusive Right to Sell Agreement
This is the most common type of agreement used in residential real estate transactions across the country. Under an exclusive right to sell agreement, the seller agrees to pay the broker's commission if the property sells during the contract term, regardless of who finds the buyer.
This means that even if the seller finds the buyer through their own efforts—or if a friend, neighbor, or family member makes an offer—the commission is still owed to the brokerage. This type of agreement provides the most protection for the agent, who invests time and money in marketing the property with the assurance they will be compensated if it sells.
2. Exclusive Agency Agreement
An exclusive agency agreement is less common but offers more flexibility for the seller. In this arrangement, the seller grants one brokerage the exclusive right to market the property. The broker earns the commission if they or another agent finds the buyer.
However, this contract includes a key exception: if the homeowner finds the buyer independently, without any assistance from the agent, then no commission is due. This option appeals to sellers who are confident in their own network and marketing abilities but still want professional representation.
3. Open Listing Agreement
An open listing is the most flexible option for sellers but provides the least protection for agents. With an open listing, the seller can sign agreements with multiple brokerages simultaneously. A commission is paid only to the brokerage that successfully brings the buyer who completes the purchase.
Furthermore, if the seller finds the buyer on their own, they owe no commission to any of the brokerages. Due to the high level of competition and lack of guaranteed payment, most agents avoid open listings for residential properties. They are more frequently used in commercial real estate transactions.
Why is Exclusive Right to Sell So Common?
Real estate agents invest significant resources upfront to market a home. These costs can include professional photography, virtual tours, online advertising, listing fees on the Multiple Listing Service (MLS), and printing marketing materials. An exclusive right to sell agreement ensures that they can recoup these expenses and be paid for their professional services if the home sells within the specified timeframe.
What Are Your Options if You Find a Buyer?
If you have already signed an exclusive right to sell agreement and then find your own buyer, you are likely legally obligated to pay the full commission. The contract is binding for the entire term, which is often three to six months.
However, all is not necessarily lost. Communication with your agent is critical. Since the agent was spared the time and expense of marketing, showing the property, and negotiating with outside buyers, they may be willing to discuss a compromise.
Consider these steps:
- Review Your Contract: First, carefully read your listing agreement to confirm it is an exclusive right to sell contract.
- Speak with Your Agent: Explain the situation clearly and professionally. Acknowledge the contract but ask if they would be willing to negotiate a reduced commission or a flat fee for managing the transaction's paperwork.
- Propose a Reasonable Settlement: Many agents in this situation will agree to a reduced fee to handle the closing process, which still requires significant paperwork and coordination. This maintains a positive relationship and ensures the deal closes smoothly.
"Most listing agreements for homes are exclusive right to sell. Although you should read your listing agreement carefully, you probably owe the 5% commission. Many brokers in these circumstances, however, are willing to negotiate a reasonable settlement."
Ultimately, preventing this issue starts before you sign any contract. Always read a listing agreement thoroughly and discuss any concerns with the agent. If you have a potential buyer in mind before listing, you can ask for that person to be named as an exclusion in the contract, meaning no commission would be owed if they purchase the home.
