A LOOK AT SOME OF THE FINE-PRINT IN A SELLER REPRESENTATION AGREEMENT
As spring approaches, many homeowners are thinking of selling their house, because they know spring is the best time to sell. The weather is nicer, the days are longer and more people are out house hunting. As we get ready to sell our current house, we are thinking about the selling process, too:
Will our house sell? Will we get the price we want? Will we get the closing date we want that aligns with the move-in date of our new Passive House?
Right now, Toronto is a seller's market but these questions are still top of mind for most sellers, and rightfully so. You have to keep in mind, that when you hire a real estate agent to sell your home, you sign something called a Seller Representation Agreement. This is a standard form agreement managed by OREA, and it's something most people don't think too much about or consider as just another formality. Regardless of the real estate agent you choose, it is the same agreement used across Ontario. Sometimes, it may also be referred to as a listing agreement. It's easy to gloss over the fine print and assume the terms and conditions are not all applicable. Nothing ever happens, right? But what if it does? Do you know what you signed up for?
In this blog, we take a closer look at the Seller Representation Agreement and break down some of the pre-printed clauses. In particular, the commission, multiple representation, and referral of enquiries clauses.
Pre-printed Clause: Commission
When you hire a real estate agent to sell your home, you pay a commission. This is usually 5%, split between the buyer's agent and the seller's agent. In an equal split, each agent gets 2.5%. The exact percentage is filled in the blank space provided in the commission section. If you were to sell your house for $1 million, it would cost $50,000 in commission fees. But let's not forget about taxes on commission, which is subject to HST. That makes it $56,500 after tax in total commission costs. This part of the clause is pretty straightforward.
What happens if your house doesn't sell? Do you still owe commission? The answer is no. If the house doesn't sell, then no commission is due.
But what happens if your listing expires, you don't relist, and your house is sold shortly after? Then yes, the commission is due, depending on the agreed-upon holdover period and when the buyer was introduced to your house. The holdover period is the number of days after a listing expires.
For example, if an interested buyer attended your open house, but decided not to buy at the time, then changed his mind the day after your listing expired, you are still obligated to pay commission, if a holdover period was specified.
While the 5% commission appears to be industry-standard, it's worth noting that the agent's commission is fully negotiable. Some brokerages deviate from the market standard to set themselves apart with a competitive advantage. Unfortunately, it's for you as the seller to determine who is best suited to sell your house.
Pre-printed Clause: Multiple Representation
Multiple representation refers to when the buyer and seller of a house are represented by the same agent. Why do you need to be concerned with this? Because buyers and sellers have opposite interests. Buyers want to buy low and sellers want to sell high. When you hire a real estate agent to sell your home, you expect that this person will look out for your best interests. This is a reasonable ask in a single representation. But in multiple representation, your best interests are no longer your agent's priority. The agent must remain impartial and cannot disclose what buyers are willing to pay and what sellers are willing to accept. By signing the Seller Representation Agreement, you are acknowledging that you understand this situation and that you are still obligated to pay commission. For the agent, this translates into double the commission, receiving both the buyer and seller commission, which is a pretty sweet deal.
Multiple representation isn't necessarily a bad thing if done ethically. The agent may have strong contacts and insights into the buyers and sellers in your particular neighborhood. If you get the price you want, do you really need to be concerned if it was a single or multiple representation? Probably not.
The problem occurs when the agent does not act in good faith because he is incentivized to make a deal earning a double commission. For example, in the event where there are two competing offers, and the higher offer is coming from a different agent, your agent might not be incentivized to present the higher offer if he wants you to accept a lower offer coming from his own buyers. This means, as sellers, you would be at a loss, while the agent collects both commissions and makes a big profit. Of course, this doesn't happen regularly, but it is something to be mindful of when the agent is representing both buyer and seller.
Pre-printed Clause: Referral of Enquiries
The referral of enquiries clause means that as sellers, you should direct all questions from anyone interested in our house to our real estate agent. For example, once the for-sale sign is up on your lawn, if a developer knocks on our door wanting to purchase your property for an exorbitant amount of money, you must immediately inform our real estate agent. If you accept the developer's offer without letting your agent know, you must pay the commission within five days following the agent's written demand. This clause ensures fairness from both seller and agent.
Similarly, if you were to sell your house to a family member after your agent listed your house for sale, you are still obligated to pay commission.
What is important to understand here is that the Seller Representation Agreement establishes an exclusive relationship with you as the seller and the agent who you have authorized to market and sell your home.
Other Pre-printed Clauses...
There are more pre-printed clauses in the Seller Representation Agreement than the ones discussed here. A few more points are given in this RECO video as well.
The selling process can be stressful, especially under a time crunch when you are inundated with form after form. The amount of paperwork to sign is daunting. Of course, it's always best to check with a real estate lawyer to clarify any misinterpretations.
Ideally, your agent talks you through the agreements and answers any questions you may have. This should cover the dates when the agreement becomes effective and when it expires and it should also cover what expectations each side has, e.g. is the agent going to stage the home, or is he asking you to do some repairs before listing?
Ultimately, it's always best to read and understand anything before signing.
We are still learning as we go, but the more we familiarize ourselves with the real estate and home building processes, the easier we hope it is when it's time to sell our current house.