This is the final episode in our video series covering a licensee’s authority to act on a client’s behalf under a written listing agreement. The ninth episode covers the use of a net listing for sellers. 

Option listing variation

An option listing

is a variation of the exclusive right-to-sell listing.

Its unique feature is the additional element of a grant to the broker of an option to buy the property at a predetermined price, if the property does not sell during the listing period.

The broker wears two hats when holding an option listing: one as an agent, and the other as a principal.

The concurrent status of agent and principal is a conflict of interest

for the broker. Here, the temptation for misrepresentation is apparent.

As a result, the seller’s broker may fail to market the property aggressively, with a view toward buying it themselves, then reselling it at a profit. Likewise, the broker may neglect to inform the seller about all inquiries into the listed property by potential buyers.

As always, brokers are required to disclose any outstanding offers or other factors affecting the seller’s decision to sell when the broker exercises the option. [Rattray v. Scudder (1946) 28 C2d 214]

The broker’s exercise of a purchase option contained in a listing agreement requires the broker to disclose to the seller the full amount of the broker’s earnings (profit). Further, they need to obtain the seller’s written consent to the earnings before or at the time the broker exercises the option. [Calif. Business and Professions Code §10176(h)]

A dilemma may arise when market prices rapidly increase after the seller’s broker exercises their option to purchase, allowing for a quick resale by the broker at a profit. On discovery, the seller may claim the profit is theirs and demand it be paid to them under the belief they have been cheated by the broker.

Thus, as with net listings, option listings are to be used with great care, if at all. The option is only exercised after full disclosure by the broker about:

  • all material facts relating to the property not known or understood by the seller;
  • the identity of all potential buyers and their offers ; and
  • any market or use conditions relating to the property known to the broker which have a current positive effect on its value.

Guaranteed sale variation

A guaranteed sale listing is also usually a variation of the exclusive right-to-sell listing. Brokers have been known to use the guarantee feature to boost sales activity during recessionary periods and when inventories of available properties are low.

A guaranteed sale listing is distinct from a regular, exclusive right-to-sell listing. Here, the broker grants their seller the option to sell, the broker agreeing to buy, called a put. The seller is given the right to call on the broker to buy the property at a predetermined price if the property does not sell during the listing period. In this respect, the guaranteed sale listing establishes a reverse role for the seller from the option listing when the property fails to sell during the listing period.

The difference with the guaranteed sale listing is that the seller, not the broker, has the right to exercise the option by accepting the broker’s promise to buy the listed property.

The guaranteed sale variation is attractive to sellers who, on account of job transfers, sudden unemployment or other financial factors, are motivated to sell at all costs. The benefit to the seller is the assurance of a back-up, last-resort sale during recessionary periods of market uncertainty — a risk some brokers are willing to take.

As with the option listing, the broker may tend not to work the listing vigorously if the price they have agreed to pay under the guarantee (put option) is much lower than the amount the seller is able to net on a sale at current market prices. Thus, the broker stands to acquire the property at a bargain price if it does not sell during the listing period.

In practice, if a buyer is not produced during the listing period, a desperate seller may have no choice but to sell to the broker. The seller under the exclusive listing has delegated complete control to the broker to locate a buyer.

The broker’s advantage, however, is lessened by a DRE regulation which prohibits the inclusion of advance fee provisions in a guaranteed sale listing. [Department of Real Estate Regulations §2970(b)(5)]

As always, the broker is required to disclose all offers and the status of potential offers during the listing period and at the time the seller exercises their option to sell to the broker.