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KASS: Agent’s commission depends on contract

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DEAR BENNY: Can you explain how real estate agents earn their commission? – Ellie

DEAR ELLIE: When homeowners decide to sell their house, they have several options. The most common approaches are to try to sell it themselves, without using a real estate agent or a broker, or to engage the services of a real estate company.

If you opt for the latter approach, you should make sure you are satisfied with the person who will be your agent. Just because the real estate company is big and has a good reputation does not mean that every agent in the company is qualified. Inquire of that person as to his or her experience and knowledge about the area where your house is located.

Once you have selected a real estate agent, you will be asked to sign a “listing agreement” with that company. There are different kinds of listing contracts:

*Open listing: You agree to pay a real estate commission only to the broker or agent who finds a buyer for you. If you personally sell your house by yourself – or through some other agent – the holder of the open listing is not entitled to any commission.

*Exclusive listing: This means you have given the exclusive right to a broker to sell your house. Regardless of who sells the property, the person holding the exclusive listing is entitled to a commission.

While brokers periodically do enter into open listings, the exclusive listing is most commonly used. Brokers and agents do not want to spend a lot of time and money marketing your house only to learn that no commission will be earned because you or someone else has sold it.

A signed listing contract is a binding legal document. You should read it carefully before it is signed. Many standard-form listing agreements provide that the commission is earned when the broker presents a ready, willing and able purchaser to the seller and a real estate contract is entered into. Accordingly, whether or not the buyer actually goes to settlement, the real estate agent would be entitled to a commission.

Keep in mind that often there are two agents involved in a real estate sales transaction: the listing agent and the selling agent. The selling agent has no previous contact with the seller; he or she was working with the potential buyer. (They could also be buyer’s brokers, which will be the subject of another column).

The listing agent may very well be willing to waive its claim for a commission if the buyer does not go to settlement, since the seller may allow that agent the opportunity to try to sell the property again, thereby earning a commission.

However, the buyer’s agent – and/or the selling agent – will not have this opportunity, and will in most cases demand the seller pay a commission, based on the language of the listing agreement.

Accordingly, it is recommended that sellers add the following language into the basic listing agreement: “Unless the Seller cancels the listing and finds another agent, the commission will not be earned until and unless settlement actually takes place. However, if a buyer was introduced by the listing agent, and enters into a contract within 30 days after the listing contract is cancelled, the listing agent is the procuring cause and is entitled to a commission.”

Without this language, all agents could legally claim a commission, even though you have not sold your house. This language is customary, and although the real estate industry does not like it, they have learned to live with it.

Benny Kass is a practicing attorney in Washington, D.C. and in Maryland. He is not providing specific legal or financial advice to any reader. He wants readers to e-mail him, but cannot guarantee a personal response. He can be reached at: mailbag@kmklawyers.com.

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