The listing agreement is the legal contract between real estate agent and developer. In many jurisdictions it is required by law before your project can be advertised by the real estate agent. There are three key points to negotiate on the listing agreement, commission, exclusivity and listing term.
Commission
Commission is the percentage of the sale value or the dollar amount you agree to pay the agent on a successful sale. The agent may offer to have a flat percentage fee, say 3%, or a graduated fee depending on the sale price, like 4% of the first $300,000 and 2.5% thereafter. If your market has co-broking arrangements then the fee may be higher (6%), split between agent and co-broking agents. A co-broking arrangement is where the agent markets to other agents to bring their ‘buyer’ clients to your project in return for a share of the commission. Commissions can be negotiated although the agent may have to confirm it with their agency’s corporate management and they may have internal restrictions on how far they are allowed to discount. Bear in mind though the idea is to sell your product at the best price in the best time and give the agent every incentive to do so. Until you are doing multiple projects and can leverage a volume relationship with agents it is recommended not to skimp on commission. You want the agent to focus on your product and not get diverted because they have other clients with better commission rates.
To help with your cash flow it is ideal to delay payment of all commission until settlement. However, to incentivise the agent, or even to get them involved in a market where they have other options, you may want to offer a portion of commission to be paid earlier. This can also be negotiated. A common arrangement is half is payable once the sales contract becomes unconditional and the other half on settlement. It is important the agent still has skin in the game right through until the purchase settles, as you will need the agents help if issues arise that affect settlement. Commission should not be held or automatically deducted from purchaser’s deposits or settlement proceeds by the agent’s firm. You should have your lawyer, escrow agent or independent entity administer deposits and settlements so there is no chance of a real estate agency controlling the money flow.[1]
Exclusivity
Every agent prefers a sole listing, where they are the only agent permitted to sell the project with the option to invite other agents on their own terms. The alternatives include: a general listing where you reserve the right to appoint other agents to sell and market; a master agency where you appoint an agent overall in charge but they ask other agencies to sell, sharing the commission; or any other combination where you define the sales channels you are allowed to use, without splitting commission. For development project marketing you should start off providing an exclusive listing to one agency. That gives them confidence to devote their time and resource. Although it is exclusive, the developer should always negotiate to retain the option to sell at least some properties themselves to ‘friends and family’ without agent involvement or commission payable. This should be carefully worded so the agent does not believe they are entitled to commission if the developer does sell some sections or homes.
Listing Term
The agent will request a term as long as possible to be listed on your project. They want the time to do their job, which is fair enough. However, don’t tie yourself into a long-term agreement that backfires if the agency doesn’t perform. Negotiate a sales performance clause into the listing term to help elicit the performance the agent promised when you selected them. The clause might read something like:
‘The exclusive listing period is 6 months from the date of this agreement provided a minimum of 2 sales per week from the attached price list is achieved. If the minimum number of sales is not achieved the vendor can terminate this agreement.’
Ironically you want your agent to
be an expert negotiator so the confidence, humility and persuasion they display
in their dealings with you to negotiate their listing agreement will often
foreshadow their ability to close buyers on your product.
[1] Your jurisdiction may have regulatory controls over exactly how this works.
Andrew Crosby
+64 21 982 444
andrew@xpectproperty.com
