What is a Seller Representation Agreement?
A seller representation agreement, also known as a listing agreement, is an agreement between a seller of real estate and a brokerage firm that provides detailed information on the property being sold. It forms the foundation of negotiations between the seller and the buyer through an agent. It is used when drafting a sale agreement and mortgage application. The agent relies on the information contained in the seller representation agreement to respond to questions asked by prospective buyers.
From the agent’s perspective, the seller’s representation forms the basis of the authority to represent the owner in the sale of the property. The agreement provides the start and end date of the contract, and the amount of compensation that the broker will receive, subject to certain terms and conditions of the contract. The agreement may also include the list price at which the seller is willing to sell the property, and the agent’s ability to work with other brokers and the compensation they will get if they manage to bring a serious buyer.
Advance your Excel Skills with CFI’s Free Excel Crash Course.
Payment of a Commission Fee
When a property seller engages a brokerage to sell a property, the seller must commit to paying the brokerage a commission fee subject to certain terms and conditions. The commission can either be a flat rate or a percentage of the sales price, or a combination of both.
The commission fee is negotiated between the seller and the brokerage and is contingent on various factors such as the duration of the sale, labor costs, advertising, market competition, etc. Typically, the percentage commission ranges from 2% to 5% of the sales price.
For a brokerage to receive a commission from the seller, the following conditions must be met:
- The brokerage must bring on board a satisfactory buyer who is willing and ready to pay the list price provided by the seller for the acquisition of the property.
- Successful negotiation between the seller and the prospective buyer, and the continued willingness of the buyer to complete the transaction.
If the seller fails to close the transaction after the brokerage has met the above conditions, the seller is required to pay the brokerage since it has performed the functions it had been assigned. However, the terms of the deal can vary significantly, depending on what the two parties had agreed in their initial agreement.
The Listing Price in a Seller Representation Agreement
When giving a brokerage the right to sell the property, the seller must provide a listing price at which the property will be sold. However, depending on the market competition and the offers given by prospective buyers, the final selling price of the property could be higher or lower than the listing price. In such cases, the commission for the brokerage is calculated based on the final selling price of the property.
The listing price is usually agreed upon by the seller and the brokerage. It must be a reasonable selling price based on the features of the property being sold. Experienced brokerages can recommend a selling price that is in line with the prevailing market property rates, and the seller can either accept, reject, or negotiate a better rate for the property.
If the seller recommends a price that exceeds the prevailing market rates for the property, the agent can negotiate with the seller to lower the price to attract more buyers. If the seller declines to lower the listing price, the brokerage can opt out of the agreement.
CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below: