A real estate broker is a person who earns a real estate broker’s license from the state in which they operate. Each state has its own requirements as to what a person must do to obtain a broker’s license in that state. Most states require a person to pass an exam and work for one to three years as a professional real estate agent.
Most states also require a broker to meet minimum age and in-state residency requirements. An applicant must also undergo a criminal background check, which must come up clean. The licensing agencies in many states also have an educational requirement involving successful completion of specified real estate courses to earn a broker’s license.
A real estate broker’s license entitles the broker to assist people buy, sell and lease residential, commercial, and industrial real property. Brokers also negotiate a final lease or purchase contract and guide their clients through the steps of real estate transactions. This includes price negotiations, inspections and repairs, and then the closing of the transaction. A closing may not be required in a lease transaction.
Some of the activities in which a real estate broker engages include the following:
- Listing properties for rent and sale with the listing services;
- Advertising properties available for sale or lease;
- Scheduling open houses and showings;
- Taking photographs of properties for listings;
- Helping clients determine what they need and can afford in the way of property for their purposes and helping them obtain mortgage loans.
Of course, a real estate agent can do many of the same things. But a licensed real estate broker can do things that an agent is not legally allowed to do. A broker can work independently. Real estate listings must be placed in the name of a licensed real estate broker, not an agent. So an agent must work with a broker, whereas a broker can work alone.
Both brokers and agents can represent any party to a real estate transaction, sellers, buyers, lessors or lessees. An agent, who must also be licensed, usually prepares the real estate contracts, however the broker principal for whom the agent works must sign them. A real estate broker’s license does not give the broker or an agent who works for the broker the authority to provide legal, lending or title search services. However, an agent typically coordinates these services with the appropriate professionals.
What Is a Listing Agreement?
A listing agreement is a kind of contract between the seller of real estate and a real estate broker. The listing agreement usually authorizes the broker to market the seller’s property, show it to potential buyers and solicit offers to buy or lease it. There are five types of listing agreements:
- Open Listing: An open listing is similar to a “for sale by owner” listing. The seller of a property offers to pay a sales commission to the first agent who brings them an acceptable offer. No commission is owed if the seller finds a buyer on their own without the involvement of the agent. The open listing arrangement creates competition between the seller and agents to find a qualified buyer.
- Most agents would not agree to an open listing, because the seller can either sell the home on their own or withdraw the listing without notice. This may happen in spite of diligent effort on the part of the agent to find a buyer. Few agents would agree to an open listing, except, perhaps, when the property is unique or the inventory of properties for sale very low.
- Exclusive Agency Listing: An exclusive agency listing is a contract between one agent and one seller for the sale of a property. If that agent, or any other licensed cooperating agent, finds an acceptable buyer, the seller must pay a sales commission to the agent. Again, as with an open listing, no sales commission is owed if the home seller finds a buyer on their own. Due to the fact that the seller can avoid paying the commission if they find the buyer, most real estate agents are reluctant to work on an exclusive agency listing.
- Exclusive Right to Sell Listing: The great majority of listings are of this type. With this type of listing, the listing agent has complete control of the transaction. Whether the seller, the listing agent or a cooperating selling agent finds a qualified buyer, the listing agent earns the sales commission. If another cooperating agent represents the buyer, the commission is typically split between the two agents.
- In most markets, a 90 or 120-day exclusive right to sell gives the experienced agent 90 to 120 days to sell the home. When the listing expires, the seller can choose to stay with the same agent or hire another one. An alternative to the standard exclusive listing is a 180-day listing with an unconditional right to cancel clause after 90 or 120 days.
- Multiple Listing: An important tool for marketing property is the Multiple Listing Service (MLS). The MLS distributes listings of properties for sale or rent with information about them, e.g. price, and photos. Today these listings are available via the internet, so the general public can access them and find a property they would like to buy or rent. MLS member brokers have exclusive rights to sell listings to the local MLS. An owner trying to sell a property on their own without a broker and agent and without access to the MLS is obviously at a huge disadvantage. A broker’s advantage is exclusive access to the MLS.
- However, today there are online listing services for homes that are being sold by the owner without representation by an agent or broker, so this lessens the broker’s advantage in this regard.
- Net Listing: The net listing is not allowed in some states. With a net listing, the seller tells their agent the net price they want for their property. This is the amount they want to clear after the sales commission and other costs of the sale are subtracted. The listing agent then adds their commission to this net price when presenting the property to buyers. If the agent obtains a purchase offer that is far above the seller’s net price, the seller may feel cheated, because the money over and above the seller’s net price goes to the agent as commission. A seller might accuse the listing agent of not telling them the home’s true market value.
- On the other hand, if the agent receives a low purchase offer close to the net price, yielding the listing agent a small commission, the agent might be tempted not to communicate the offer to the seller, thus depriving the seller of the sale they desire. A better alternative is an exclusive right to sell at a listing price that reflects what the seller wants to net as well as market conditions, of course. Then the agent gets a percentage of the sales price, which motivates the agent to find a seller willing to pay the best price that market conditions allow.
Another factor that affects the sales price of property is whether the buyer can pay cash or has to qualify for a mortgage loan. If the buyer is financing the purchase with a loan, the property must be appraised by a professional real estate appraiser at an amount that supports the amount of the loan. This is a factor that influences the price the buyer can command.
When Can a Broker Collect Their Commission?
Most listing agreements allow a broker to collect a commission when a broker or agent is able to present a qualified buyer, the buyer’s offer is accepted and the transaction closes. This usually means a person is able to pay the purchase price as noted above. When the transaction closes and the purchase money is transferred from seller to buyer, the broker collects the commission.
What If a Seller Doesn’t Accept the Buyer’s Offer?
If a prospective buyer makes an offer that satisfies the terms in the listing agreement, a broker has earned their commission even if the buyer should refuse to complete the sale. The offer must satisfy the terms of the listing agreement. A buyer’s offer that is less than the asking price does not entitle the real estate broker to a commission.
Of course, the seller is always free to accept an offer that is below the list price and often does because of market conditions and the characteristics of the property that is for sale.
Should I Consult a Lawyer about Hiring a Real Estate Broker?
Selling a property is a complicated process. An experienced real estate attorney will help you decide whether to hire a broker and what kind of agreement to make with the broker you hire.
A real estate lawyer can also represent you in court if a dispute arises between you and your broker. They can be especially helpful in a commercial real estate transaction where there are more factors at issue in a transaction than in the average residential real estate deal.