Net listings are an older form of contract that is only used in rare circumstances. They are illegal in some states, and the National Association of Realtors forbids them in most states and circumstances. A net listing circumvents the traditional way that agents are compensated by absolving them of a percentage gained from the sale of a home, but rather receiving a lump sum over a net amount.
What Are the Issues With Net Listings?
Let’s look at a hypothetical net listing situation: A seller enters into a net listing agreement with the agent. The seller agrees to receive $400,000 in exchange for the home sale. The realtor would then find a buyer for much above that price, say $600,000. Instead of receiving a commission of 2.5% on the sale of $600,000 ($15,000), the realtor would keep the difference between $600,000 and $400,000 ($200,000).
Net listings benefit the real estate agent at the buyer's expense. A real estate agent who usually earns a small commission could allow a seller to undervalue their home to make a larger profit. This means that the home seller could have made more money themselves, but instead, this profit went directly to the real estate agent.
This situation is sometimes enticing to inexperienced sellers, those in a rush to sell, or those unfamiliar with the housing market value. If their agent guarantees them an amount for their house, they may not question what amount the agent themselves will be making as profit. The difference between a typical commission and what an agent might make in a net listing is enormous with higher-priced homes. A realtor could take advantage of an unsophisticated seller if they are unaware of the market value of housing for their comparable real estate listings. A realtor has a higher fiduciary duty to clients who are less educated in these situations.
What States Are Net Listings Legal?
Because of the chance for issues, net listings are illegal or banned in most states. However, there are still three states where they are legal. In California, net listing agreements are legal but can only be used with highly sophisticated or independently represented clients. Texas also makes net listings legal but stipulates that a net agreement holds the agent in a position of power. This means they can only be used if the seller is extremely familiar with the market pricing. Net listings are also legal in Florida.
Even in states where net listings are legal, they still cannot be used by most realtors. The National Association of Realtors (NAR) does not allow net listings to be included in the Multiple Listing Service. This is a database of homes for sale that real estate agents use. Because about 70% of realtors are NAR members, they cannot use net listings.