What Is a Net Listing in Real Estate? 

Real estate transactions involve various types of listing agreements, each with its own set of advantages and risks. Among these is the net listing in real estate, a rare and often misunderstood method that can dramatically affect both the seller’s profits and the agent’s commission. In this guide, we’ll break down what they are in real estate, why it’s controversial, and what you need to know before considering this option.

Understanding Net Listings in Real Estate

A net listing is a pretty rare and often controversial type of real estate listing agreement where the seller sets a minimum acceptable price for their property, and the real estate agent’s commission is any amount above that price. 

This arrangement differs from traditional listing agreements, where the agent earns a percentage of the final sale price as their commission. While it might seem straightforward, they pose significant risks for sellers and create potential conflicts of interest for agents.

However, it’s important to note that while net listings can sometimes lead to large commissions for agents, there’s also a risk that the agent may earn very little or even nothing, depending on the market. This creates uncertainty for both the seller and the agent.

How do they work?

In a net listing, the seller and agent agree on a net price—the minimum amount the seller wants from the sale. The agent is then free to sell the property for as much as possible, keeping any amount above the net price as their commission.

Real-life example

To illustrate, imagine a homeowner agrees to a net listing with an agent. The homeowner sets a net price of $200,000 for their home. The agent managed to sell the home for $270,000. Under the net listing agreement, the agent would keep the $70,000 difference as their commission, which sounds like a terrific deal for the agent because it is significantly higher than the typical 5-6% commission ($13,500-$16,200) he would have earned in a traditional listing agreement.

While this might seem like an excellent deal for the agent, it can leave the seller feeling shortchanged, especially if they were unaware of the actual market value of their property.

On the flip side, if the market is slow and the agent can only sell the property for $255,000, they would only make $5,000—far less than they might have earned in a traditional commission structure. 

In some cases, the agent may struggle to sell the property at all, leading to a situation where they earn nothing despite their efforts.

The dangers of Net Listings

Net listings are not only controversial but also considered unethical by many real estate professionals. The primary danger lies in the potential conflict of interest they create. Since the agent’s commission is directly tied to how much they can sell the property above the net price, there’s a risk that the agent may not act in the seller’s best interest. For example, an agent might pressure a seller to agree to a lower net price to increase their own commission.

Another significant risk is the lack of transparency. Sellers might not fully understand how much their property is worth, which could lead to them setting a net price that is too low. Unscrupulous agents could exploit this by selling the property at a higher price and pocketing a substantial commission.

Legal status

Due to these risks, net listings are illegal in most states. The National Association of Realtors (NAR) explicitly forbids its members from engaging in net listings. In the few states where they are legal, such as California, Texas, and Florida, there are strict regulations in place to protect sellers. For example, in Texas, a net listing is only allowed if the seller explicitly requests it and fully understands the property’s market value.

In California, net listings are only recommended for highly sophisticated clients or clients who are independently represented and are well-versed in real estate investment and laws, allowing them to protect their interests. Even in these states, real estate professionals generally advise against using this listing agreement due to the potential for abuse.

Alternatives to Net Listings

Given the risks associated with net listings, sellers should consider safer and more transparent alternatives:

1. Exclusive right-to-sell listing

This is the most common type of listing agreement. The seller works exclusively with one agent who has the right to market and sell the property. The agent earns a commission based on a percentage of the final sale price, even if the final buyer was attracted by the seller. This arrangement ensures that both the seller and the agent have aligned interests, as both benefit from securing the highest possible sale price.

2. Exclusive agency listing

In this type of listing agreement, the seller also works with one agent, but if the seller finds a buyer independently, they are not obligated to pay the agent a commission. This option offers more flexibility for sellers while still allowing them to benefit from the agent’s expertise.

3. Open listing

An open listing allows the seller to work with multiple agents, with the commission going to the agent who brings in the buyer. This arrangement provides sellers with maximum flexibility, though it may also require more effort to manage multiple agents.

Why choose an alternative?

While net listings may seem attractive because they guarantee a certain amount of money for the seller, the potential downsides—such as leaving money on the table and creating conflicts of interest—often outweigh the benefits. Alternatives like exclusive right-to-sell or exclusive agency listings provide a more balanced and transparent approach, ensuring that the seller’s interests are protected while still allowing agents to earn a fair commission.

Should you use a Net Listing?

In most cases, the answer is no. A net listings in real estate is risky and often not in the seller’s best interest. They can create conflicts of interest, lead to lost money, and cause legal headaches. It’s usually better to stick with more traditional listing agreements, like exclusive right-to-sell or exclusive agency listings, which provide more transparency and better align everyone’s interests.

Summing-up

Net listings are a controversial and risky way to sell real estate. While they are legal in a few states, they are heavily regulated and generally discouraged due to the potential for abuse and conflicts of interest. Sellers and agents alike should be cautious when considering a net listing and explore safer, more transparent alternatives that protect all parties involved.

If you’re preparing for the real estate exam, understanding the complexities of net listings is necessary. Consider using Lexawise’s real estate exam prep tools to ensure you’re fully prepared to tackle any question on this topic and more. With comprehensive summary guides, practice exams, and flashcards, Lexawise helps you succeed in your real estate licensing exam.