What is a Net Listing in Real Estate and Why Should You Avoid Them?

What is a Net Listing in Real Estate?

A Net Listing is a type of real estate agreement where the seller sets a price for their home and the real estate agent who sells the home gets to keep any additional amount over that sales price.

For example, if a seller agrees to sell a house for $400,000 and the home sells for $450,000, then the real estate agent gets to keep the additional $50,000.

This type of listing is uncommon because it creates a conflict of interest. The agent is incentivized to get the homeowner to agree on the lowest sales price possible to increase the resulting commission to the agent.  This is why Net Listings are completely banned in multiple states.  It directly conflicts with an agent’s fiduciary responsibility to protect the client’s best interests.

What are the Risks with Net Listings?

To avoid a conflict of interest, a homeowner would have to knowingly set a Net Listing price below market value or the real estate agent would need to magically sell the home for more than market value. Without one of these two scenarios, it becomes very easy to question whether a real estate agent provided the homeowner with accurate information. 

Sellers could end up:

1. Underselling their home without realizing its full market value.
2. Losing money if the final sales price is much higher than the net listing price.
3. Being misled by an agent who does not disclose the home’s true worth.

Are Net Listings Legal in Arizona?

No, Net Listings are NOT legal in Arizona. The Arizona Department of Real Estate does not allow this kind of agreement because of the risk it poses to consumers. 

Are Net Listings Illegal Everywhere?

Although Arizona specifically bans these types of agreements, other states have different rules.  Most states that allow net listings still discourage or restrict them.  Here are a few examples:

Note: A real estate agent or authority should always be cross-checked for changes in the rules regarding net listings.

Why Do Net Listings Exist?

Considering the extreme potential for abuse, it is curious why these types of agreements exist at all. There are certain scenarios where someone who has extensive real estate knowledge may choose to utilize a Net Listing to motivate a real estate agent and simplify the process.

For example, a real estate investor may have dozens or hundreds of homes they want to sell but they do not have time or want to review every purchase offer. 

In this scenario, let’s assume the educated investor knows a very realistic market value for each home and sets the Net Listing price high enough to achieve the profit margin they want while leaving room for their agent to still make some money on the sale. 

This allows the agent to work more freely without having to run every offer past the investor. In these rare cases, a Net Listing agreement may be a win-win.

What Other Types of Listing Agreements Are There?

There are multiple different types of listing agreements, but the most common are:

1. Exclusive Right-to-Sell: The listing agent designated is guaranteed a commission regardless of how the buyer is procured. This is the most common agreement because it promises to pay the listing agent for their time, effort, and expenses while marketing and managing the sale.

2. Exclusive Agency: An agent acts for the seller but does not get a commission if the seller finds the buyer. These are less common because most agents are not willing to take a gamble on their time and efforts, and it is very difficult to prove whether the buyer would have become interested in the home without the marketing efforts the agent performed.

Both of these agreements provide the benefit that a seller is able to realize the upside if a home sells for more than they expected. It is also worth noting that with proper marketing exposure to qualified buyers, homes typically sell for the maximum price the market will allow. 

How to Safely Handle a Net Listing?

If Net Listings are allowed in your state, and you are committed to using this type of listing agreement, you should consider the following:

1. Obtain an independent appraisal:  These typically cost less than $1,000 and will provide you with a high level of certainty regarding the market value of your home.

2. Find a reputable real estate agent: Before signing on the dotted line, make sure you speak with multiple different brokerages and find an experienced agent who has worked with Net Listings. It might be helpful to ask them for references to past clients who have sold with this type of agreement.

3. Understand the Risks: Once you have set your Net Listing price in the agreement, you are giving up potential profits if market conditions change.

Is a Net Listing Right For You?

Net listings are only advisable if you trust your agent and they possess strong market knowledge. However, traditional listing agreements are more secure. Alternatively, you can try the flat fee model too.

Pros and Cons of Net Listings:

Pros:

• Agents are motivated to obtain the maximum possible sales price
• Provides efficiency and simplicity for the home seller

Cons:

• Significant risk of conflict of interest
• Loss in potential profits to the homeowner
• Illegal or highly discouraged in many states
  

Should You Avoid Net Listings Altogether?

In most cases, home sellers should avoid net listings. The risk of underselling the property or being misled regarding property value is significant. Full-service flat-fee brokerages are a good alternative to consider when trying to maximize net proceeds from a home sale.

Learn More: Flat Fee Real Estate Phoenix Laws

Final Thoughts on Real Estate Net Listing

The net listing model is an uncommon and potentially dangerous option for selling a home. Though it offers some potential benefits, most sellers would do better with a traditional listing agreement or flat fee agreement.

If you are selling and want to keep more money in your pocket without the risks of a net listing, consider using a top-rated full-service flat-fee brokerage such as AZ Flat Fee.